Tax Residency Dispute: IRS Taxation of Cross-Border Worker Under Portugal-Spain Double Tax Treaty (Art. 15)

ARBITRAL DECISION

I – Report

1. On 21 July 2015, A..., with Tax Identification Number ... and domiciled at Travessa ..., no. ..., Apartment ..., ..., Maia, came, pursuant to the provisions of article 2, paragraph 1, of Decree-Law no. 10/2011, of 20 January (RJAT), to request the constitution of an arbitral tribunal with a view to annulling the tax assessment identified with number 2015..., relating to the fiscal year 2014, concerning Personal Income Tax (IRS), in the total amount of €12,880.30 (twelve thousand, eight hundred and eighty euros and thirty cents). In addition to the power of attorney and proof of payment of the initial fee, the applicant attached 9 documents.

2. In the Request for Arbitral Decision, the Applicant opted not to appoint an arbitrator, and by decision of the President of the Deontological Council, pursuant to paragraph 1 of article 6 of the RJAT, the signatory was appointed as sole arbitrator, who accepted the appointment within the legally prescribed period.

3. The arbitral tribunal was constituted on 5 October 2015.

4. The Tax and Customs Administration (AT or Respondent) sent, on 10 November 2015, its Response as well as the administrative file (PA).

5. The Parties were notified of an arbitral order to pronounce themselves on the dispensability of the meeting required by article 18 of the RJAT and on written submissions. The Applicant came, on 28 December 2015, to consent to the dispensation of the meeting and even of written submissions on the condition that the joinder of four additional documents to the proceedings be accepted. The tribunal, accepting the documents, ordered the Respondent to be notified to pronounce itself, setting a deadline for any submissions.

6. Following the Respondent's agreement to dispense with the meeting of article 18 of the RJAT, written submissions were presented successively (on 9 and 17 February 2016, respectively), and the tribunal indicated that it would render its decision on 5 April 2016.

7. The Request for Arbitral Decision

In the initial Request, the Applicant sustains, in summary:

• For years he did not habitually reside in Portugal but in Spain, where he exercised his professional activity and was taxed as a resident under the "Special Regime applicable to workers posted to Spanish territory", having in September 2014 returned to Portugal to occupy an employment position and earn income, at which time he made the residence indicated in the Request his principal address and ceased residing in Spain.

• By oversight, he did not then notify the Tax Authority of his return, doing so only later, with retroactive effect to September 2014, and also requested the correction of records in Spain.

• He filed in Portugal his IRS (Personal Income Tax) return for 2014 in his capacity as a resident, but the AT effected the tax assessment without applying the provisions of the Agreement between Portugal and Spain to Avoid Double Taxation, specifically article 15 thereof, to the declared situation of dependent employment income taxed in Spain while he was a resident there under the aforementioned regime, and dependent employment income in Portugal following his return in September 2014.

• The Applicant was classified as fiscally resident in Spain for the period between January and September 2014, there being an overlap between Portuguese and Spanish fiscal residence.

• While Spain applies to the temporal extension of residence a fractional criterion, Portugal applied an annual criterion, resulting in a case of true international double taxation: there is identity of the subject matter (the same income earned by reason of employment), identity of the subject (the Applicant), identity of the period (between January and September 2014), and identity of the tax (IRS and IRPF, taxes levied on income earned by a natural person).

• Under the Convention between the Portuguese Republic and the Kingdom of Spain, approved by Resolution no. 6/95 of the AR, taking into account the principle of territoriality which marks the connection by source, it follows that the State where the taxpayer resides is competent to tax the income earned by him, regardless of its origin.

• Article 15, paragraph 1, of the Convention provides that income obtained in the exercise of dependent professions is taxed exclusively in the State of residence, and paragraph 2 specifies an exceptional situation by stipulating that, notwithstanding the provisions of paragraph 1, remuneration obtained by a resident of one contracting State from employment exercised in another contracting State may be taxed only in the first-mentioned State if the recipient remains in the other State during a period or periods that in the calendar year in question do not exceed 183 days.

• As in this case it is a matter of remuneration obtained from employment exercised in another State, where he remained for a period exceeding 183 days, such income cannot be taxed in Portugal.

• Thus, income earned in Spain in the period from January to September cannot be taxed in Portugal in accordance with paragraph 2 of article 15 of the Convention, and there is no need to apply subparagraph (a) of paragraph 1 of article 24 of the Convention, a provision that would only be applicable if the income could be taxed in Portugal, to eliminate double taxation.

• Employment was exercised exclusively in Spain, so Portugal has no competence to tax the income in question, earned between January and September 2014.

• Because the value of internal law yields to the value of international conventions (article 8, paragraph 2, of the CRP), the proposed assessment violates the Convention and should be annulled.

8. The Response

The Respondent replies, in summary:

• According to the IRS Code, in 2014, income earned is subject to tax at its annual value (articles 1 and 2 of the CIRS, real scope), provided that its holder is resident in Portuguese territory or, if not, that such income should be considered as obtained in Portuguese territory (article 13, paragraph 1 of the CIRS). Relevant for tax purposes is the personal and family situation that exists on the last day of the year to which the tax applies, as provided in paragraph 7 of article 13 (personal scope).

• According to subparagraphs (a) and (b) of paragraph 1 of article 16 of the CIRS, persons resident in Portuguese territory are those who, in the year to which the income relates, have remained there for more than 183 days, consecutive or interpolated, or, having remained for less time, have at 31 December of that year a dwelling under conditions that suggest the intention to maintain and occupy it as a habitual residence, and, pursuant to paragraph 2 of article 16 of the CIRS, persons constituting the family unit are always deemed resident in Portuguese territory, provided that any of the persons responsible for directing the same resides there, in the case at hand the Applicant or his spouse.

• Paragraph 3 of article 16 provides that the condition of resident resulting from the application of paragraph 2 may be negated by the spouse who does not meet the criterion provided in subparagraph (a) of paragraph 1, provided that he proves the non-existence of a connection between the majority of his economic activities and Portuguese territory. Article 81 of the CIRS also provides for the elimination of international juridical double taxation.

• The Applicant requested on 2 April 2015 from the AT services the correction of his tax register status, establishing him as fiscally resident in Vila do Conde, Portugal, with retroactive effect from 1 September 2015, which was accepted, and he filed his IRS return for the year 2014 in his capacity as fiscally resident.

• In the 2014 IRS tax return Form 3, the Applicant and his spouse, B..., recorded in Annex H permanent housing in Portugal and tax benefits relating to that autonomous fraction, and in Annex J recorded income obtained abroad, and it was based on this tax situation and data communicated that the IRS assessment was made, resulting from automatic processing, which is challenged by the Applicant.

• There is no situation of international juridical double taxation because the Applicant should be considered resident, for tax purposes, in Portugal, in the year 2014. According to the provisions of article 4, paragraphs 1 and 2 of the Tax Convention between Portugal and Spain, in particular in the second part of subparagraph (a) of paragraph 2, the legal framework of the issue should only proceed to the assessment of the State with which the Applicant had the closest personal and economic ties (centre of vital interests) if he had permanent housing available in both States.

• From the facts presented, it does not follow that the Applicant had, in 2014, permanent housing available in both States: the Applicant resided in Spain for part of the year 2014 (it is not known precisely how long and whether it was consecutive or interpolated) but that housing assumed a transitory character until the Applicant's move to Portugal, from 1 September 2014, and then with the intention of "permanence".

• The Applicant merely attached some instructions for completing the "Impuesto sobre la Renta de las Personas Físicas" return, presenting no document issued by a competent authority to attest that, according to Spanish law, he was subject to tax there due to his domicile or residence.

• The Applicant presented no documentary evidence capable of attesting that he remained in Portuguese territory for less than 183 days, and at 31 December 2014 he had in Portuguese territory a dwelling under conditions that suggest the intention to maintain and occupy it as a habitual residence, under the terms provided in subparagraph (b) of paragraph 1 of article 16 of the CIRS.

• Documents intended to serve as evidence must be presented with the pleading in which the corresponding facts are alleged, with any subsequent presentation of documentary evidence by the Applicant being barred, pursuant to article 423 of the CPC.

• The Applicant neither submitted clarifications concerning his legal-tax situation and that of his family unit (such as the place where healthcare expenses were incurred in 2014, what water, electricity and gas consumption occurred at his family home before and after 1 September 2014) capable of negating the indications of his permanence in national territory in that year (subparagraph (a) of paragraph 1 of article 16 of the CIRS and article 15, paragraph 2 of the Convention), nor a declaration from the employing entity referring to the place where the functions inherent to his activity were performed in the year 2014.

• The present request should be judged groundless, maintaining in the legal order the impugned tax assessment act.

9. Subject Matter of the Request

The issue subject to dispute consists in determining whether the Applicant, by changing his tax residence from Spain to Portugal in September 2014, is subject to the scope of Personal Income Tax (IRS) with respect to all income earned in that year, whether in Spain (January to August) or in Portugal (September to the end of the year), with a deduction of the tax paid in Spain, or whether he is subject to taxation in Portugal only for income earned in Portuguese territory.

10. Joinder of Issues

The arbitral tribunal is materially competent, pursuant to the provisions of articles 2, paragraph 1, subparagraph (a) of the Legal Framework for Arbitration in Tax Matters.

The parties have legal personality and capacity and have standing pursuant to articles 4 and 10, paragraph 2, of the Legal Framework for Arbitration in Tax Matters (RJAT) and article 1 of Ordinance no. 112-A/2011, of 22 March.

The proceedings do not suffer from any defect and no exceptions were raised by the parties that would prevent the examination of the merits of the case, so the conditions are met for the rendering of the arbitral decision.

II – Grounds for Decision

11. Proven Facts

11.1. A..., Applicant in these proceedings, and B..., filed on 29 April 2015, via the internet, the IRS tax return Form 3, relating to the year 2014, indicating as tax residence "mainland": in Annex A was included as dependent employment income of the taxpayer A (husband) the amount of €34,770.33; in Annex J, as dependent employment income earned abroad, the amount of €105,378.33 (field 401); in Annex H were recorded expenses with property used for permanent housing (fields 731 and 814) (PA, pp. 15 to 17).

11.2. The return referred to in the preceding number resulted in the issuance of IRS assessment no. 2015..., of 09 June 2015, in the amount of €12,880.30, payable by 31 August 2015 – the tax withheld abroad, Spain, in the amount of €26,081.14, was included in the line of deduction from the tax (26,682.47) and considered deductible only to the extent of the portion of the tax proportional to such income, pursuant to article 81 of the CIRS (Doc. no. 1 attached to the Request, PA, pp. 12 and 18 to 22).

11.3. Between September and December 2014, C...-Branch in Portugal processed salaries for the Applicant (Document no. 3, attached to Request).

11.4. By request of 2 April 2015, the Applicant requested the AT to change his address with effect from September 2014, a request that was granted and made known on 27 May 2015 (document no. 6 attached to Request).

11.5. The Applicant obtained registration in the Central Register of Foreigners of the General Police and Civil Guard as a community resident in Spain since 18 March 2011, with a certificate of registration as a Union citizen being issued on that date and a social security number assigned (Document no. 8 attached to Request).

11.6. The company D..., S.L.U. with address at ... ... – .../..., ..., Barcelona, issued on 8 April 2011 a declaration that Mr. A..., who until that date had held, since 14 February 2005, the position of Director of D... in Portugal, had been hired for the position of Director General of Spain and Portugal (document no. 4 attached to the proceedings in December).

11.7. The company D..., S.L.U., is a subsidiary of the company C..., classified in Fortune 500, which has its main office at ..., ..., USA, with employees in more than 60 countries (doc. no. 4 attached to Request, http://www...com/.../.../.../...=...;

https://en.wikipedia.org/wiki/...

11.8. On 1 May 2011, the Applicant signed a lease contract for an apartment located at ..., in ..., for a period of one year renewable for a maximum of four years (Document no. 1 attached to the proceedings in December 2015).

11.9. On 13 May 2011, the Applicant submitted to the Tax Agency, at the Tax Management Department, in Barcelona, a communication choosing the special regime applicable to workers posted to Spanish territory, regulated in article 93 of Law 35/2006, of 28 November, on the Personal Income Tax (IRPF), which resulted in the issuance, on 18 July 2011, by that Tax Management Department, of a certificate of the status of IRPF taxpayer under the special taxation regime for taxation under the Tax on the Income of Non-Residents, and that this option, unless renounced or excluded, covers the fiscal years 2011 to 2016[1] (Doc. no. 7, attached to Request).

11.10. According to the database System for Management and Registration of Taxpayers (SGRC) of the AT, A... communicated successively between 2011 and 2014 the following tax domiciles: Spain on 2011-12-09 and 2011-07-12; Street..., Vila do Conde, on 2011-08-01; Spain on 2013-05-07 and 2013-05-08 and Street..., Vila do Conde, on 2014-09-01 (PA, p. 11).

11.11. On 3 May 2014 a speeding violation fine was issued addressed to A... at the address "..., ..., ..., ... ..., Barcelona" (Document no. 3 attached in December).

11.12. On 28 April 1999, A... and his wife, B..., acquired a property intended as permanent housing (doc. no. 4, attached to Request)[2].

11.13. Regarding the fiscal year 2014, and with a view to obtaining a tax refund, the Applicant filed with the Agencia Tributaria in Spain Form 150 "Personal Income Tax, Special Regime applicable to workers posted to Spanish territory" (article 30 of the Request and Doc. no. 9 attached to Request).

11.14. On 31 March 2015, a third party submitted via Internet to the Spanish Tax Agency a Form 30 communication of change of tax domicile of the Applicant, situating him abroad, Street..., ..., Vila do Conde, Portugal, and as the place of domicile for notifications in Spain, ..., no. ..., no. ..., Barcelona (Document no. 5 attached to Request).

11.15. On 10 June 2015, the Applicant submitted to the Tax Agency in Spain a communication regarding the account to be debited or credited according to the result of the assessment relating to 2014 (Document no. 9 attached to Request).

12. Unproven Facts

12.1. That the Applicant lived and worked exclusively in Spain in the period between 2001 and 2014.

12.2. What the amount of income earned by the Applicant and taxed in Spain in the year 2014 was.

13. Grounds for the Proven and Unproven Facts

The determination of the facts was made on the basis of facts alleged by the parties and not contested, as well as on the documentation attached to the proceedings, including the administrative file.

The Tribunal accepted the joinder of documents presented later by the Applicant, not seeing in this any disturbance of the procedural principles enshrined in article 16 of the RJAT, provided that the principle of due process was safeguarded.

The proven facts are sufficient for deciding the case.

14. Application of Law

14.1. The Facts to be Classified Legally

Despite the doubts that may remain given the facts as determined, it is possible to conclude that:

The Applicant has been an employee of the multinational C... since at least 2005. Until 2011 (March/April?) he worked, according to a declaration from the employing entity, at an establishment located in Portugal, having returned there to exercise management functions in the year 2014 (the receipts issued by the employing entity and attached to the proceedings confirm this exercise, at least from September onwards).

In 2011 (March? April?) he began to hold the position of Director General of Spain and Portugal, being remunerated by the subsidiary D..., S.L.U., located at ..., ..., Barcelona.

In that same year, 2011, in March, the Applicant signed a lease contract for an apartment in ..., ..., ... (Barcelona area). He registered himself as a foreigner, a Union citizen, in the Central Register of Foreigners of the General Police and Civil Guard in Spain, and obtained a Social Security number (Ministry of Labour and Immigration in Spain), indicating as his domicile ... .

In May 2011, represented by C..., he submitted to the "Agencia Tributaria", Special Delegation for Catalonia, a communication choosing the "special regime applicable to workers posted to Spanish territory".

Given the documentation (or lack thereof) attached, whether by the Applicant or by the AT, it is unknown what exactly was the legal-tax and employment situation of the Applicant in Portugal during the period between March 2011 and September 2014. Exercising during that period, according to the declaration of D..., the position of "Director General of Spain and Portugal", it is admissible that he distributed his time and work between the two countries, although having need of a location that would allow him to (also?) live in Barcelona. It is not known whether this was so. Nor is it known the reason for and consequences of the change of tax domicile communicated to the AT database in Portugal between 2012 and 2013. And, although the Applicant states at one point that his wife also accompanied him to Barcelona, it remains unclear whether and how IRS returns were filed in Portugal by the family unit.

It is also noted that the Applicant only took steps to change his tax domicile in Portugal in May 2015, although with effect from 1 September 2014.

Notwithstanding the identified doubts about the real factual situation, this tribunal should not have conducted an in-depth inquiry into the Applicant's tax situation if the existing data were sufficient to decide the case that is the subject of this Request. And we believe they are.

Thus, this arbitral decision, relating only to 2014, is based on the factual data brought to the proceedings and on the normative provisions invoked and applicable.

14.2. The Applicable Legal Regime – Doubts and Interpretation

14.2.1. Taxation of Dependent Employment Income and the Concept of Residence - Internal Law and Conflicts of Competence

The Personal Income Tax Code (CIRS), as worded at the time relevant to these proceedings[3], provided, regarding the taxpayers of the tax, in article 13: "1 - Persons residing in Portuguese territory and those who, not residing there, obtain income there are subject to IRS. 2 - Where there is a family unit, the tax is due by the set of income of the persons constituting it, those being considered taxpayers to whom falls the duty of its direction"[4], with "the personal and family situation of taxpayers relevant for tax purposes being that which exists on the last day of the year to which the tax applies" (paragraph 7 of article 13).

According to article 15 of the CIRS[5], the tax is levied exclusively on persons residing in Portuguese territory or not residing there but obtaining income there[6], and regarding residents the tax is levied on the totality of income obtained outside national territory, while non-residents are subject only to income obtained in Portuguese territory.

It thus becomes fundamental to delimit the concept of resident, the connecting element which, if present, "legitimizes the taxation of the income of residents on a worldwide basis, i.e., of all income regardless of where such income is obtained (world income principle)"[7].

Paragraph 1 of article 16 of the IRS Code provided[8]:

"Persons resident in Portuguese territory are those who, in the year to which the income relates:

a) Have remained there for more than 183 days, consecutive or interpolated;

b) Having remained for less time, have at 31 December of that year a dwelling under conditions that suggest the intention to maintain and occupy it as a habitual residence;

c) On 31 December are crew members of ships or aircraft, provided that such are in the service of entities with residence, seat or actual direction in that territory;

d) Perform abroad functions or commissions of a public character, in the service of the Portuguese State".

The establishment of a "plurality of alternative criteria creates the danger of double taxation, by virtue of the connecting element of residence, since they can result both from different definitions in the tax jurisdictions involved as from identical definitions, provided that they are integrated by a plurality of criteria that are repeated in the legislation of such tax jurisdictions, with the situation being classifiable under different criteria"[9].

To avoid conflicts arising from the application of tax rules in cases of situations with connections to other territories, special importance is assumed by the negotiation and conclusion of Conventions signed between Portugal and other States to Avoid Double Taxation (CDTs).

Conventions do not, however, consecrate an autonomous definition of residence[10], remitting to the notion of residence of the contracting States, although with some delimiting criteria, so that the same person can be considered resident in two tax jurisdictions, a situation for which paragraph 2 of article 4 of the OECD Model Convention establishes resolution criteria:

"Where by virtue of the provisions of paragraph 1, a natural person is resident of both contracting States, the situation shall be resolved as follows:

a) He shall be deemed to be a resident of the State in which he has a permanent home available to him. If he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (centre of vital interests);

b) If the State in which he has the centre of his vital interests cannot be determined or if he has not a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode;

c) If he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident of the State of which he is a national;

d) If he is a national of both States or of neither of them, the competent authorities of the contracting States shall settle the question by mutual agreement".

This means that "someone – within the framework of a convention – cannot be considered resident in two States. But (...) being considered resident in a State by that State's internal law, cannot claim to cease being so for purposes of the convention when the other State does not consider him resident according to the corresponding legislation. Double non-residence is inadmissible; otherwise the convention would be inapplicable, since it requires, at minimum, residence in one of the Contracting States"[11].

14.2.2. Situation Giving Rise to Doubts – Jurisprudence and Legislative Evolution

The fact that paragraph 2 of article 16 of the CIRS provides that "Persons constituting the family unit are always deemed resident in Portuguese territory, provided that any of the persons responsible for directing the same resides there", gave rise to many doubts regarding cases of emigrants who, while working in another State, maintained in Portugal a dwelling where the other spouse continued to reside, accompanied or not by children.

The provision makes explicit that in this situation persons physically absent from Portuguese territory continue to be considered resident by internal law. And if considered resident by another Contracting State, how is the Convention to Avoid Double Taxation applied? Recourse to norms with content such as article 4 of the Model Convention raises problems when the emigrant has in the State where he works a "permanent home", a "centre of vital economic interests" and "habitual abode".

Precisely concerning this situation, with special relevance for situations of emigrants in Germany, numerous disputes arose, already during the 1990s, with tax courts pronouncing in different senses. After hesitations, a jurisprudential current prevailed to the effect that, recognizing, by virtue of article 8 of the CRP, the supremacy of norms contained in international conventions, the remission of article 4, paragraph 1 of the CDT Portugal/Germany (identical, moreover, to that of other Conventions and following the OECD Model Convention) to the fiscal legislation of the contracting States should not be seen as an unconditional remission, rather imposing that the analysis of the question of residence be done person by person, abstracting from the family situation of the subject in question, establishing limits to the nature of the connections adopted by the laws of the contracting States, requiring that such criteria express an actual connection with the territory of the State.

In this sense, and for all, see the Decision of the STA of 25 March 2009, in proc. no. 068/09, which concludes: "The criterion of 'residence by dependence' adopted in article 16, paragraph 2 of the IRS Code, because it does not respect the conventional limitations on the concept of residence that Contracting States may adopt, is not valid ground for a tax claim of the Portuguese State against a resident of Germany who obtained in the year in question all of his income there and who is not taxed in that country only because the German State is the source State of his employment income"[12].

This controversy was largely overcome by the provisions added to article 16 of the CIRS, by Law no. 60-A/2005, of 31 December, which came to provide, in paragraph 3, that: "The condition of resident resulting from the application of the provisions of the preceding paragraph may be negated by the spouse who does not meet the criterion provided in subparagraph (a) of paragraph 1, provided that he provides proof of the non-existence of a connection between the majority of his economic activities and Portuguese territory, in which case he is subject to taxation as a non-resident with respect to income of which he is the holder and which is considered obtained in Portuguese territory under the terms of article 18" and in paragraph 4, that "Proof having been provided as referred to in the preceding paragraph, the spouse resident in Portuguese territory submits a single return of his own income, his share in common income and the income of dependents in his charge according to the regime applicable to persons in the situation of de facto separation under the terms of the provisions of paragraph 2 of article 59"

"With the modifications and additions of new rules, the regime came to cease taxing the income of the worker earned from employment exercised and paid outside Portugal, in the case of the worker demonstrating the falsity of what was provided in paragraph 2, which shall be done through the demonstration of 'non-existence of a connection between the majority of his economic activities and Portuguese territory'"[13]. [14]

However, in the case at hand, the application of paragraph 2 of article 16 was not invoked.

And would it be a case in which the situation of the Applicant is classified as resident by the internal law rules of both States?

14.2.3. The Facts, the Spanish Tax Regime and Delimitation of the Disputed Issue

As seen above, in March 2011, the Applicant registered himself in Spain as a foreigner, a Union citizen, and in May 2011 submitted, represented by his employing entity, to the Spanish "Agencia Tributaria", a communication choosing the "special regime applicable to workers posted to Spanish territory".

In Spain, the Personal Income Tax (IRPF) applies, approved by Law 35/2006, of 28 November (and respective subsequent amendments).

Limiting ourselves to a fairly superficial reference, it is noted only that the IRPF is a tax levied on the totality of the taxpayer's income regardless of where it is produced, and taxpayers are persons who have habitual residence in Spanish territory, understood to occur when they remain for more than 183 days in that territory or have there the principal nucleus or basis of their economic activities or interests, directly or indirectly (...) (articles 2, 8 and 9 of the cited Law).

The same statute (article 93) provides for the application of a special regime for workers posted to Spanish territory, workers who acquire fiscal residence in Spain as a consequence of posting, consisting of the option for taxation under the Tax on the Income of Non-Residents[15], maintaining the status of taxpayers under the IRPF provided the conditions established in paragraph 1 of article 93 are met, and applying the rules of paragraph 2 of the same article.

That is, the Applicant is, under the IRPF regime, considered resident in Spanish territory, but according to norms of that same law, he opted for the application of the taxation regime under the Tax on Non-Residents' Income (possibly because it proved more favorable to him).

However, and independently of this aspect, let us examine the arguments put forward by the Parties:

The Applicant argues that, having exercised his professional activity in Spain until September 2014 and with the income earned there taxed in his capacity as a resident in that territory, when he moved to Portugal where he worked the remainder of the year, without remaining there 183 days, the IRS for 2014 could not be levied on income from Portuguese source and on salaries earned in Spain because, under article 15, paragraph 2, of the DTA, the competence to tax income obtained in Spain belongs exclusively to the Spanish State.

The AT, in addition to questioning the sufficiency of the evidence produced as to the existence of actual residence and permanent housing of the Applicant in Spain throughout the period after 2011 (or at least 2014), and as to the non-permanence in Portuguese territory for less than 183 days in 2014, considers that the fact that the Applicant had at 31 December 2014 in Portuguese territory a dwelling under conditions that suggest the intention to maintain and occupy it as a habitual residence leads to the application of subparagraph (b) of paragraph 1 of article 16 of the CIRS and, in case of doubt, to article 4 of the Convention.

In sum, for the Applicant the issue at hand concerns the value of conventional law, which is superior to internal law, arguing that the provision of paragraph 2 of article 15, paragraph 2 of the CDT is overridden by the provision of article 16, paragraph 1, subparagraph (b) of the CIRS, while for the Respondent the issue at hand concerns the application of article 16 of the CIRS, with possible recourse to the provision of article 4 of the Convention.

14.2.4. Scope of Article 15 of the CDT and Relationship with Article 4 of the Same CDT

Thus posed, the question is considered useful to relate the scope of application of articles 4 and 15 of the CDT between Portugal and Spain (and concordant with the provisions of the corresponding articles of the OECD Model convention).

As already seen above, article 4 provides for the case where, according to the internal legislation of the contracting States, a natural person is considered resident of both States, choosing criteria - permanent home, centre of vital interests, nationality, mutual agreement of the contracting States – with the purpose of enabling the elimination of double taxation deriving from double residence.

Article 15 of the Convention between the Portuguese Republic and the Kingdom of Spain to Avoid Double Taxation and Prevent Tax Evasion in Matters of Income Taxes[16], on "Employment Income", provides in paragraphs 1 and 2:

"1. Subject to the provisions of articles 16, 18 and 19, salaries, wages and similar remuneration obtained from an employment by a resident of one contracting State shall be taxable 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. 2. Notwithstanding the provisions of paragraph 1, remuneration obtained by a resident of one contracting State from an employment exercised in the other contracting State shall be taxable only in the first-mentioned State if: a) the recipient remains in the other State during a period or periods that do not exceed, in total, 183 days in any period of twelve months beginning or ending in the fiscal year in question; and

b) the remuneration is paid by an employer or on behalf of an employer who is not resident in the other State; and

c) the remuneration is not borne by a permanent establishment or fixed installation that the employer has in the other State."

The version of the OECD Model Convention says in the corresponding articles[17] (1992 version):

"1. Subject to the provisions of articles 16, 18 and 19, salaries, wages and similar remuneration obtained from an employment by a resident of one contracting State shall be taxable 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.

1. Notwithstanding the provisions of paragraph 1, remuneration obtained by a resident of one Contracting State from an employment exercised in the other Contracting State shall be taxable exclusively in the first-mentioned State if:

a) the recipient remains in the other State during a period or periods that do not exceed, in total, 183 days in any period of twelve months beginning or ending in the fiscal year in question; and

b) the remuneration is paid by an employer or on behalf of an employer who is not resident in the other State; and

c) the remuneration is not borne by a permanent establishment that the employer has in the other State."

In commentary on the wording of the OECD model convention, Margarida Cordeiro Mesquita says[18] "Regarding the taxation of dependent profession income, the OECD Model (article 15, paragraph 1), like the UN Model, grants to the State where the activity takes place the primary right to taxation, with the limitation, however, of paragraph 2: when the activity is exercised in a state different from the State of residence, the State of exercise of the activity may tax when the beneficiary remains in its territory during a period or periods that exceed, in total, 183 days during a period of twelve months beginning or ending in the fiscal year considered, when the remuneration is paid by an employer or on behalf of an employer who is its resident or when payment of the remuneration is borne by a permanent establishment or fixed base that the non-resident employer possesses in its territory. Once one of these circumstances is verified, both States may tax, with the State of residence, under the terms of article 23, charged with the elimination of double taxation. If, differently, none of the three conditions set forth are verified, taxation shall fall, exclusively, to the State of residence (paragraph 2)"

14.2.5. The Relationship Between Article 15 of the CDT and Article 16 of the CIRS

The Decision rendered by the TCAN on 26 October 2016 (proc. 00198/04) exemplifies the posing and delimitation of questions which, in our understanding, are in the case at hand a subject of confusion in the Applicant's argument.

At issue was a situation in which the taxpayer had, in 2001, earned income in Germany, where he had remained for more than 183 days. In the following year he filed in Portugal a joint IRS return with his wife. The taxpayer had argued that article 15 of the Convention functions as a special rule, of exclusion from the general taxation rules of Portugal contained in articles 15/1 and 16 of the CIRS, since in the conflict between the Internal Law of the Portuguese State and Law emerging from a Treaty International ratified by Portugal, the solution set out in the Treaty prevails - under penalty of violating article 8 of the CRP. And, against the position of the AT, article 24 of the Convention, an exceptional norm, would only be applicable in this situation if the income in question could be taxed by the Portuguese State, in which case it was incumbent on it to proceed with the elimination of double taxation.

Identifying as the issue to be decided whether the employment remuneration earned by the plaintiff husband in Germany, during the 365 days of the year 2001, is or is not subject to taxation in Portugal, proven as it is that, during that year, he resided in that country for a period exceeding 183 days, where he earned income and where he paid the corresponding tax, with the plaintiff wife and son remaining resident in Portugal, the court came to resolve the question under the terms of the jurisprudence then prevailing and contained in the Decision rendered by the STA in proc. no. 01211/05, that is, interpreting article 4 of the Convention in conjunction with paragraph 2 of article 16 of the CIRS, and recognizing residence by dependence of the taxpayer (this was a situation prior to the legislative amendment referred to above that introduced paragraphs 3 and 4 of article 16 of the CIRS and the prevalence of jurisprudential current expressed, among others, in Decision 68/09 of the STA).

Considering the taxpayer resident in Portugal, and taking into account that the country of residence, Portugal, was different from the country where the income was earned (Germany), the source State, the court proceeded to analyze article 15 of the Convention to establish which State was competent to tax.

And, thus, proceeded:

"(...) article 15 of the Convention[19] provided as follows: a) Exclusive competence of the country of residence if employment is exercised there – paragraph 1, first part; b) Cumulative competence of the two States if employment is exercised in the other State (other than that of residence) – paragraph 1, last part. For its part, paragraph 2 of article 15 provides for the case of exclusive competence of the State where employment is exercised – notwithstanding the taxpayer not residing there, once the three negative requirements stated therein are met – 'temporary activities'. Thus (...) the said second part of paragraph 1 establishes cumulative competence of the two States for taxation – cf. cit. p. 434, Casalta Nabais, Tax Law, 2nd edition, p. 232 et seq., Leite de Campos, Tax Law, 2nd edition, p. 332 and Fiscal Law nos. 17-61 and 18-61. That is, the State where employment is exercised only has cumulative competence once the said requirements are met, but by the positive and alternatively. In the case at hand, thus the last part of paragraph 1 of article 15 applies: cumulative tax competence of Portugal and Germany to tax the income in question. It thus falls to the State of residence – Portugal – to eliminate double taxation, under the terms of article 24 of the Convention (subparagraph (a) of paragraph 1: deduction from the tax paid in Portugal of the tax paid in Germany, which cannot, however, exceed the portion of the tax, calculated before the deduction, corresponding to income earned abroad, requiring proof document of the tax paid there (...). Cf. in the sense set out the Decisions of the STA, of 24 March 2004 Appeal no. 1872/03, of 15 December 2004 Appeal no. 834/04 and of 20 April 2005 Appeal no. 1254/04."

In the sense of this interpretation of article 15 of the Convention, the Decision cites Prof. Alberto Xavier[20]: "if employment is exercised in the State of residence of the employee no problem arises; if, however, it is exercised in another State, it is important to proceed to the distribution of tax powers potentially interested in the situation and, in this case, it is necessary to distinguish 'permanent activities', in which case cumulative tax competence of the source State occurs (in this case, Germany may tax), from 'temporary activities', in which case the State of residence has exclusive power if the following three negative requirements are cumulatively met: I – the recipient remains in the other State during a period or periods that, in the calendar year in question, do not exceed, in total, 183 days; II – the remuneration is paid by an employer or on behalf of the employer that is not resident in the other State; III – remuneration is not borne by a permanent establishment or fixed installation that the employer has in the other State"[21].

That is, in the case submitted to the TCAN, whose excerpt we transcribe, the court accepted the classification of the taxpayer as resident in Portugal, by application of article 16, paragraph 2 of the CIRS, but, finding it proven that the worker had remained in Germany for more than 183 days, it was then decided that Germany could also, under conventional terms, tax (as it did) the income it obtained there, thus existing cumulative tax competence of Portugal and Germany, with the State of residence – Portugal – charged with eliminating international juridical double taxation, by means of the application of the mechanism provided in article 24, paragraph 1 of the Convention, that is, by deducting from the tax paid in Portugal an amount equal to the tax that was paid in Germany, with the deduction limit stated therein.

This position is also confirmed (and explained) by Rui Duarte Morais, in a very useful commentary on the jurisprudence relating to this matter[22], because not only is the relationship between the various provisions clarified but also the reason for some doubts that may be generated given the content of the text of the CDT Portugal Spain[23].

Expressly referring to the CDT norm on the "taxation of dependent employment income" (article 15), he considers that the provision "(...) establishes, regarding employment income (income obtained by a resident in one contracting State by reason of activities on behalf of another exercised in the other contracting State), the solutions recommended by the OECD Model. Trying to summarize them, we will say: normally, the competences of the source State and the State of residence to tax such income cumulate. However in certain circumstances, the right to taxation belongs, exclusively, to the state of residence. This happens where the following conditions are met: the beneficiary (the worker) having remained in the source country, during the fiscal period in question, less than 183 days; the remuneration having been borne by an employer not resident in the source State and which does not have in that State a permanent establishment to whose activity the payment of such remuneration should be attributed. The reason for this exception to the cumulative competence of both States seems clear: in such circumstances, it is understood that there is no sufficient connection (time of physical presence of the worker and location in the State where the activity is exercised or the financial source of the remuneration) capable of legitimizing the right to taxation by the source state (the place where employment was exercised)."

And, considering erroneous certain judicial decisions to the effect that a worker who had remained for more than 183 days in Germany could only be taxed in that country, the Author identified two reasons for such error:

• not having previously answered the essential question of knowing which was, in the case, the source State and the State of residence, failing to achieve a systematic view of the rights and obligations that, within the conventional framework, devolved to each of the States present;

• the equivocal tenor of the legal text.

As to the second, he explains: "The expression 'remuneration obtained by a resident of one contracting State from an employment exercised in the other contracting State shall be taxable only in the first-mentioned State if (...)' contained in the body of paragraph 2 of article 15 of the Convention lends itself to being, as it was, read to the effect that taxation by the first-mentioned State (State of residence, that is, Portugal) may only take place when the conditions provided in the subsections of such paragraph are verified and not – as is correct – that where such conditions are verified, the only State competent to tax is the State of residence (may only be taxed in the first-mentioned State means that only that State may tax)".

The Author further raises doubts about whether the difficulty does not stem from the translation effected of the OECD Model Convention, possibly carried out from the English original "remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if" (...). By contrast, the French version would be much clearer" (..."les rémunérations qu'un résident d'un État contractant reçoit au titre d'un emploi exercé dans l'autre État contractant ne sont imposables que dans le premier État si (...)".

But, he reaffirms, different interpretation reflects a misunderstanding of the "general principles" to which the distribution of the right to taxation operated by the CDTs obeys[24]).

14.3. Conclusion Regarding the Situation at Hand

As we have seen above, article 16, paragraph 2, of the CIRS came to be subject to interpretation firmly established at the STA level to the effect that the concept of residence by dependence does not prevail against conventional norms.

But in the case at hand, it is not the application of paragraph 2 of article 16 that is at issue but of subparagraph (b) of paragraph 1 of article 16. The Applicant had at 31 December housing in Portugal under conditions that revealed the intention to maintain and occupy it as a habitual residence (he held a management position in the company in Portugal and had requested registration as resident in Portugal from September 2014).

Then, in light of all the considerations made above, it is concluded that:

• The Applicant is, under Portuguese internal law, considered resident in Portugal in 2014;

• In that same year he earned income paid and declared in Spain, being taxed in that State only for such income[25];

• According to article 15, paragraphs 1 and 2, of the Convention between Portugal and Spain, it follows that if the Applicant had remained in 2014 for less than 183 days in Spain only the State of residence, Portugal, would have the right to tax all income earned in that year; in the case of permanence in Spain for more than 183 days, there exists cumulative competence of the two States, with the State of residence – Portugal – charged with eliminating international juridical double taxation.

Thus, the assessment made by the Respondent, on the basis of the data recorded in the IRS tax return Form 3 submitted by the taxpayer himself, was made in accordance with the provisions of the CIRS without violating any provision of the Convention to Avoid Double Taxation between Portugal and Spain, in particular the invoked article 15, so that the arbitral request does not merit approval.

15. Decision

With the grounds set out, the arbitral tribunal decides:

a) To judge the arbitral request for a declaration of illegality of the IRS assessment relating to the year 2014 (no. 2015...) as groundless.

b) To condemn the Applicant in costs.

16. Value of the Case

In accordance with the provisions of paragraph 2 of article 315 of the CPC, subparagraph (a) of paragraph 1 of article 97-A of the CPPT and also paragraph 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at €12,880.30 (twelve thousand, eight hundred and eighty euros and thirty cents).

17. Costs

For the purposes of the provisions of paragraph 2 of article 12 and paragraph 4 of article 22 of the RJAT and paragraph 4 of article 4 of the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is fixed at €918.00 (nine hundred and eighteen euros), under the terms of Table I attached to said Regulation, to be borne entirely by the Applicant.

Lisbon, 5 April 2016.

The Arbitrator

(Maria Manuela Roseiro)

[1] In that "Certificate of having exercised the option for the special regime applicable to workers posted to Spanish territory" it is stated: "In view of the communication and supporting documentation presented and in accordance with article 119.2 of the Regulation of Personal Income Tax, this certificate is issued for the purpose of establishing before persons or entities obliged to withhold the status of IRPF taxpayers under the special taxation regime for taxation under the Tax on Non-Residents' Income"

[2] It is not possible to verify the identification of the property because the document is incomplete (page 3 is missing).

[3] Wording prior to the amendments introduced by Law no. 82-E/2014, of 31/12, but with the amendments introduced by Law no. 60-A/2005, of 31/12.

[4] The family unit consisted, in particular, of "Spouses not judicially separated regarding persons and property and their dependents" (subparagraph (a) of paragraph 3 of article 13).

[5] "1 - Where persons are resident in Portuguese territory, the IRS is levied on the totality of their income, including that obtained outside that territory. 2 - In the case of non-residents, the IRS is levied solely on income obtained in Portuguese territory."

[6] That is, of the categories subject to tax according to article 1 of the same Code, among which are dependent employment income, such as those at issue in the case at hand.

[7] Rui Duarte Morais On IRS, Almedina 2014, 3rd edition, pp. 11 et seq. Residence is today generally accepted as constituting the connecting element that expresses the closest economic connection between a person and a State (crisis of the principle of nationality – note 19, p. 11).

[8] Wording already contained in the text of the CIRS approved by Decree-Law no. 442-A/88, of 30 November.

[9] "Article 16, paragraph 2, of the CIRS and Conventions Intended to Prevent Double Taxation", Manuel Pires, Studies in Memory of Professor Antonio Marques dos Santos", vol. II, Almedina, p. 594.

[10] Conventions to prevent double taxation on income and property have followed the OECD Model Convention, whose paragraph 1 of article 4 states: "For the purposes of the Convention, the expression 'resident of a contracting State' means any person who, by virtue of the legislation of that State, is subject to tax there due to his domicile, his residence, the place of direction or any other criterion of a similar nature, and applies equally to that State and to its political subdivisions or local authorities (...)" (our emphasis).

[11] Manuel Pires, in "Article 16, paragraph 2 of the CIRS and Conventions Intended to Prevent Double Taxation", ibidem, p. 596.

[12] Cf. point 3 of the summary. The Decision contains relevant doctrinal citations, among which we note: "The analysis of residence must be made person by person, although married, so it is common for the existence of 'mixed couples', one of the members being considered resident in one country and the other in another (...) Conventions thus override the internal regimes that may possibly establish, by fiction, 'residence' by 'dependence' of a person in the country of residence of any other member of the family unit" (Alberto Xavier, in Tax Law International, note 61 at pp. 291) and: "Regarding natural persons, the test of residence is performed contributor by contributor, independently of his marital situation. The conventional concept of residence overrides the internal regimes which, such as the Portuguese, establish 'residence by dependence' of a person in the country of residence of another member of his family unit – cf. Personal Income Tax Code, article 16, paragraph 2" (Maria Margarida Cordeiro Mesquita, in Conventions on Double Taxation, Lisbon, 1998, p. 85).

[13] Gustavo Courela, "Journal of Public Finances and Tax Law", year I, no. 1, p. 293. Emphasizing the fact that the other spouse declares himself as de facto separated to be taxed, the Author raised doubt about the compatibility with the constitutional provision relating to the treatment of the family unit.

[14] These provisions were eliminated with the IRS Reform, approved by Law no. 82-E/2014, of 31 December. (cf. justification point 4.2.2 of the Preliminary Draft of IRS Reform July 2014 p. 45 "Residence by Attraction. The regime of residence by attraction, provided for in article 16, paragraph 2 of the Personal Income Tax Code, is a generator of multiple positive conflicts of residence, so its repeal is proposed. In reality, notwithstanding the law already providing for the possibility of moving away from the condition of resident by the spouse who does not remain in Portuguese territory, the regime in question represents an unnecessary source of complexity. Moreover, by adopting the principle of separate taxation of spouses, it is more coherent that fiscal residence be assessed regarding each taxpayer of the family unit").

[15] Regarding the taxation of Non-Residents' Income, Royal Legislative Decree 5/2004, of 5 March and Royal Decree 1776/2004, of 30 July.

[16] Signed in Madrid, on 26 October 1993, approved, for ratification, by Resolution of the Assembly of the Republic no. 6/95, on 29 June 1994, and published in the Official Journal on 28 January 1995 (Decree of the President of the Republic no. 14/95).

[17] Cf. "Model Convention on Income and Property, Committee of Tax Affairs", Cadernos Ciência e Técnica Fiscal no. 210, p. 46 and 47.

[18] Conventions on Double Taxation, Cadernos de Ciência e Técnica Fiscal no. 179, Centre for Tax Science and Technology Studies, Lisbon 1998, p. 231.

[19] Read article 15 of the Convention concluded between the Portuguese Republic and the Federal Republic of Germany to prevent double taxation in matters of taxes on income and capital (identical to article 15 of the other Conventions signed by Portugal and other States, notably with Spain, and having as model article 15 of the OECD Model Convention).

[20] Tax Law International, p. 434 (this is the 1st edition).

[21] Therefore in the case being tried, in which the court accepted the classification of the taxpayer as resident in Portugal by application of article 16, paragraph 2 of the IRS Code, but remained in Germany for more than 183 days, Germany could also, under conventional terms, tax (as it did) the income it obtained there, thus existing cumulative tax competence of Portugal and Germany, with the State of residence - Portugal - charged with eliminating international juridical double taxation, by means of the application of the mechanism provided in article 24, paragraph 1 of the Convention, that is, by deducting from the tax paid in Portugal an amount equal to the tax that was paid in Germany, with the deduction limit stated therein.

[22] "International Double Taxation in IRS, Notes on a Reading of Jurisprudence", in Journal of Public Finances and Tax Law, year 1, no. 1, pp. 111 to 127.

[23] Point 7 of the said commentary (ibidem, p. 124 to 127).

[24] He also insists on the importance of not ignoring the OECD Model, which is the source of such conventions (and, in particular, its commentaries (in JPFTL, year 1, no. 1, p. 127). It should be noted that, as seen above, the translation effected by the Centre for Tax Science and Technology Studies, and published in 2010 in the Cadernos de Ciência e Técnica Fiscal (no. 210), is as follows: "Notwithstanding the provisions of paragraph 1, remuneration obtained by a resident of one contracting State from an employment exercised in the other contracting State is taxable exclusively in the first-mentioned State if: (...)" (our emphasis).

[25] According to the Applicant's declaration, not entirely confirmed documentally (cf. 12.2.).