IRS Capital Gains Reinvestment: Family Home Concept in CAAD Case 47/2014-T

ARBITRAL DECISION

CAAD: Tax Arbitration

Case No. 47/2014 – T

Subject: Personal Income Tax – Capital Gains; reinvestment; concept of primary residence.

A – REPORT

"A", taxpayer no. … resident at Rua …, no. …, …-… Porto and her husband "B", resident at Rua …, no. …, Apt. …, …, …-… Brazil, married under a separation of property regime, both referred to as "Taxpayers" hereby request ARBITRAL PRONOUNCEMENT, pursuant to the provisions of Decree-Law No. 10/2011 of 20 January, on the grounds of erroneous characterization of the tax fact and error in the determination of taxable income, resulting in the issuance of Personal Income Tax Assessment No. 2013…, of 2013-08-06 and assessment of compensatory interest with No. 2013…, charged against the Taxpayers which fixed the Personal Income Tax to be paid in 2009 in the amount of € 303,194.08, and compensatory interest in the amount of € 38,773.35, under the following terms and grounds.

The disputed issue is as follows:

Whether the urban property acquired by the female Applicant, by public deed of 9/7/99, located at Rua …, nos. … and … of the Parish of…, Porto, registered in the property register under article …, constituted her own and permanent residence at the time of its disposal on 29/4/2009 and, if so, whether the proceeds of the sale were reinvested and to what extent in the acquisition of another urban property for the same purpose.

The Tax Authority (AT) takes the view that the female Taxpayer failed to dispel fundamental doubts regarding the permanent residence of the Applicant and her family household in the urban property disposed of (hereinafter referred to as the Massarelos residence) and proceeded to assess Personal Income Tax on the capital gains realized and the corresponding compensatory interest aforementioned.

The Personal Income Tax assessment made is No. 2013…, of 2013-08-06 and the assessment of corresponding compensatory interest with No. 2013…, charged against the Applicant Taxpayers which fixed the Personal Income Tax to be paid in 2009 in the amount of € 303,194.08 and compensatory interest in the amount of € 38,773.35.

That the Applicant made payment of the assessed tax on 13/12/2013, in the amount of € 303,440.32, without the addition of interest, as she benefited from the Exceptional Regime for Regularization of Tax Debts, approved by Decree-Law No. 151-A/2013 of 31 October.

2.1 – From the Position of the Applicant Taxpayer

a) The female Applicant acquired, as proven, by notarial deed of the 4th Notarial Registry of … of 9/7/1999, an urban property located at Rua …, no. … and Rua …, nos. … and …, parish of Massarelos, municipality of … and registered in the respective urban property register under article ….

b) According to the aforementioned notarial deed, the acquisition price was 60,000,000$00 (sixty million escudos) (equivalent to € 299,278.74), conf. doc. no. 4 attached by the Applicant.

c) That the Applicant alleges that she devoted the property to her own and permanent residence and that of her family, as declared in the aforementioned deed.

d) The Applicant declares that she made, at the time of acquisition of the residence, on 8/7/99, at the then Tax Office of … Bairro do Porto, by receipt no. …, the amount $ 6,000,000.00 (six million escudos), (equivalent to € 29,927.87) of transfer tax and the amount of $ 1,101,610.00 (one million, one hundred and one thousand, six hundred and ten escudos), (equivalent to € 5,494.81), as notarial fees, paid at the Notarial Registry on 9/7/99.

e) That the Applicant carried out, as aforementioned, various improvement works initiated in 2005 and completed in the year of sale itself in 2009, which led to the incurrence of various expenses.

f) That on 29/4/2009 the female Taxpayer proceeded to sell this residence, for the price of € 2,200,000.00 (two million two hundred thousand euros), by deed executed before Notary Dr. "C", conf. doc. no. 5, attached to the case file.

g) When disposing of the Massarelos residence, the Applicant manifested in Annex G to her respective Personal Income Tax return form 3 for the year 2009, the intention to proceed with the reinvestment of the amount realized from such disposal.

h) That in the years 2011 and 2012 the Applicant proceeded with partial reinvestment of the aforementioned realization amount of € 2,200,000.00 – which she entered in Annex G to the income tax returns for Personal Income Tax for said years.

i) The partial reinvestment was made in the acquisition of another property, on 19/12/2011, allegedly intended for her own and permanent residence, and she also carried out various restoration works therein.

j) The urban property located at Rua …, no. …, parish of Foz do Douro, …, registered in the respective property register under article…, was that new residence, acquired by Applicant "A", for the price of € 900,000.00 (nine hundred thousand euros), through the "H" system, operating at the First Notarial Registry of Specialized Competence of Porto, cfr. docs. of pages 58 to 60 of the case file.

k) The AT considered that the Massarelos property, disposed of on 29/4/2009 for the aforementioned amount of € 2,200,000.00 (two million two hundred thousand euros), was not intended as the own and permanent residence of the taxpayer or her family household, and therefore proceeded to assess 50% of the capital gains realized, disregarding, for this reason, the partial value of reinvestment made, as it was not applicable under No. 5 of Article 10 of the Personal Income Tax Code.

l) From which resulted the assessment challenged by the Applicants, which determined an increase in capital gains to declared income of € 722,476.92 and an additional assessment of Personal Income Tax and compensatory interest in the total amount of € 342,213.67, relating to the year 2009, received by the Applicants on 28/8/2013.

m) On the day before, they had received Compensation Statement No. 2013 …, with the breakdown of the aforementioned amount.

n) The Applicants filed a gracious complaint against the assessment act on 30/9/2013, which was dismissed and whose order of 23/12/2013 was communicated to them on 8/01/2014.

o) The Applicants proceeded to pay the required Personal Income Tax on 13/12/2013, without interest, in the amount of € 303,440.32, under the Exceptional Regime for Regularization of Tax Debts, approved by Decree-Law No. 151-A/2013 of 31 October.

p) Because they did not agree with the decision dismissing the gracious complaint, on the grounds that they understand that both the property disposed of in 2009 (Massarelos) and that acquired in 2011, in its replacement (at Foz do Douro) and subject to rehabilitation works in 2011 and 2012, were intended as the own and permanent residence of the Applicants and their family household, they filed the present request for arbitral pronouncement.

q) And, consequently, they further request that these facts be considered, as well as the reinvestment made in the new residence at Foz do Douro, and, therefore, the assessed Personal Income Tax be annulled.

r) That Applicant "A" paid "D", for the real estate appraisal required by the financing bank for the acquisition, in June 2006, the amount of $ 18,000.00 (€89.78), against receipt mod. 6 of Personal Income Tax, AEG …, cfr. doc. no. 23 of the case file, at page 89.

s) The Applicant also incurred maintenance expenses for the disposed property (Massarelos), in the amount of € 8,052.71, relating to electrical installations, placement of circuit breakers, bulbs, terminals, wire, etc., in the amount of € 8,052.71, with the amount of € 3,323.39 relating to Invoice No. 2090, of 17/4/2009, and € 4,729.32 relating to Invoice No. 2091, of the same date, both issued by the firm "E", Lda, addressed to the Applicant husband "B" for the address Rua … – urban property of Massarelos, cfr. docs. nos. 24 and 25 of the case file, pages 88 and 89.

The electrical installation of the Massarelos property, given the aforementioned Invoice, was completed on 17/4/2009, on a date close to the date of sale of said property on 29/4/2009.

t) She paid Applicant "A" to the Municipal Chamber of … on 23/4/2009, the amount of € 1,470.77, relating to urban infrastructure and respective license/Building Works Authorization, Proc. no. …/09, cfr. doc. no. 28 of the case file, at page 90-verso.

u) The Applicant also requested a mandatory energy certificate, having spent € 540.00, paid to "F", which issued Invoice No. …, of 10/2/2009, addressed to Applicant "A", for Rua …, no. … (Massarelos urban property), cfr. doc. no. 26 of the case file, page 26.

v) She paid the company "G" – Real Estate Intermediation Company, Lda., the sum of € 79,920.00, as a commission for brokerage of sale of the residence at Rua …, no. … and Rua …, nos. … and …, parish of Massarelos, city of …, conf. Invoice No. …/2009, of 29 April, addressed to Applicant "A", for Rua …, no. … (Massarelos urban property), cfr. doc. no. 27 of the case file, pages 89.

x) She further paid by Applicant the amount of € 300.00 expenses for cancellation of a mortgage of the residence, so that the property would be sold in a free and unencumbered state, according to Receipt No. …/2009, of 3 March, from the 2nd Registry Office of Real Property Registration of ….

z) Applicant "A" bore charges for interest and amortization of the disposed residence (Massarelos), according to the statement hereinafter mentioned, but which is intended to be included in the Personal Income Tax return for purposes of deduction from the tax liability under Article 85 of the Personal Income Tax Code.

aa) The Applicant further states that "the difference between the acquisition price and the sale value of the property, less the expenses incurred and the monetary correction factor resulted in a capital gain of € 1,444,953.84 for the Taxpayer (as – says the Applicant – is recognized by the AT, which determined an increase to global income in Personal Income Tax on 50% of this amount)".

ab) That regarding the property acquired at Foz do Douro, object of the alleged reinvestment, the Applicant made various restoration and improvement expenses, in the global amount of € 471,393.26, which she documented with the tax administration and entered in Annex G to her Personal Income Tax return for the year 2012.

ac) Reinvestment which, as she alleges, was not accepted by the AT because this entity understood that the disposed property (Massarelos) was not intended as own and permanent residence.

ad) The Applicant confirms that "had tax residence at the following locations and dates, as declared to the AT, (as per certificate issued by the Tax Office of … which she attaches as doc. no. 7):

a. On 20/01/2006 and on 29/4/2009 at Rua …, No… in the …;

b. On 12/01/2012 at Rua …, no. …, Foz do Douro in the …".

ae) And the Applicant further states that "she resided uninterruptedly in the disposed property (Massarelos), making it her own and permanent residence, from the moment subsequent to its acquisition until the date of its disposal".

af) The Applicant clarifies that her husband "B", with whom she was married under a separation of property regime, "had, for professional reasons, only in the year 2010, to move his residence and at this moment has residence in …, Brazil".

ag) The Applicant further clarifies that the AT bases its action on the fact that "in the purchase and sale deed executed (on 29/4/99 – Massarelos property) it was declared that the female Taxpayer would reside at …, Praia …, …,…, and that the aforementioned property is not her primary residence".

ah) The Applicant justifies herself with the allegation that "these declarations are wrong and came to be entered in the deed by mere oversight, completely beyond the will of the female Taxpayer, to whom they are attributed".

ai) And she clarifies that "in fact, since from the date of sale the female Taxpayer would no longer reside in the disposed property, it was declared that she resided in the …, …, considering that that was the only house the Taxpayers had to spend holidays in the Algarve not having, yet, a fixed residence in Porto".

aj) And that immediately thereafter "they went to live in a house made available temporarily by a friend of the couple, located at Rua da…, no. … in Porto", until "they moved their residence, definitively, at the beginning of 2012, to Rua …, no…, parish of Foz do Douro, in the property acquired on 19 December 2011".

ak) And regarding the aforementioned argument of the AT to not consider the Massarelos property as the Applicant's own and permanent residence and "so that no doubt remains on the formal plane and confirming that such declarations are nothing more than mere oversight and imprecision, on 16/01/2014 at the Notarial Registry of Porto of notary "I" the Deed of Purchase and Sale executed on 29/4/2009 was rectified, so as to make it clear that the residence of the issuer (here female Taxpayer) and her husband were at Rua …, no. … and Rua .. no. … in Porto, and that it constituted on that same date, their primary residence – (See doc. no. 8 which is attached)".

al) And she clarifies that "the rectification deed amends and integrates the original deed, with its effects reported to the date of the rectified deed".

am) And, thus, the Applicant emphasizes that "with this rectification of the notarial act, the merely formal and unwarranted rationale of the tax assessment act practiced by the AT falls away".

an) And she points out that, given the incompatibility between the residence declared in the sale deed and the residence declared for tax purposes, it is clear – says the Applicant – that "this incompatibility would have to be resolved by resorting to material truth and underlying reality – which the AT did not care to investigate".

ao) And the Applicant alleges that there is abundant evidence that the Applicants and their family household had their permanent residence at Rua …, (Massarelos property) on 29/4/2009, which they cite:

"The residence is close to the area where their children go to school…where they do their shopping…where they spend their free time…where they receive friends…where they receive correspondence…and which represents the address used in their normal and daily life".

ap) In these terms, they request that the Tribunal appreciate the attached documents nos. 9 to 20, relating to the places frequented by the children in their daily lives, to the residence of their domestic employee with the Applicants, to the address of correspondence received, to communication services, television, water supply, security and alarm services and to the fact that the husband is an administrator of companies headquartered in Porto.

aq) Terms in which the Applicant Taxpayers had the right to reinvest the realization value obtained from the sale of the said property, under No. 5 of Article 10 of the Personal Income Tax Code, thus removing from taxation the capital gains arising therefrom.

ar) And the Applicants further request that "the reinvestment made in 2011 and 2012 in the acquisition and improvement of the property located at Rua …, no. …, in Porto, should be accepted for purposes of elimination of taxation on such capital gains".

as) Thus, given the sole ground for the assessment invoked by the AT, with manifestly unfounded rationale for the assessment challenged, its revocation is imperative, in terms whereby the reinvestment of € 1,371,393.26, made in 2011 and 2012, is accepted and considered for tax purposes, eliminating from the taxable income the portion of capital gains corresponding to the realization value.

at) And the Applicants conclude that, consequently, having the AT violated the provisions of Nos. 5 and 7 of Article 10 of the Personal Income Tax Code,

"- The Order of 23712/2013 which dismissed the gracious complaint filed by the Taxpayers must be revoked;

• Consequently, the Personal Income Tax assessment for 2009 must be annulled, on the grounds of error in characterization of the tax fact;

• And, furthermore, the AT must be ordered to proceed with reimbursement to the Taxpayers of the sum of € 303,440.42, plus compensatory interest in their favor, calculated at the rate legally stipulated from 13/12/2013 until the date when such reimbursement has been made".

They listed witnesses whom they waived when the Meeting of Article 18 of the Tax Arbitration Rules took place, committing to attach proof documents relating to the Building License for the works carried out, the electricity billing and the use of telephone, all relating to said disposed address of Massarelos.

THE TAX AUTHORITY AND CUSTOMS AUTHORITY responds, in summary, in the following terms:

3.1 Of the Facts

a) It highlights, first of all, that by deed executed on 9/7/99, the female Applicant acquired the property located in the parish of Massarelos, registered in the property register under article .., for the price of $ 60,000,000.00 (€ 299,278.74).

b) That in the alienation deed executed on 29/4/2009, of the same property located in the parish of Massarelos, whose stated value was € 2,200,000.00, it is stated that "the aforementioned property is not her primary residence", indicating as her address …, Praia …, …,…, Algarve.

c) That by notarial deed of 19/12/2011 the female Applicant acquired, for the amount of € 900,000.00, the property located at Foz do Douro, registered in the property register under article ….

d) The female Applicant filed on 27/5/2010, her Personal Income Tax return form 3, for the year 2009, with Annexes A, G and H, having declared in Annex G the following:

i. The acquisition in 1999 of the property which is the subject of these proceedings;

ii. The realization of the same, in April 2009 for the amount of € 2,200,000.00;

iii. The purpose of reinvesting this latter amount.

e) Subsequently, in the Personal Income Tax returns form 3 for the years 2011 and 2012, the Applicant entered as reinvestments made the following amounts:

i. € 900,000.00 in 2001;

ii. € 471,393.26 in 2012, which gives a total reinvestment of € 1,371,393.26.

f) The AT, because it disregarded the aforementioned amounts as reinvestment, notified the Applicant on 28/8/2013, of the Personal Income Tax assessment note No. 2013 … (in reliquidation of the one previously made).

g) Against this, the Applicant filed a gracious complaint, asserting the right to consideration of the reinvestment made and also the right to tax exclusion, on the grounds that the disposed property, Massarelos, constituted her own and permanent residence, notwithstanding having declared the contrary in the sale deed of the same property, "for strictly personal reasons".

h) The said gracious complaint was dismissed and the final decision was notified on 8/1/2014, after notification for prior hearing on 19/11/2013, with the AT invoking as grounds the fact that the disposed Massarelos property did not constitute, at the time of alienation, her own and permanent residence.

i) The AT points out that the Applicant, between 31/12/2000 and 31/12/2005, had tax residence at Rua …, no. …, Porto.

j) And that on the dates of 31/12/2006, 31/12/2007 and 31/12/2008, her tax residence was at Rua …, no. ….

k) And the AT further states that the Applicant's tax residence, on 31/12/2009, became …, Praia …, …, Algarve.[1]

l) And the AT, in line with its demonstration that the aforementioned Massarelos property, disposed of on 29/4/2009, did not constitute the Applicant's permanent residence, comes to emphasize the circumstance that it carried out enlargement works on the said property.

m) Thus, it states that by Building License No. ALV/…/…/…, enlargement works were authorized on the Massarelos property.

n) The AT states that from the said License, "The construction conditions, whose compliance will determine the subsequent decision to authorize the use of the building, are those mentioned in the sheet attached to this license, as well as those indicated in the opinions and information from the entities and services presented below, whose copies are attached (…). And that the deadline for completion of the works is: 750 days".

3.2 Of the Challenge

o) The AT states that the Applicant alleged in the gracious complaint that the disposed Massarelos property was, from its acquisition, her own and permanent residence, as well as that of her family household and that the fact that she mentioned in the sale deed that it did not constitute her own and permanent residence, constitutes an oversight, corrected through the rectification made on 16/1/2014.

p) The AT then cites what is provided in No. 5 of Article 10 of the Personal Income Tax Code, namely what is mentioned in its paragraph a), relating to the conditions for tax exclusion of capital gains, whenever there is reinvestment of the realization value of the disposed own and permanent residence, into another residence with the same purpose, within a maximum period of 36 months.

q) And the AT emphasizes that what is under discussion in these proceedings, is whether "in light of the justifying facts presented by the Applicant, one can conclude that the disposed property was or was not intended as the own and permanent residence of the Applicant or her family household".

r) And the AT understands that it was not.

s) And it bases its conviction on the fact that the Applicant declared on 29/4/2009, in the sale deed of the Massarelos property in question, that the property did not constitute her own and permanent residence.

t) And it emphasizes that it would be implausible that this mention was made without the Applicant's knowledge, or without her understanding of its meaning, all the more so that, precisely for tax reasons, it is usually one of the matters to which the notary makes particular reference.

u) And the AT also emphasizes that the justification for the existence of mere oversight and the fact that the marital status of the Applicants is separation of property is beside the point.

v) And it also notes the fact that the rectification of the sale deed was only made after the Applicant was directed by the AT, whereby, it says, "the rectification does not have the virtue of remedying, without more, its content, particularly because it is a rectification declarative of the full responsibility of the signatories".

w) And in reinforcement of its thesis, the AT comes to clarify that "only in this context is that the Applicant comes to say that it is an oversight, whereas, in the prior hearing for the decision on the gracious complaint, the Applicant stated that in the sale deed of the property she declared that it did not constitute her own and permanent residence for strictly personal reasons".

x) The AT invokes that "neither can the fact that the Applicant's tax residence, at the date of alienation, was the address of the disposed property be determinative, by itself".

y) And this is because, says the AT, "the Case Law of the Supreme Administrative Court has come to move away, in this matter, from a concept of cadastral residence, to privilege habitatio, the center of personal life".

z) And on the other hand, continues the AT, "because the reality of the facts does not even support this argument, since the Applicant although alleging that, from acquisition in 1999, she lived uninterruptedly in that property, only indicated it, for purposes of the cadastral register of tax residence, from 2006 onwards".

aa) And the AT, to substantiate that the facts alleged by the Applicant do not constitute suitable proof, further refers "to docs. nos. 9 and 10 attached by the Applicant, which nothing more prove, for what is relevant to these proceedings, than that the children attended, in 2010, "J" and were accompanied by a doctor located in Porto."

bb) And the AT also reports doc. no. 11 attached to the case file. "which purports to show that the Applicant's son attended "K", in Porto".

cc) And neither is it a sufficient indication, according to the AT, "the fact that the Applicant presents invoices from Porto pharmacies, yet it may be relevant that some of these acquisitions were made after the disposal of the property, on a date which, according to the Applicant, she was living temporarily in the Algarve".

dd) And the AT further emphasizes that also regarding the proof of payments, at the said address, of security and alarm services, mobile phone and water, which, after weighing the evidence, this, by being manifestly inconclusive, cannot dispel the AT's doubts regarding the permanent residence of the Applicant and her family household.

ee) And in addition, the AT reinforces its conclusions, stating that such proof, "with the exception of water supply and security services, do not allow one to conclude that that address is 'lived in' by the Applicant and her family household, particularly because the water expenditure demonstrated may derive only from the maintenance of the house, the same being able to be said of security services".

ff) And the AT further states that "moreover, it is the Applicant herself who comes before these proceedings to demonstrate the concurrent use of diverse addresses, whereby, obviously, she cannot reside in all of them, in a continuous and permanent manner.

gg) And the AT cites the case of the year 2010, in which the following addresses are referred to:

i. Letter from "L" addressed to the Applicant for Rua …, …, Porto (pages 53 of case file);

ii. Tax residence indicated by the Applicant at …, .., Algarve;

iii. Residence indicated by the Applicant in these proceedings at Rua … no. …, Porto.

hh) And, lastly, the AT states that as "weighing of the panoply of inconclusive, ambiguous and diffuse and even contradictory facts about whether the Applicant or her family household, inhabited in a permanent manner, or not, from the time of acquisition, the property disposed of in 1999, located at Rua …, no. …, there also weighs in a very significant manner, the fact that the aforementioned property was the subject of enlargement works, whose licensing permit, of the Porto Municipal Chamber, requested in 1999, was granted on 6/12/2005 (cfr. pages 109 of case file)".

ii) And that this License, the AT emphasizes, authorizes works of great magnitude, establishes a deadline for completion thereof of 750 days and thus, at best, could not have begun before 2006 and would have lasted, at minimum, more than two years.

jj) The AT further emphasizing "what in fact did come to happen, insofar as the Applicant attached to the gracious complaint proceedings various documents that demonstrate that such works were only completed days before the alienation of the property – cfr. pages 47, 48 and 50 of case file".

kk) And the AT further states that, "in fact, it follows from pages 47 of case file, that the electrical installation of the property was only completed on 17/04/2007, it being certain that the sale of the same occurred on 29/4/2009".

ll) And to conclude, the AT makes a summary list of its arguments and the available evidence, to conclude that "the Applicant cannot, therefore, benefit from the exclusion of taxation of the capital gains resulting from the sale of the aforementioned property, no defect being able to be imputed to the challenged act, given that it made a correct application of the law".

mm) And it concludes by the groundlessness of the request for arbitral pronouncement and by the conclusion that, therefore, there is no basis for the payment of compensatory interest.

1. WRITTEN SUBMISSIONS

4.1 - OF THE APPLICANTS

The Applicant presented her final submissions and with them the proof documents, which the Tribunal recalls were not presented with the initial petition, and which are four, namely:

i. Invoice No. A…, relating to February 2009 and to communications from 16 January to 16 February, in the amount of € 22.99, being € 14.15 relating to monthly fees and other services, € 5.009 of communications and € 3.83 of VAT, addressed to the Applicant and for Rua …, nº… in Porto;

ii. Idem No. A…, relating to March 2009 and to communications from 16 February to 16 March, in the amount of € 24.44, being € 14.25 relating to monthly fees and other services, € 6.115 of communications and € 4.07 of VAT, addressed to the Applicant and for Rua …,nº … in Porto;

iii. Building License No. ALV/…/…/…, P.º …/05(?) or …(?)/CMP, issued on 6/12/2005 for the carrying out of works on the Massarelos property and with a deadline for completion thereof of 750 days.

iv. License of Use No. ALV/…/…/…, Proc. no. …/09/CMU, issued on 5/8/2009, in which it is referred in summary that:

a. The common parts of the building are completed and in conformity with the approved project;

b. The certificate for the installation of telecommunications infrastructure (ITED) was not delivered to the Municipal Chamber;

c. On 10/7/2009, the Director of Municipal Planning, Arch. "M" issued an order authorizing the use of the above-described building. On the same date, the issuance of the present license was ordered, so that it serves as title to the applicant and for all purposes prescribed in the Legal Regime for Urban Planning and Building.

Regarding the Submissions, the Applicant alleges in summary the following, in addition to referring to the attachment of the aforementioned documents:

4.1.1 OF THE INTRODUCTION

a) The Applicant recalls the subject matter of the dispute, which concerns the assessment of Personal Income Tax, by the AT, of capital gains obtained from the disposal of the Massarelos urban property, on the grounds that it was not the Applicant's and her family household's own and permanent residence, and therefore the AT disregarded the reinvestment made in the acquisition of a new residence for own and permanent residence.

b) The fundamental issue is, therefore, says the Applicant, given the facts and the evidence made, whether the Applicant had her own and permanent residence in the Massarelos disposed residence.

c) The Applicant alleges that "the disputed matter of fact that this Tribunal must decide, is reduced to determining whether the facts necessary for qualification of the disposed property as having been intended for own and permanent residence of the Applicant are found to be proven".

d) And the Applicant emphasizes that "the qualification of the property as intended for own and permanent residence is a legal qualification that involves a judgment of fact on the facts, that is, it is a qualification of fact that the Tribunal will have to make based on other facts it ascertains and deems proven".

e) And the Applicant further states that "it is certainly true that this judgment will have to be based on credible and relevant indicia, adequate in light of the rules of common experience to confer a certain level of plausibility and conviction that such own and permanent residence occurs".

f) And the Applicant further emphasizes "from the outset that the great question is translated into the verification of the permanent character, which will be the one that will have to be verified in light of the cognitive methodology just mentioned, since the determination of the character of own residence will not raise major difficulties".

g) And concludes this point by stating that "whether in one plane or in the other, the judgment and conviction of the decision-maker will always have to be based on the piece of concrete reality that comes to be ascertained, and never based, exclusively, on documents or on formal declarations. These are important for forming an initial judgment, but can never override the reality actually ascertained".

4.1.2 – OF THE JUDGMENT OF FACT

The Applicant alleges in this section that it will address only the matter that is disputed, leaving aside what are matters perfectly accepted and consensual between the Applicant and the Respondent – matters which she does not specify.

And the Applicant then refers, in the disputed part of the proceedings, to the following elements which she considers relevant for the judgment of fact to be formed by the Tribunal – with reference to the existing testimonial evidence:

a) The Applicant states that the disposed property is located at Rua …, no. … and Rua …, no. … and …, in the parish of Massarelos, municipality of … – and usually appears identified either by the name of one, or by the name of the other of the Roads identified.

b) The Applicant states that this property was acquired in 07/09/99, having then declared "that she devoted it to her own and permanent residence, and that of her family" – see the acquisition deed - which "constitutes a first indication of formal and declarative nature, favorable to the Applicant's claim".

c) Regarding the notarial sale deed of the property executed on 24/9/2009, in which the Applicant declares that "the aforementioned property was not her primary residence and that she resided at Praia…,". In the words of the Applicant, "this aspect constitutes another indication, also of formal and declarative nature, unfavorable to the Applicant".

d) However, the Applicant alleges that this declaration was produced in error, having been revoked and corrected by rectification of the deed, "reverting this indication into a new declaration of formal nature, now with a sense favorable to the taxpayer".

e) And the Applicant, in this path of rationale, now states that "she had tax residence declared in the property in question (Rua …, ..) between 20/1/2006 and 29/4/2009 – which she says constitutes "one more indication, also of formal declarative nature, favorable to the Applicant".

f) And she further states that also the male Applicant husband maintained his declared tax residence at Rua …, no. … in Porto, a situation which was maintained on 29/4/2009 (fact not proven documentally, but not contested by the Respondent) – which she says constitutes "one more indication, also of formal declarative nature, favorable to the Applicant".

g) The Applicant further alleges that the property was subject to enlargement works, with a building license issued on 6/12/2005 and a license of use issued on 10/7/2009 (facts proven documentally with documents attached with the present submissions).

h) And the Applicant further alleges that "these facts tell us nothing for the ascertainment of the relevant facts", because the works were nothing more than enlargement works and even if they were not "nothing prevents the property from having continued to be the family's own and permanent residence during the development of the works".

i) The Applicant further alleges that the fact that her children ("N" and "O") attended in 2009 the educational establishment "J", located in Foz do Douro, in the… – "this indication also favorable to the Applicant, being an indication of material nature, fact of concrete and real life – suggesting that it would not be possible for the Applicants to reside in the municipality of …, in the Algarve, and their children to study in Porto, at Foz do Douro, precisely in the area where the disposed property is located".

j) And the Applicant further alleges that the children of the applicants availed themselves of the services of a pediatrician also in Porto and that one of them attended in 2009 a health club in Porto, conf. docs. 10 and 11 attached to the initial petition.

k) Thus, the Applicants conclude that regarding their minor children, these made their daily life in Porto – which are indications favorable to the Applicant, since, being those minor children, the rules of common experience dictate that, absent other information, they surely would reside with their parents".

l) In reinforcement, the Applicants prove documentally that various medicines were acquired at pharmacies located in Porto.

m) And they also allege and prove documentally that they had in their employ an internal domestic employee of Brazilian nationality, who obtained on 16/7/2008 authorization to reside at Rua .., no. … – which constitutes "one more indication of material nature favorable to the Applicant, since it would be contrary to the normality of things that the Applicants maintained an internal domestic employee in a residence they did not use".

n) Regarding their correspondence, they allege and prove that the Applicants requested from the Postal Service that their correspondence addressed to Rua … in Porto be forwarded to the town of … in …, only with effect from 4/5/2009, and having the property been sold on 29/4/2009 – such fact "constitutes one more indication favorable to the Applicant".

o) They further allege that they provably received at the property various letters to pay insurance and taxes, and maintained contracts and paid for services of fixed telephone, electricity, water and security at the property, and one of the companies mentioned with headquarters in Porto, in which the male Applicant husband was an administrator, in the annual income statement he filed with the same, indicated his residence as being at Rua …, nº… in Porto – which "are indications favorable to the Applicant, which in light of the rules of common experience lead one to think that the Applicants inhabited the property and that they publicized it as being their residence".

p) And the Applicants conclude, combining all the evidence collected, the following:

i. That there is only one indication of formal and declarative nature, which "would lead us to say that the property would not be the Applicants' own and permanent residence – the declaration made in the sale deed of the property";

ii. That "the aforementioned declaration was amended and rectified by a formal act of identical authority – the rectification deed of 16/1/2014".

iii. That "all other indications indicate that the habitual and permanent residence of the Applicants was located in the disposed property, without any margin for doubt".

iv. That, concluding, "the evidence collected demonstrates, in light of the facts proven documentally combined with the rules of common experience, that that property was effectively the habitual and permanent residence of the Applicants and their family".

4.1.3 OF THE JUDGMENT OF LAW

Having exposed and analyzed the matter of fact, proven in these proceedings and not contested by the Respondent, the Applicants state that it remains for the Tribunal to make the legal conclusion.

Thus, they allege that:

a) "The sole ground for the Personal Income Tax assessment made by the AT, increasing the taxable income of the Applicants by the sum of € 722,476.92, is based on the allegation that the disposed property did not constitute the own and permanent residence of the Applicant and her family household".

b) "As demonstrated, this premise was refuted by the truth of the facts and by the evidence brought to these proceedings".

c) "The assessment is based on the consideration of the impossibility of elimination of taxation of capital gains obtained from the sale of the property, through the reinvestment of the realization value".

d) "It is also established in these proceedings that the realization value was reinvested as to € 1,371,393.26 in 2011 and 2012 in the acquisition and improvement of the property located at Rua …, no. …, in Porto, becoming own and permanent residence in this property".

e) "The Tax Authority should have accepted such reinvestment as relevant for tax purposes for the purpose sought by the applicant, and having failed to do so, the issuance of the additional assessment violated No. 5 of Article 10 of the Personal Income Tax Code".

f) "The dismissed Gracious Complaint should have been granted".

For which reason, the Applicants allege, this Tribunal should consider the present arbitral action as founded, and thus determine:

i. "The revocation of the order of 23/12/2013 which dismissed the gracious complaint filed by the here Applicants";

ii. "The annulment of the additional Personal Income Tax assessment for 2009, on the grounds of error in characterization of the tax fact";

iii. "Condemn the Respondent entity to proceed with reimbursement to the Applicants of the sum of € 303,404.32, plus compensatory interest in their favor, calculated at the rate legally stipulated from 13/12/2013 until the date when such reimbursement has been made".

4.2 – OF THE RESPONDENT – THE TAX AUTHORITY AND CUSTOMS AUTHORITY

The Respondent in the submissions filed comes to emphasize that, in essence, what is at issue in these proceedings is to ascertain whether the property disposed of on 29/4/2009, located at Rua …, no. 3 and Rua …, no. …, constituted, for purposes of taxation of capital gains, at the time of said sale, the own and permanent residence of the Applicant.

For such purpose, the AT emphasized in its submissions, in summary, the following:

a) That the Applicant, whether in administrative procedure or in arbitral proceedings, failed to demonstrate that the aforementioned property constituted her own and permanent residence, under the terms and for purposes of the provision of No. 5 of Article 10 of the Personal Income Tax Code.

b) That the documentation presented by the Applicant regarding the schools attended by the children, the extracurricular activities, the doctors and pharmacies they use, have little significance in terms of evidence.

c) Relevant, alleges the Respondent, that what is relevant is the fact that the Applicant declared in the purchase and sale deed of the property in question, executed on 29/4/2009, "that it did not constitute her own and permanent residence".

d) And the Respondent does not accept the argument now invoked by the Applicant "that it was an error in the declaration, cured with the rectification of the deed occurred in 2004".

e) And it clarifies that it does not accept this argument "because this rectification, of the exclusive responsibility of the declarants, does not prove, by itself, what was declared…

f) …And then because it was the Applicant herself who during the administrative procedure, officially called upon to do so, came to say, contrary to what is now sustained and the rectification made, that she had declared that the property did not constitute own and permanent residence, for strictly personal reasons".

g) And the Respondent further alleges that neither is it sufficient the fact that the Applicant had, at the date of disposal of the property, her tax residence in the disposed Massarelos property, "it being to be privileged, according to current Case Law of the Supreme Administrative Court, the habitatio, that is, the center of personal life of the taxpayer and her family household".

h) And, the Respondent further alleges, that that proof of "habitatio" was not presented by the Applicant, in an irrefutable manner "although it is not beside the point, in weighing the facts, that the Applicant only altered, in 2006, her tax residence to that address, notwithstanding the acquisition of the property having occurred in 1999".

i) The Respondent further states that "the invocation of tax residence in the disposed property, at the date of sale, moreover, is even untenable for the Applicant's argument, insofar as, even with tax residence in the Algarve, she continued to have the school, the health club and pharmacy shopping, based in Porto".

j) On the other hand, the Respondent draws attention to "the diversity of addresses presented by the Applicant, during the year 2010, which suggest an arbitrariness in the use of those, which do not allow one to draw a secure conclusion about her effective own and permanent residence, based on the disparate facts demonstrated by the Applicant"

k) Regarding the elements of evidence, brought to these proceedings, which in the Respondent's words, are "insufficient and even contradictory", it intends to analyze them, all the more so because, in its view, "they point, in a reinforced manner, in the opposite direction of what is alleged by the Applicant".

l) And in this line of analysis, the Respondent emphasizes the attachment of the Building Licenses issued on 6/12/2005, which provided for a deadline for completion thereof of 750 days, and the License of Use issued on 5/8/2009.

m) And that having the disposed property been subject to enlargement works for a period exceeding 2 years, initiated in 2006 and completed in August 2009, as per the License of Use granted on 5/8/2009...

n) …The Respondent concludes that such works "did not permit, during the whole of that gap, its occupation/use…".

o) And further states that "this fact which highlights the inconsistency of the evidence presented by the Applicant, given that it was in 2006, on a date when she could not reside in the property, that the Applicant altered her tax residence to that address".

p) And the Respondent emphasizes that "the probative elements now presented allow one to conclude, in an unequivocal manner, that at the date of disposal of the property, the Applicant and her family household, did not inhabit it, with the license of use only occurring after said disposal".

q) And further states that "this inescapable reality, has adherence with the evidence previously produced by the Applicant, at pages 47, 48 and 50 of case file, where it is proven that the electrical installation of the property was only completed days before the sale, on 17/4/2009".

r) And therefore, the Respondent again emphasizes that "at the date of disposal, and after more than two years of works and possibly some more awaiting the building license, the Applicant and her family household did not inhabit the aforementioned property".

s) And it is precisely for this reason, concludes the Respondent, "because the Applicant did not reside in the disposed property that she did not attach the elements of evidence requested by the tax administration, such as proof of use of TV and internet services and proof of gas supply, which allow one to infer, in weighing the evidence, the existence of family living arrangements".

t) And, therefore, says finally the Respondent that "the Applicant failed to prove that the disposed property constituted own and permanent residence".

1. OF THE PROCEDURAL SANITATION

The Applicants chose not to appoint an arbitrator, whereby the Deontological Council of the CAAD proceeded to appoint the undersigned arbitrators, who were accepted by the parties – Applicants and Tax Authority and Customs Authority.

The Arbitral Tribunal was regularly constituted at the CAAD, on 25-03-2014, to appreciate and decide the subject matter of this case, as stated in the respective minutes.

The petition is legitimate and was filed on 22 January 2014 and accepted on 23 January, whereby, having the Applicant been notified on 08-01.2014 of the decision dismissing the gracious complaint filed against the Personal Income Tax assessment act 2013…, of 2013-08-06 and the assessment of corresponding compensatory interest with No. 2013…, which determined the value of Personal Income Tax to be paid in 2009, in the amount of € 303,194.08 and compensatory interest in the amount of € 38,773.35, the petition is timely.

The Tribunal is competent and the parties enjoy legitimacy, with no nullities or exceptions standing in the way of knowledge of the merits of the case.

1. MATTER OF FACT

The Tribunal evaluated all elements brought to these proceedings, having accepted all that came to its knowledge, whether in the initial phase or in the submissions, as it always aimed at the discovery of material truth, in the name of Justice.

5.1 FACTS ESTABLISHED AS PROVEN

Applicant "A" is married under a separation of property regime with "B", as stated in the purchase and sale deeds relating to the Massarelos and Foz do Douro properties, both located in Porto.

The female Applicant "A" acquired by notarial deed of the … Notarial Registry of Porto, of 9/7/1999, an urban property located at Rua …, no. … and Rua …, nos. … and 168, parish of Massarelos, municipality of Porto and registered in the respective urban property register under article …, which we will refer to as the Massarelos residence, conf. doc. no. 21 of case file.

The Massarelos real estate property acquired was the separate property of the female Applicant.

The acquisition price was 60,000,000$00 (equivalent to € 299,278.74), having paid 6,000,000$00 (equivalent to € 5,494.81) for transfer tax, cfr. doc. no. 22 of case file.

As per information from the AT, it appears in the notarial deed that the declarant devoted the property to her own and permanent residence and that of her family, cfr. doc. 133 of case file.

For cadastral purposes, according to certificate from the AT, it appears that Applicant "A" on 2006-01-20 and on 2009-04-29 her tax residence was at Rua …, no. …, …-... Porto - Massarelos residence – and on 2012-01-12 was Rua …, at Foz do Douro no. …, …-… Porto, cfr. doc. no. 16 of case file.

That Applicant "A" carried out various improvements to her Massarelos residence, some of which are mentioned below.

It is shown to be proven that Applicant "A" requested from the Porto Municipal Chamber a building license to proceed with enlargement of the residence acquired at Massarelos, which license she obtained, according to License …/…/…, of 6/12/2005, being fixed therein the deadline for completion of the works of 750 days, cfr. doc. no. 2 of case file, page 109.

It is equally shown to be proven that the Applicant obtained from the Porto Municipal Chamber, by License of Use No. ALV/…/.../…, P.º …/09/CMP, issued on 5/8/2009, which authorizes the use of the property, with cellar, ground floor and residential floor, with the area of 574 m.2, conf. Order from the Director of Municipal Planning of 10/7/2009, conf. doc. attached in the submissions, page 393. It notes therein that the certificate for the installation of telecommunications infrastructure (ITED) was not delivered to the Municipal Chamber.

That Applicant "A" paid "D", for the real estate appraisal paid to the financing bank for the acquisition, in June 2006, the amount of 18,000$00 (€89.78) against receipt mod. 6 of Personal Income Tax, AEG …, cfr. doc. no. 23 of case file, at page 89.

Applicant "A" incurred expenses relating to electrical installations, placement of circuit breakers, bulbs, terminals, wire, etc., in the amount of € 8,052.71, with the amount of € 3,323.39 relating to Invoice No. …, of 17/4/2009, and € 4,729.32 relating to Invoice No. …, of the same date, both issued by the firm "E", Lda, addressed to the Applicant husband "B" for the address Rua … – Massarelos urban property, cfr. docs. nos. 24 and 25 of case file, pages 88 and 89.

The electrical installation of the Massarelos property, given the aforementioned Invoice, was completed on 17/4/2009, on a date close to the date of sale of said property on 29/4/2009.

The Applicant requested also a mandatory energy certificate, having spent € 540.00, paid to "F", which issued Invoice No. …, of 10/2/2009, addressed to Applicant "A", for Rua …, no. … (Massarelos urban property), cfr. doc. no. 26 of case file, page 26.

She paid the company "G" – Real Estate Intermediation Company, Lda., the sum of € 79,920.00, as a commission for brokerage of sale of the residence at Rua …, no. … and Rua …, nos. … and …, parish of Massarelos, city of Porto, conf. Invoice No. …/2009, of 29 April, addressed to Applicant "A", for Rua …, no. .. (Massarelos urban property), cfr. doc. no. 27 of case file, pages 89.

She paid Applicant "A" to the Porto Municipal Chamber on 23/4/2009, the amount of € 1,470.77, relating to Urban Infrastructure and respective license/Building Works Authorization, Proc. no.…/09, cfr. doc. no. 28 of case file, at page 90-verso.

She paid the Applicant the amount of € 300.00 expenses for cancellation of a mortgage of the residence, according to Receipt No. …/2009, of 3 March, from the 2nd Registry Office of Real Property Registration of Porto.

Applicant "A" bore charges for interest and amortizations of the residence, according to the statement hereinafter mentioned, but which was intended to be included in the Personal Income Tax return for purposes of deduction from tax liability under Article 85 of the Personal Income Tax Code.

As per statement issued by "L" for purposes of deduction from Personal Income Tax, Applicant "A" made payments for payment of interest and amortizations of debts contracted for the acquisition, construction or improvement of properties for own and permanent residence, deducted from the amount from the Housing Savings Account, in the amount of € 246,186.19, cfr. doc. no. 30 of case file, at page 92.

The female Applicant "A" proceeded on 29/4/2009 to the sale of the Massarelos residence, her property, for the price of € 2,220,000.00 (two million two hundred and twenty thousand euros), according to deed executed on the same date before Dr."C", Notary of the Notarial Registry of Av…, nos. …/…, Porto, in which it appears that the disposed property is not "her primary residence", cfr. doc. no. 1 of case file, at pages 8 to 11.

That in prior hearing for the final decision on the gracious complaint she filed against the Personal Income Tax assessment for capital gains determined by the Tax Authority on the sale of the Massarelos property, she stated that in the sale deed of the Massarelos property it was not her own and permanent residence "for strictly personal reasons".

This notarial deed was subject to rectification on 16/1/2014 at the Porto Notarial Registry in charge of Notary "I", so as to make it clear that "the residence of the issuer, female Applicant and her husband was at Rua …, no. … and Rua …, no. …, in Porto, and that it constituted on that same date, her primary residence."

To be noted that with issue date of 18/2/2009, was sent to the Applicant for the address Rua …, no., …, Porto, Massarelos residence, by Porto Water Company, EM, a water consumption invoice, relating to the period of 10/1/2009 to 9/2/2009, in the total amount of € 59.24.

As per Point 15 of the Respondent's Response, on the dates of 31/12/2006, 31/12/2007, 31/12/2008, the tax residence of Applicant "A" was at Rua …, no.. – Massarelos residence.

The Applicants manifested in Annex G to their Personal Income Tax return for the year 2009 filed on 27/5/2010, the intention to proceed with reinvestment of the realization value obtained from the disposal of their Massarelos residence.

That in Annex G of the income tax returns for the years 2011 and 2012, relating to the years 2010 and 2011, Applicant "A" mentioned the materialization of reinvestment made, respectively of € 900,000.00 in 2011 and € 471,393.26 in 2012, having declared as reinvested the total value of € 1,371,393.26 of the total realization value of the Massarelos residence, in the amount of € 2,200,000.00.

That the reinvestment stated in Annex G to the income tax return for the year 2012, in the amount of € 471,393.26, relates, according to the Applicants, to the works carried out and the expenses for restoration and improvements in the new urban property acquired at Foz do Douro.

On 19/12/2011 Applicant "A", acquired for the price of € 900,000.00, through the "H" system operating at the First Notarial Registry of Specialized Competence of Porto, the urban property located at Rua .., no. …, parish of Foz do Douro, Porto, registered in the respective property register under article …, cfr. doc. at pages 58 to 60 of case file.

According to what appears in the respective deed, the buyer "A" "declares that the acquired property is intended for her own and permanent residence".

That, as the Respondent states, between 31/12/2000 and 31/12/2005 the Applicant had tax residence at Rua …, no. …, Porto.

That at the request of the Applicant, a certificate was issued by the Tax Office of Porto-…, on 29/11/2013, where it appears that given the available elements the taxpayer "A", with the Tax ID …, on 20/1/2006 and on 29/4/2009 the tax residence of the applicant was Rua …, no. …, …-… Porto (Massarelos property) and on 12/1/2012 was Rua …, Foz do Douro no. …, …-… Porto.

That the Applicant entered in the notarial deed of acquisition of the new property subject to reinvestment, executed on 19/12/2011, located at Rua …, Nº…, Foz do Douro, …-… Porto, "that this property was not her primary residence".

That on that date of acquisition of the new residence at Foz do Douro she resided at …, Praia …, …,.. Algarve.

And that on 31/12/2009, the tax residence of the Applicant became …, Praia …, …, Algarve, this date being posterior to the date of disposal of the property which occurred on 9/4/2009.

That conf. Invoice No. A…, relating to February 2009 and to communications from 16 January to 16 February, in the amount of € 22.99, being € 14.15 relating to monthly fees and other services, € 5.009 of communications and € 3.33 of VAT, addressed to the Applicant and for Rua…no. … in Porto, Massarelos residence, attached by the Applicant in the submissions.

That also conf. Invoice No. A…, relating to March 2009 and to communications from 16 February to 16 March, in the amount of € 24.44, being € 14.25 relating to monthly fees and other services, € 6.115 of communications and € 4.07 of VAT, addressed to the Applicant and for Rua …, no. … in Porto, Massarelos residence, attached by the Applicant in the submissions.

It is not known from the proceedings on what date the Applicants began to use the new Foz do Douro residence as their permanent residence.

That part of the reinvestment made in the new Foz do Douro residence, invoked by the Applicants in Annex G of the income tax returns for the years 2011 and 2012, relating to the years 2010 and 2011, was proven, in that:

-Required reinvestment value:

• Value of acquisition of the 2nd Foz do Douro residence: € 2,220,000.00

• Value of required reinvestment, as 1st condition for total exclusion of capital gains € 2,220,000.00

• Reinvested value:

• Application of the realization value of the alienation value of the Massarelos residence ……….………………… € 900,000.00

• Charges with the Massarelos disposed residence:

  • Payment of Transfer Tax …………….. € 29,927.87

  • Notarial Fees……………. € 5,494.81

  • Assessment expenses ……………… € 89.78

  • Electrical installation expenses…… € 8,052.71

  • Idem with Energy Certificate… € 540.00

  • Intermediation commission………… € 79,920.00

  • Building License from Porto..City… € 1,470.77

  • Mortgage cancellation…………. .€ 300.00

                                                            € 125,795.94
    

-Reinvested value………………………. €1,025,795.94

-BOOK VALUE NOT REINVESTED:…………………… € 1,194,204.06

• PERCENTAGE OF NON-REINVESTMENT…… 53.79 %

That the Tax Authority and Customs Authority proceeded to assess Personal Income Tax for capital gains obtained from the disposal of the Massarelos property subject to the present arbitral challenge, on the grounds that the Applicant or her family household failed to prove having permanently inhabited her residence from its acquisition.

The Tax Administration and Customs Authority proceeded to assess Personal Income Tax for capital gains realized from the disposal of the Massarelos urban property, on the grounds that it did not constitute her own and permanent residence and that of her family household, resulting in the assessment of Personal Income Tax 2009 no. 2013 5005312705, in the amount of € 303,194.08 of 2013-08-06 and assessment of corresponding compensatory interest with No. 2013 00002144582, in the amount of € 38,773.35.

The Applicant proceeded to payment of the tax assessment without payment of interest on 13/12/2013, in the amount of € 303,440.32, under the Exceptional Regime for Regularization of Tax Debts, approved by Decree-Law No. 151-A/2013 of 31 October.

That the Gracious Complaint filed by the Applicant on 30/9/2013 against the Personal Income Tax assessment in question was dismissed by Order of 23/12/2013, on the grounds that the disposed property was not the permanent residence of the family household, according to Order of 23/12/2013, from the Head of Division, by Delegation, notified to the Applicant on 08/01/2014.

6.2 FACTS NOT PROVEN

It was not proven unequivocally that the Applicant and her family household effectively had their Massarelos residence acquired on 9/7/1999, as their own and permanent residence.

It is not proven on what dates the improvement works on the Massarelos residence began and ended, something which may have eventually begun in 2005 and ended in 2009.

It is not proven on what date the Massarelos residence became habitable, whether after the electrical installation on 17/4/2009 or on another date.

[It is recalled that the License of Use contains the order authorizing use on 10/7/2009 and issued on 5/8/2009 by the Porto Municipal Chamber, already after the date of disposal on 29/4/2009].

Neither is it proven on what date the Applicants used the property subject to reinvestment at Foz do Douro, which they acquired on 19/12/2011.

1. OF THE LAW

The issue at hand concerns the right or not to the exclusion of capital gains realized from the disposal of the urban property located at Rua de Felicidade Brown, no. 3 and Rua …, nos. …and … of the parish of Massarelos, Porto, invoked by the Applicant as her own and permanent residence.

For such purpose it is relevant to invoke what is provided in No. 5 of Article 10 of the Personal Income Tax Code, in the wording of Law No. 64-A/2008, of 31/12, which is cited below:

"Excluded from taxation are the gains arising from the onerous transmission of properties intended for own and permanent residence of the taxpayer or her family household, under the following conditions:

a) If, within the period of 36 months counted from the date of realization, deducted of the amortization of any loan contracted for the acquisition of the property, it is reinvested in the acquisition of ownership of another property, land for construction of property, or in the construction, enlargement or improvement of another property exclusively for the same purpose located in Portuguese territory or in the territory of another Member State of the European Union or of the European Economic Area, provided that, in the latter case, there is an exchange of information on tax matters."

From this it follows, first of all, that the first and indispensable assumption for the tax exclusion of gains arising from the transmission of properties – is that it be properties intended for the own and permanent residence of the taxpayer or her family household.

If this assumption is not verified, any other circumstances cease to be relevant that may contribute to a greater or lesser tax exclusion, such as the part of reinvestment of the realization value, amortization of any loan or expenses of works carried out.

Thus, it is therefore as to this assumption that the Tribunal will appreciate all facts brought to these proceedings in order to make its decision.

That is, the relevant matter is to determine whether the disposed Massarelos property did or did not, in fact and in law, constitute the own and permanent residence of the Impugner or her family household, at the time of its disposal.

The disputed matter in this case is, therefore, and surely one of those which demands great effort both as to evidence and as to theoretical determination of what should be understood as "own and permanent residence".

If it is true that the legislator acted well in granting this "tax benefit", it is no less true that it should only be recognized when the base situation corresponds with a reasonable degree of certainty to the intended objectives, under penalty of creating situations of unacceptable relative injustice between taxpayers, in light of the major objectives of the tax system.

In the case at hand, the circumstance that works were carried out over a long period makes evaluation difficult.

Also, the documents brought into the case do not make the decision of the case especially easy, since the Tax Administration could have gone further in the investigation it carried out and the Applicant, having other means of proof available, should have attached them.

The AT presented no conclusive evidence that the A. did not have own and permanent residence in the Massarelos property; it could and should have been more assertive, namely by contacting suppliers of water, electricity, gas, telephone, to ascertain the dates of the contracts and the consumptions between 1999 and 2009;

The AT could also have alleged that the Applicant had various addresses since the date of acquisition can suggest that the Applicant acquires properties to restore and subsequently proceed to their sale (she is already restoring the Foz do Douro residence) and this makes it to be presumed an activity of buying and selling properties.

But it must be stated very clearly that upon the AT's duty of investigation is superimposed the duty of truth in declaration and of cooperation from the taxpayer with respect to the factual assumptions of the assessment.

And the burden of proof as to the verification of the assumptions of exemption or tax benefit also falls on the taxpayer.

What is seen, however, is that the Applicant only attached materials that allow proving that

a. The Massarelos property was acquired in July 1999 with the stated purpose of own and permanent residence, having been sold in April 2009, that is, 10 years later.

b. In the sale deed, in April 2009, the Applicant declared that the Massarelos property was not her own and permanent residence, a declaration which she came to rectify by deed of 2014.

d. The A. carried out enlargement works on the Massarelos property from 2005 to 2009

e. She partially reinvested the sale price of the Massarelos property by acquiring a new property in Porto in December 2011, also intended for own and permanent residence; in 2012 she initiated restoration works on this property.

f. As evidence that the Massarelos property was an own and permanent residence, she attached the following documents:

i. Declarations that she had tax residence in the Massarelos property at least between 2005 and 2009

ii Proof of the enlargement works, most dated 2009

iii Proof of the children attending a school and a gymnasium in Porto, and being assisted by a doctor also in Porto

iv. Receipts from Porto pharmacies

v. 2008 residence authorization for a Brazilian domestic employee having the Massarelos property as address

vi. Receipts for insurance, taxes, security addressed to the Massarelos property.

vii. Two receipts for water consumption relating to the months of January and February 2009

viii. Two invoices for communication service relating to the period from mid-January to mid-March 2009.

Now, in an overall appreciation, it appears that:

a. Having the Massarelos property been acquired with the purpose of being devoted to own and permanent residence it is normal that the tax residence be at that address (one might, at least, question what the tax residence was between 1999 and 2005).

b. The documents relating to the enlargement works are irrelevant to the objective of proving own and permanent residence, as is their contrary.

c. The same will be said regarding schools, gymnasium, doctor and pharmacy receipts, since what is at issue is not proving that she lived in Porto, but specifically that the Massarelos property was an own and permanent residence; conversely, the own and permanent residence would not be affected if the children studied in Coimbra or Lisbon.

d. The receipts for taxes, insurance and others do not seem sufficient to distinguish an own and permanent residence from a mere post office box.

If the matter established as proven seems to be insufficient to support a decision, the same cannot be said of that which was established as not proven and which seems sufficiently solid to support a negative decision as to the Applicant's claim.

This is not to say that the concept of permanent residence requires a constant and permanent presence in the house; rather it is understood to be compatible with periods of absence justified by family, professional or even leisure and other reasons.

As well recalled in the Judgment of the Supreme Court of Justice of 12 February 2009, citing: "Professor Alberto dos Reis (in R.L.J. 79, 118) equated permanent residence with habitual and stable residence, considering, however, that it is not required that the person always live in a house, being able to have another where one spends one, two or three months a year, for example a country house or beach house where one stays during the summer. It is, however, essential, that the center of stable and lasting permanence be located in a certain place, that there his home be installed, his logistics organized, where he lives, and from which, whenever he absents himself, he does so in a transitory or temporary capacity, and with the purpose of returning with stability, for his domestic economy and family household to remain there.

Now, it does not seem possible, having analyzed all the evidence, that one is in the presence of a situation that can approach the characterization of the great Master.

Thus, it is concluded that the factual assumptions on which depends the recognition of the tax exclusion sought by the Applicant are not proven and, consequently, the requirement legally required by Article 10 of the Personal Income Tax Code is not met.

1. OF THE DECISION

Terms in which it is decided to judge the present arbitral petition as entirely unfounded, condemning the Applicants in their respective case costs, jointly and severally at their charge, attributing to the case the value of € 303,440.32 (indicated in the petition, and not contested), having in mind the provision of Article 306, No. 1 of the Code of Civil Procedure and Article 97-A, No. 1, paragraph a) of the Code of Tax Procedure and Article 3, No. 2 of the Regulations of Costs in Tax Arbitration Proceedings, applicable by virtue of paragraphs a) and b) of No. 1 of Article 29 of the Tax Arbitration Rules.

1. OF THE COSTS

The arbitration fee charged to the Applicants is fixed at € 5,010.00, under the terms of Article 12, No. 2 and 22, No. 4, both of the Tax Arbitration Rules and Article 4, No. 4 of the Regulations of Costs in Tax Arbitration Proceedings and Table I attached to the same.

Notify.

Lisbon, 16 September 2014.

The collective tribunal,

Jorge Lino Ribeiro Alves de Sousa (president).

Eduardo Paz Ferreira

José Rodrigo de Castro

Text produced by computer, under the terms of No. 5 of Article 131 of the Code of Civil Procedure, applicable by referral of paragraph e) of No. 1 of Article 29 of Decree-Law No. 10/2011 of 20/01.

The wording of this decision is governed by the old spelling.

[1] It is to be noted that nothing is mentioned regarding the Applicant's address at the date of disposal of the Massarelos property, disposed of on 29/4/2009.