Summary
Full Decision
ARBITRAL DECISION
PARTIES
Claimants: A..., Tax File No. ... and spouse B..., Tax File No. ..., both with domicile at Rua ... ..., ... (Netherlands)
Respondent: TAX AND CUSTOMS AUTHORITY (AT)
I. REPORT
a) On 12 August 2016, the Claimants filed with CAAD a request seeking, under the Legal Regime for Arbitration in Tax Matters (RJAT), the constitution of a singular arbitral tribunal (TAS).
THE REQUEST
b) The Claimants, Dutch nationals currently residing in the Netherlands, seek to have annulled the Personal Income Tax (IRS) assessments for the year 2007 with numbers 2016... and 2016... and compensatory interest with numbers 2016... and 2016..., in the global amount of EUR 27,369.34, on the grounds that they were not granted the tax exemption under No. 5 of Article 10 of the Personal Income Tax Code (CIRS) concerning gains obtained from the sale of a real property they held in Portugal.
c) In response to the AT's reply noting the existence of a new assessment in replacement of the aforementioned, the Claimants submitted on 19.12.2006, through a subsequent pleading, new IRS assessments Nos. 2016... and 2016... and compensatory interest Nos. 2016... and 2016..., in the total amount of EUR 23,964.95.
d) Assessments which the AT carried out once the Claimants sold a property they owned in Portugal as their own and permanent residence in 28.08.2007, which they had constructed from the ground up, without having, allegedly due to lack of knowledge, submitted the IRS Model 3 declaration – Annex G, in the year of realization, expressing the intention to reinvest.
e) In the aforementioned pleading, the Claimants also petitioned for the condemnation of the Respondent as a litigant in bad faith, alleging essentially that, having been notified by the AT in the Netherlands through the mechanism of administrative cooperation between tax authorities of EU Member States, it would not be lawful to notify the assessments to the address of the tax representative in Portugal, whose representation would have been terminated.
THE CAUSE OF ACTION
f) The Claimants invoke the illegality of the disputed assessment acts, charging them with the vice of violation of law due to error of law by the AT (non-compliance with the norm of Article 10 No. 5 – paragraph a) of the Personal Income Tax Code, in the wording in force at the date of the facts).
g) Since they consider that they were not tax residents in Portugal on the date of alienation of the property (on 28.08.2007), they invoke, firstly, that they were not required to submit the Model 3 Declaration – Annex G reporting the alienation of the property and the capital gains and also the intention to reinvest; and secondly that the failure to submit it does not prevent the enjoyment of the tax exemption benefit established in paragraph a) of No. 5 of Article 10 of the CIRS, since they invested the proceeds from the sale in 2008 in the acquisition of another real property intended as their own and permanent residence in an EU Member State.
h) They base their claim on the Court of Justice Judgment of 26.10.2006, European Commission v. Portugal, Case C-345/05, in which the Court stated: "By maintaining in force tax provisions such as those of Article 10, No. 5, of the Personal Income Tax Code, which subordinate the benefit of exemption from taxation of capital gains resulting from the onerous alienation of properties intended as the taxpayer's own and permanent residence or those of members of their household unit to the condition that the gains obtained are reinvested in the acquisition of properties located in Portuguese territory, the Portuguese Republic has failed to fulfill its obligations under Articles 18 EEC, 39 EEC and 43 EEC and Articles 28 and 31 of the Agreement on the European Economic Area of 2 May 1992", which prompted the amendment of paragraph a) of No. 5 of Article 10 of the CIRS by Decree-Law No. 361/2007, of 02.11.
i) And that even if this were not the case, the assessments would always be illegal, since they did not take into account – for deduction from the realization value of EUR 252,500.00 – the value of the land, construction costs and the currency depreciation coefficient (all in the amount of EUR 158,950.20).
OF THE SINGULAR ARBITRAL TRIBUNAL (TAS)
j) The request for constitution of the TAS was accepted by the President of CAAD and automatically notified to the AT on 17-08-2016.
k) By the CAAD Deontological Council, the signatory of this decision was appointed as arbitrator, and the parties were notified thereof on 25-10-2016. The parties expressed no wish to refuse the appointment, in accordance with Article 11 No. 1 paragraphs a) and b) of the RJAT and Articles 6 and 7 of the Code of Ethics.
l) The Singular Arbitral Tribunal (TAS) has been, since 10-11-2016, regularly constituted to hear and decide the subject matter of this dispute (Articles 2 No. 1 paragraph a) and 30 No. 1 of the RJAT).
m) All these acts are documented in the communication of constitution of the Singular Arbitral Tribunal dated 10-11-2016, which is hereby reproduced.
n) On 10-11-2016 the AT was notified in accordance with and for purposes of Article 17-1 of the RJAT. It responded on 13.12.2016, submitting the documentary file consisting of 4 documents. On 12.01.2017 it submitted some documents by oversight, which it subsequently replaced with 17 documents submitted with the motion of 19.01.2017.
o) In accordance with the agreed position of the parties, the meeting of parties provided for in Article 18 of the RJAT was not held. By order of the TAS of 24.01.2017, a deadline for written submissions was set.
p) On 30.01.2017 the Claimants submitted written submissions arguing for the position defended in the request. On 10.02.2017 the Respondent also submitted written submissions arguing for the rejection of the requests with acquittal of the AT.
PROCEDURAL REQUIREMENTS
q) Legitimacy, capacity and representation – The parties are legitimate parties, possess legal personality and procedural capacity and are represented (Articles 4 and 10 No. 2 of the RJAT and Article 1 of Order No. 112-A/2011 of 22 March).
r) Principle of contradiction – The AT was notified in accordance with point n) of this Report. All procedural documents and all documents attached to the case were made available to the respective opposing party in the CAAD Case Management System. Both parties were always notified of their submission. Likewise, regarding subsequent procedural handling, the TAS followed what results from the expressed or tacit position of the parties as written in points o) and p) above.
s) Dilatory exceptions – The arbitral procedure is not vitiated by nullities and the request for arbitral pronouncement is timely since it was submitted within the deadline prescribed in paragraph a) of No. 1 of Article 10 of the RJAT, as evidenced by the fact that the Claimants submitted the request for pronouncement on 12.08.2016 and the disputed assessments date from 04.05.2016 and were notified on 16.05.2016, which became irrelevant since during the pendency of this arbitral pronouncement procedure (on 19.12.2016) new assessments were submitted that replaced the previous ones (those of paragraph b) of this Report), and these are the acts at issue herein.
SUMMARY OF THE CLAIMANTS' POSITION
t) The Claimants, Dutch nationals, disagree with the IRS assessment for the year 2007 since, having constructed from the ground up an urban property at ...-..., they established their residence there, having obtained a building use license for residence on 31.01.2001.
u) And in that property they maintained their permanent residence in Portugal until 2007, when they sold it for the price of EUR 252,500.00, alleging that from 2004 onwards they had also become tax residents in the Netherlands in accordance with Article 4 of the Tax Treaty between Portugal and the Kingdom of the Netherlands and appointed a tax representative in Portugal.
v) And because in April 2008 the Claimants reinvested the proceeds from the sale of the property sold in Portugal in the purchase of a permanent residence in the Netherlands for the value of EUR 251,000.00, where they maintain their permanent residence, they understand that the IRS assessment, for not being granted the tax exemption of No. 5 of Article 10 of the CIRS, is vitiated by illegality.
w) They contend that, allegedly not being residents in Portugal in 2007, the date of the sale of the residence, they were not required to comply, as they did not comply, with the disclosure obligation of Article 57 of the CIRS, notably its No. 4, since the reinvestment occurred at a time when they would no longer be residents in Portugal.
x) They argue that only later did they realize they had to comply with disclosure obligations in Portugal and accordingly engaged a Dutch lawyer to contact the Portuguese AT, which occurred through Dr. C... by letter of 01.04.2009, in which the non-taxation of the Claimants is defended on the grounds that reinvestment of the proceeds occurred in the acquisition of a permanent residence in the Netherlands, also invoking the CJEU judgment of 26.10.2006, European Commission v. Portugal, Case C-345/05.
y) The Claimants contend that the AT became aware of the reinvestment through that letter, which never received a response, and this should be considered valid as a substitute for the formal disclosure obligation referred to in Article 57 of the Personal Income Tax Code.
z) They further invoke that the appointed tax representative renounced the representation in February 2010, having communicated the address of the Claimants in the Netherlands by letter which the AT denies having received, objecting to the fact that notifications continued to be sent to the tax representative.
aa) The Claimant-husband further manifests his dissent regarding the fact that he was at the ... Tax Office on 21.01.2010 and was not notified at that opportunity that he had an IRS debt concerning the gains at issue, finding it strange that they were never notified in the Netherlands, which only occurred on 05.09.2014, through the mechanism of administrative cooperation between tax authorities of EU Member States.
bb) From this assessment in the amount of EUR 60,139.08 (capital gains taxed at 100%), they filed a claim for administrative relief and obtained favorable ruling only as to the taxation at 100%, which resulted in the new assessments (those of paragraph b) of the Report).
cc) They contend that even if this were not the case, "the amount of the capital gain is wrong" since "the gain subject to IRS is constituted by the difference between the realization value and the acquisition value, in accordance with Article 10, No. 1 paragraph a) and No. 4 paragraph a), of the CIRS, after the adjustments contained in the CIRS" and that in the assessment there was no account taken of the value of the land (EUR 24,939.89), the cost of construction (EUR 106,243.95) and other costs with construction materials and services in the amount of EUR 33,186.05.
dd) Concluding that the capital gain would be EUR 62,374.94 and not EUR 172,077.12, considering construction costs and the currency depreciation coefficient, in a global amount of EUR 158,950.20.
SUMMARY OF THE RESPONDENT'S POSITION
ee) The Respondent argues for a different reading of the facts and the law. First, it states that "contrary to what is intended by the claimants, document No. 13 attached to the record – a typewritten and unsigned communication of 08.02.2010 renouncing the tax representation obligation – does not prove that it was received by the tax administration, as it is not accompanied by proof of sending (not even a record is attached), nor does it result from it having been received, by means of the affixing of a reception stamp by the AT".
ff) Regarding the failure by the Claimants to submit Annex G of Model 3 of the IRS, it states that: "they violated the disclosure obligations to which they were bound in the year 2007, because here in Portugal they obtained income of category G", "Article 57 of the CIRS is applicable to the claimants, and it is precisely because the claimants are not exempted from it in accordance with Article 58 and because they are covered by the norm of personal incidence of Article 13 No. 1, all of the same code" and concludes: "The claimants were obligated to comply with Article 57, namely and by reference to the income at issue, No. 3 of the same article (in the wording in force at the date of the facts)".
gg) And because the Claimants on 14.10.2008 "proceeded to change their addresses to the Netherlands - ...- Netherlands", having proceeded on 14.10.2008 not only to change the address but also to "the appointment of company D..., SA, Tax ID..., with registered office at..., No. ...-.... -... ..., as their representative", "this determined that, automatically, notifications of the existing assessments were sent by the competent Central Services, in this case the Collection Services Directorate, to the address of the taxpayers' representative, at Rua..., No. ...-...-... ...".
hh) And even regarding the assessments referred to in b) and c) of this Report, it states: "By consultation of the information contained in the 'SECIN' Application, as well as on the CTT website, it is found that the notifications were received at the address to which they were sent, that of the representative, on 11-05-2016 the first, and on 07-06-2016 the second".
ii) Regarding the document referred to in ee) of this Report, it adds the following: "The claimants filed on 04-11-2014 oppositions to tax executions (No. .../15.7BELLE and No. .../15.9BELLE), and in both cases a document is attached, numbered No. 13, addressed to the Head of the Tax Office of Loulé ..., dated 08-02-2010, allegedly issued by company D... and through which it declares that from said date, 08-02-2010, it renounces the representation of the objectors"; "However, the document bears no signature, merely indicating at the end thereof the name of 'E...', nor the affixing of any stamp to evidence its reception by the Tax Office to which it is addressed, or by any other, as well as any notation by an official to evidence its reception"; "Such written document did not enter the Tax Office of Loulé"; "Upon consultation of the list of all documents contained in the SGRC, registration and alteration of both objectors, it is found that there is no reference therein to the handling of such document, with the last alteration being that of 14-10-2008".
jj) And concludes: "Therefore, the assessments with Nos. 2016... and 2016...7, to which are associated the assessments of compensatory interest Nos. 2016... and 2016..., dated 01/06/2016, which replaced the assessments challenged herein, could only have been, as they were, sent to the address of the tax representatives of the RR., appointed by them"; "And as the RR persist in not revoking such appointment, which they could and should always have done".
kk) And regarding the non-consideration, in the assessments, of the values referred to in cc) and dd) of this Report, it states: "without granting ... only by means of a declaration of the taxpayer can the AT consider the costs alleged by the taxpayers".
ll) Finally, the AT concludes by stating: "Furthermore, the substantive requirements on which depends the exclusion from taxation are yet to be verified", since as the Claimants admit "they became residents in the Netherlands in 2004", concluding that "if they only resided in Portugal from 1999 to 2003, in the year of alienation of the property, in 2007, this property was no longer intended as their own and permanent residence, whence it is manifest that the requirement of No. 5 of Article 10 of the CIRS is not met 'Capital gains from the onerous transfer of properties intended as the taxpayer's own and permanent residence or those of members of their household unit are excluded from taxation...'"
mm) It concludes by arguing for the rejection of the requests with acquittal of the AT.
II. QUESTIONS FOR THE TRIBUNAL TO RESOLVE
It will be necessary to determine, in the specific case, what consequences result from the fact that the Claimants did not comply with what is prescribed in paragraph c) of No. 5 of Article 10 of the CIRS and Nos. 1 and 4 of Article 57 of the CIRS. That is, whether this non-compliance with disclosure obligations prevents the application of the tax exemption benefit at issue, or whether it merely results in the burden of challenging and proving, in this case, in judicial proceedings, what could be proved more easily with the simple submission of the income return, given the presumption of truth of its elements.
The fundamental question that arises in this dispute concerns the assessment, in light of the evidence produced, of whether the legal requirements for the Claimants to benefit from the tax exemption of paragraph a) of No. 5 of Article 10 of the CIRS are met.
Finally, should it be concluded that in this case the requirements for the Claimants to benefit from the tax exemption of paragraph a) of No. 5 of Article 10 of the CIRS are not met, it will be necessary to assess, in light of the evidence produced, whether the assessments should always have taken into account the value of the land, the cost of construction and other costs with construction materials and services, concluding that these values should be considered to reduce the value of taxable gain (Articles 43-1 and 46-4, both of the Personal Income Tax Code).
It should also be assessed whether the request filed by the Claimants for condemnation of the AT for bad faith litigation is well-founded.
III. MATTERS OF FACT ESTABLISHED AND NOT ESTABLISHED. REASONING
Regarding matters of fact, the Tribunal need not rule on everything alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to discriminate between the facts established and those not established (in accordance with Article 123 No. 2 of the Tax Procedural Code and Article 607 No. 3 of the Code of Civil Procedure, applicable by reference to Article 29 No. 1 paragraphs a) and e) of the RJAT).
Thus, the pertinent facts for the judgment of the case are selected and determined in function of their legal relevance, which is established in attention to the various plausible solutions of the question(s) of law (in accordance with former Article 511 No. 1 of the Code of Civil Procedure, corresponding to current Article 596, applicable by reference to Article 29 No. 1 paragraph e) of the RJAT).
Thus, having regard to the positions taken by the parties and the documentary evidence submitted, the following facts were considered proven, with relevance for the decision, as set out below, with the respective documents indicated (proof by documents), as reasoning.
It should be noted that nothing prevents the TAS from considering documents Nos. 7 and 18 submitted with the request for pronouncement, given their probative force, moreover not specifically contested (see point 43 of the Respondent's submissions), which was not required of the AT, and even if it had been, this would not preclude the possibility of the tribunal assessing them in a global evaluation of the evidence produced.
By the dynamics of the administrative relief procedure (see Articles 52 to 54 of the request for pronouncement and the substantiation itself of the assessments referred to in paragraph c) of the Report of this decision) developed before this contentious phase, documents Nos. 7 and 18 submitted with the request for pronouncement would have been offered to the AT, and it can be understood from the tenor of the response brought to this process that they were considered uninteresting in its decision to maintain the IRS assessment, since the Respondent's position is that only the construction costs of the real property in Portugal intended as the own and permanent residence would have relevance (to be deducted from the realization value) if the Claimants had submitted the Model 3 IRS declaration (see point 43 of the Respondent's submissions).
The TAS cannot therefore ignore the probative force of documents 7 and 18 submitted with the request for pronouncement, as results from Article 376 of the Civil Code.
FACTS ESTABLISHED
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The Claimants acquired, on 12 August 1999, the rural property named "...", located in the Parish of ..., Municipality of ..., corresponding to item ... of said parish with patrimonial value of PTE 56,148.00, for the value of PTE 5,000,000.00 which corresponds to EUR 24,939.89 – Article 6 of the request for pronouncement and in accordance with document No. 5 submitted with the request for pronouncement.
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On the aforementioned rural property, the Claimants constructed a residence for which a building use license was issued on 31.01.2001 by the Municipal Council of ... with number .../01, whose urban part – the residence – came to be listed as item ... – Parish of ... – Article 7 of the request for pronouncement and in accordance with documents Nos. 6, 7 and 9 submitted with the request for pronouncement.
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On an unspecified date in 2007, the Claimants, following the execution of a promise contract executed on 28.08.2007, sold the residence referred to in 2., for the price of EUR 252,500.00 – Article 13 of the request for pronouncement and in accordance with document No. 9 submitted with the request for pronouncement.
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On 18 April 2008, the Claimants acquired in the Netherlands, for the price of EUR 251,000.00, a "house, including the parcel of land on which it was built, garden and outbuildings, located at ..., ... ... registered in the Municipality of ..., Section ... No. ... with 00.1500 hectares of area" and the "meadow parcel behind the property ... registered in the Municipality of ..., Section ... No. ..., with 00.3800 hectares of area" – Article 14 of the request for pronouncement and in accordance with document No. 10 submitted with the request for pronouncement.
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On 14.10.2008, the Claimants, indicating the address at ... ... – Netherlands, updated their tax registration in Portugal, reporting their residence in the Netherlands and appointing D... SA, Tax ID..., with registered office at Rua... No.... ...-... ... Albufeira as their tax representative, an entity which since 22.04.2006 had already represented the Claimant-husband with address in Oslo – Documents Nos. 1, 2, 16 and 17 submitted with the Respondent's motion of 19.01.2017 and points 11 and 13 of the Respondent's submissions.
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On 01 April 2009, C..., a Dutch lawyer, sent a letter to the address of the Tax Office of ... invoking the discipline of the CJEU Judgment of 26.10.2006, European Commission v. Portugal, Case C-345/05, and referring that his clients had reinvested the capital gains realized in Portugal in the Netherlands, a letter to which no response was ever given by the Respondent – Articles 20 to 23 of the request for pronouncement and in accordance with document No. 12 submitted with the request for pronouncement.
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On 21 January 2010, the Claimant-husband was present at the ... Tax Office where he paid an IRS debt from 2003, not being notified of any pending assessment – Articles 39, 40 and 44 of the request for pronouncement and in accordance with documents Nos. 14 and 15 submitted with the request for pronouncement.
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On 05.09.2014, the ... Tax Office addressed to the Belastingdienst/Central Liaison Office of the Netherlands, on the basis of Article 5 of Directive 2010/24/EU, an automatic request for exchange of information concerning the Claimants, requesting information on the address and on income and assets for collection purposes, the official entity of the Netherlands indicating the address known as "...-...-NL", providing the IBAN of the bank account in the Netherlands and regarding assets stating: "has real property located at the address ...-... Value EUR 250,000.00. Mortgage EUR 73,922.00" – Documents Nos. 11 and 14 submitted with the Respondent's motion of 19.01.2017.
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On 05.09.2014, the Head of the ... Tax Office sent to the authorities of the Kingdom of the Netherlands two summonses, one for each Claimant, summoning the Claimants in the Netherlands through the mechanism of mutual assistance for the recovery of claims (Directive 2010/24/EU – Article 8), for the coercive collection of IRS debts relating to the gains at issue herein and penalties for failure to submit Model 3 IRS – Article 48 of the request for pronouncement and in accordance with 12 documents following document No. 15, submitted with the request for pronouncement and which the Claimants contend have numbers 16 and 17, but are not numbered.
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Two documents called "population registration extract" were issued on 09.10.2014 by the Municipality ... - Netherlands, with the address of the Claimants at ..., ... – Netherlands – Article 15 of the request for pronouncement and in accordance with document No. 11 submitted with the request for pronouncement.
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On 16 May 2016, the Respondent notified the Claimants through the entity referred to in 5., of the IRS assessments with numbers 2016... and 2016... and compensatory interest with numbers 2016... and 2016... in the global amount of EUR 27,369.34, referred to in paragraph b) of the Report of this decision – preamble of the request for pronouncement, Article 2 of the request for pronouncement and documents 1 to 4 submitted with the request for pronouncement.
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On 06 June 2016 and on 07 June 2016, the Respondent notified the Claimants to the entity and address of the entity referred to in 5., of the IRS assessments Nos. 2016... and 2016... and compensatory interest Nos. 2016... and 2016..., in the total amount of EUR 23,964.95, referred to in paragraph c) of the Report of this decision, in replacement of those referred to in the previous point, with the following reasoning: "The assessment carried out corresponds to the execution of the decision rendered in the process ... of official review with No. ...2014..." – Claimants' motion of 19.12.2016 and in accordance with Documents Nos. 1 to 4 which accompanied it.
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On 12 August 2016, the Claimants filed with CAAD the present request for pronouncement – entry registration in the Case Management System of the request for pronouncement.
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The Claimants bore, in addition to the price of the land referred to in 1., the construction costs of the property referred to in 2. with the contractor, in the value of EUR 106,243.95 (PTE 21,300,000.00) and further bore the price of various construction materials in the value of EUR 33,186.05 (PTE 6,653,205.92) – Articles 87 and 88 of the request for pronouncement and in accordance with documents Nos. 7 and 18 submitted with the request for pronouncement.
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Against the IRS assessment and against the coercive collection of a previous assessment, an official review (No. ...2014...) and two oppositions to execution (cases .../15.7BELLE and .../15.9BELLE) were filed, whose contents and other elements were not submitted to this process – Articles 34 and 52 of the request for pronouncement, point 18 of the Respondent's submissions and in accordance with documents 1 and 2 submitted by the Claimants with their motion of 19.12.2016.
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In the official review request, the Claimants invoked: "1) the fact that the AT ignored that reinvestment occurred; 2) incorrect calculation of the capital gain; 3) taxation of the capital gain at 100% instead of 50%", the request being "partially granted only as to the illegality of taxation of the capital gain at 100%" – Articles 52 to 54 of the request for pronouncement, overall position of the AT and tenor of the notification appearing in documents 1 and 2 submitted by the Claimants with their motion of 19.12.2016.
FACTS NOT ESTABLISHED
There is no other factuality alleged that has not been considered proven and that is relevant for the resolution of the procedural dispute.
IV. ASSESSMENT OF THE QUESTIONS FOR THE SINGULAR ARBITRAL TRIBUNAL (TAS) TO RESOLVE
The Disclosure Obligation of Article 57 of the Personal Income Tax Code – IRS Model 3
It should first be noted that in the present case, we do not see legal support for the Claimants' assertion that they were not required to submit the Model 3 Declaration in 2008 regarding gains obtained in Portugal from the sale of their residence in 2007. Whether or not they were tax residents in Portuguese territory.
Particularly because, in fact, only on 14.10.2008 (see fact 5 of the facts established), the Claimant-wife altered her tax registration in Portugal, indicating new residence in the Netherlands and appointing a tax representative resident in Portugal. Previously the Claimant-wife was resident in Portugal and the deadline for compliance with this disclosure obligation elapsed before she proceeded to make such alteration.
The mere fact of appointing a tax representative in a country, in this case Portugal, suggests that the Claimants had pending matters that should be entrusted to local representation of their interests.
It even appears irrelevant to us, in this case, the discussion conducted in the process regarding whether the Claimants were or were not tax resident in Portuguese territory (with relevance for determining the place of notifications), because at least until the date they sold their residence in Portugal in accordance with paragraph b) of No. 1 of Article 16 of the Personal Income Tax Code and because they possessed that residence, they would always be, in principle, considered tax residents in Portugal through the application of this norm.
This does not mean that the IRS assessment made against the Claimants for failure to submit the respective declaration (in accordance with paragraph b) of No. 1 of Article 76 of the Personal Income Tax Code, by the AT) cannot later be corrected, determining the acquisition value of the alienated property, in this case in accordance with No. 3 of Article 46 of the Personal Income Tax Code, in administrative relief proceedings or thereafter in judicial challenge, obligating the non-compliant taxpayer to a more difficult burden of proof, running the risk of incurring costs they would not have incurred had they complied with disclosure obligations timely and subjecting themselves to a more exacting and higher-risk probationary regime.
Since the relevance of the disclosure obligation referred to in Article 57 of the CIRS is being discussed (the AT even refers that it could only accept construction costs of the residence in Portugal – to be deducted from the realization value and reduce the calculation of taxable gain – if the same had been submitted), it is found that the parties, especially the AT, did not bring to this process information regarding compliance with what is contained in No. 3 of Article 76 of the Personal Income Tax Code, in the wording in force since January 2007:
"1 – IRS assessment shall be processed as follows:
a) If the declaration has been submitted up to 30 days after the end of the legal deadline, the assessment is based on the taxable income determined based on the declared elements, without prejudice to the provisions of No. 4 of Article 65;
b) If no declaration has been submitted, the assessment is based on the elements available to the Directorate-General for Taxes;
c) If superior to what results from the elements referred to in the previous paragraph, the entirety of net income of category B obtained by the income holder in the nearest year that is determined shall be considered, when the respective cessation of activity has not been declared;
2 – In the situation referred to in paragraph b) of the previous number, net income of category B shall be determined in accordance with the rules of the simplified taxation scheme, with application of the highest coefficient provided for in No. 2 of Article 31.
3 – When no declaration is submitted, the holder of income is notified by registered mail to comply with the obligation within 30 days, after which the assessment is made, not taking into account the provisions of Article 70, and only deductions provided for in paragraph a) of No. 1 of Article 79 and No. 3 of Article 97 are made.
4 – In all cases provided for in No. 1, the assessment may be corrected, if applicable, within the deadlines and in accordance with the terms provided for in Articles 45 and 46 of the general tax law."
Now, having the Claimants not submitted the IRS declaration in 2008, as they themselves acknowledge (invoking that they did not have to do so because supposedly they were no longer residents in Portugal) regarding gains obtained from the sale of the house in Portugal, and with the AT invoking that it would only accept the costs for determining the acquisition value in accordance with No. 3 of Article 46 of the Personal Income Tax Code if the same had been submitted (naturally with those elements), it was necessary that at least the Respondent demonstrate in this process that it complied with No. 3 of Article 76 of the Personal Income Tax Code, which did not occur.
In the case of real property capital gains, this disclosure obligation assumes importance for the procedural simplification it may bring to the relations between the AT and taxpayers, with a view to establishing the taxation required or not on gains obtained.
First, paragraph c) of No. 5 of Article 10 of the Personal Income Tax Code states that: "For the purposes of the provisions of paragraph a), the taxpayer shall express the intention to proceed with reinvestment, even if partial, mentioning in the income declaration for the year of alienation the value intended to be reinvested",
that is, in the event the taxpayer wishes to benefit from the regime of exclusion from taxation of gains from the onerous alienation of properties intended as the taxpayer's own and permanent residence or those of members of their household unit, he shall, from the outset, in the declaration for the year of realization, express that intention.
And in the same vein, No. 4 of Article 57 of the Personal Income Tax Code states: "4 – For purposes of the provisions of Nos. 5 to 7 of Article 10, taxpayers must:
a) Mention the intention to carry out the reinvestment in the declaration for the year of realization, indicating in the same and in the declarations for the following two years the investments made;
b) Prove, when requested, the dedication of the property to their permanent residence or that of their household unit, when the reinvestment is made in property located in the territory of another EU Member State or the European economic area, by means of a declaration issued by an official entity of the other State."
However, from a reading of these legal provisions, it does not appear to result that in the absence of submission of the income declaration (and the absence of expression of intention to reinvest) anything more than the application of the respective penalties for non-compliance occurs and that the assessment be made based on the elements available to the AT (No. 3 of Article 76 of the CIRS).
And we do not see in the law that the assessment thus carried out by the AT cannot later, in administrative relief proceedings or in judicial proceedings, in light of the evidence presented by the non-compliant taxpayer (regarding the disclosure obligation), be annulled or corrected, especially when the taxpayer invokes and proves:
a) The elements that permit the application of the regime of tax exemption of paragraph a) of No. 5 of Article 10 of the Personal Income Tax Code;
b) And the elements of No. 3 of Article 46 of the Personal Income Tax Code applicable to this case since it concerned the alienation of a property constructed by the taxpayers themselves.
This is not the reading of the law defended by the AT, which argues that only through the submission of the Model 3 Declaration could it consider construction costs. But one might then question what purpose the penalties fixed in law would serve in case of non-compliance with disclosure tax obligations.
In this case, having the IRS been assessed by the AT, in accordance with paragraph b) of No. 1 of Article 76 of the Personal Income Tax Code, and the consequent penalty applied to the Claimants (or to their tax representatives) which they will have to pay for the non-compliance (non-submission of the income declaration by themselves or their tax representative, since at least the Claimant-wife was resident in Portugal until 14.10.2008), it will no longer make sense to reason, after notification of the assessments, that they would have had to, in any event, submit the IRS Model 3 Declaration.
We conclude, therefore, that the fact that the Claimants did not comply, by themselves or through their tax representative (the Claimant-husband had a tax representative since 2006), with the disclosure obligation of Article 57 of the Personal Income Tax Code (and consequently the indications of paragraph c) of No. 5 of Article 10 and paragraph a) of No. 4 of Article 57, both of the CIRS) for the year 2007, during 2008, will not invalidate that subsequently, in administrative relief proceedings, as was the case with the official review they filed, or in judicial proceedings, taxpayers may achieve a taxation regime identical to that they would have if they submitted the declaration within the legal deadline, all depending on the evidence produced, so as to be capable of integrating the provision of the substantive norms at issue herein.
Only with one difference. In addition to there being application of the penalties for non-compliance with the disclosure obligation and, should the amounts assessed have been paid and their annulment obtained, they shall not be entitled to compensatory interest in case of success of the administrative or contentious measure used to challenge the assessment, since it will be lacking to attribute to the AT services the occurrence of error, except in the case of paragraph c) of No. 3 of Article 43 of the General Tax Law.
In this case, the Claimants themselves do not petition for compensatory interest, limiting themselves to requesting the annulment of the assessments and compensatory interest.
A situation would arise here in which in this case the Claimants discuss matters that were not discussed in the administrative review proceeding regarding the assessments. But as can be seen from fact 16) of the facts established, "in the official review request, the contents of which were not submitted to the record, the Claimants invoked: '1) the fact that the AT ignored that reinvestment occurred; 2) incorrect calculation of the capital gain; 3) taxation of the capital gain at 100% instead of 50%'", the request being "partially granted only as to the illegality of taxation of the capital gain at 100%", demonstrating that here the arguments are repeated and the documents that were part of the administrative review proceeding are submitted.
The Requirements of No. 5 of Article 10 of the Personal Income Tax Code
Body of No. 5 of Article 10 of the Personal Income Tax Code
The AT argues, as referred to in ll) of the Report of this decision, that "the substantive requirements on which depends the exclusion from taxation are yet to be verified", since as the Claimants admit "they became residents in the Netherlands in 2004", concluding that "if they only resided in Portugal from 1999 to 2003, in the year of alienation of the property in 2007, this property was no longer intended as their own and permanent residence, whence it is manifest that the requirement of No. 5 of Article 10 of the CIRS 'Capital gains from the onerous transfer of properties intended as the taxpayer's own and permanent residence or those of members of their household unit are excluded from taxation...' is not met".
The fact that the Claimants state what they state regarding their residence in the Netherlands does not, by itself, allow disregarding the documentary evidence to the contrary and the conclusions that should be drawn from the documentary evidence presented herein.
The norm of the Personal Income Tax Code contained in the final part of paragraph b) of No. 1 of Article 16 would be applicable here. That is, at least until the date of sale of the house in Portugal, the fact that the Claimant-husband had a domicile, a residence in Oslo since 22.04.2006, or both stating that since 2004 they were "residents" in the Netherlands, does not, by itself, resolve the question of determining whether before 14.10.2008 (the date on which they changed their tax domicile in the taxpayers' register in Portugal, already after sale of the house in Portugal) they were non-residents in Portuguese territory.
The AT further alleges that if "in the year of alienation of the property in 2007, this property was no longer intended as their own and permanent residence", the requirement of the body of Article 5 of Article 10 of the Personal Income Tax Code is not met. This does not appear to us to be the case.
First, nothing in the record demonstrates the existence of other properties, other houses intended for residence even if leased, that the Claimants had in Portugal and could use as a residence. Furthermore, it would be by force of mere ownership of this property intended for "residence" until its sale that the owners would be considered residents in Portugal (paragraph b) of No. 1 of Article 16 of the Personal Income Tax Code).
On the other hand, what the law requires is that the intended purpose of the property eligible for this regime be assigned according to the building license from the local municipality (and in this case the requirement is met according to No. 2 of the facts established). There is no norm in the IRS context and for the functioning of the regime of No. 5 of Article 10 of the CIRS identical to that of the final part of No. 1 of Article 46 of the Real Estate Tax Code regarding exemption from property tax for own and permanent residences provided they are actually dedicated to that purpose.
The integration of the concept of "own and permanent residence" of the Claimants regarding the residence they sold in 2007 results from the fact that they are owners (own residence) and according to the evidence produced in this case they were only known to have in Portugal this property where they could have their common life center (permanent residence), a fact that the AT itself did not challenge.
It does not therefore hold, the alleged failure to meet, in this case, the requirements of the body of No. 5 of Article 10 of the CIRS regarding the classification of the property referred to in 2. of the facts established as own and permanent residence of the Claimants in Portugal, noting that the Claimant-wife only on 14.10.2008, after the sale of the house in Portugal and after the purchase of another house in the Netherlands, altered her tax domicile in the taxpayers' register.
Paragraph a) of No. 5 of Article 10 of the Personal Income Tax Code
It is established according to Nos. 3 and 4 of the facts established:
a) On an unspecified date in 2007, the Claimants, following execution of a promise contract executed on 28.09.2007, sold the residence referred to in 2., for the price of EUR 252,500.00.
b) On 18 April 2008, the Claimants acquired for the price of EUR 251,000.00 a "house, including the parcel of land on which it was built, garden and outbuildings, located at ..., ... ... registered in the Municipality of ..., ... No. ... with 00.1500 hectares of area" and the "meadow parcel behind the property ... registered in the Municipality of ..., ... No. ..., with 00.3800 hectares of area".
Even if the sale of the Portuguese house had occurred on 01.01.2007, between the date of sale in Portugal and the date of purchase (reinvestment) in the Netherlands less than 24 months would have elapsed, so that the requirement provided for in paragraph a) of No. 5 of Article 10 of the Personal Income Tax Code is met.
Another question arises here: the house (and its dependent areas) that the Claimants bought on 18.04.2008 in the Netherlands (No. 4 of the facts established) for EUR 251,000.00 appears on 05.09.2014 with a registered mortgage in the amount of EUR 73,922.00 (No. 8 of the facts established), which could be seen as evidence of non-reinvestment of the full realization value from the sale of the property in Portugal.
Credibility must be given to the deed of acquisition of the property in the Netherlands, executed before an official of the Kingdom of the Netherlands, which refers to payment of the price of EUR 251,000.00 with no mention of any contemporaneous mortgage that would indicate bank financing. This mortgage will have been established after the purchase of the property and for other purposes not relevant here.
Another question might arise: the realization value in Portugal was EUR 252,500.00 (gross price received) and the reinvestment value in the Netherlands was EUR 251,000.00, with a difference of EUR 1,500.00, which seems acceptable. The TAS does not consider this difference relevant since it is common sense that acquisition of real property anywhere in the world always brings additional costs in taxes, notarial and registration costs.
Had the AT harbored doubts about this objective (whether the reinvestment of the realization value was carried out in accordance with what the acquisition document states and what specific costs were associated), in the use of the powers and duties conferred upon it through paragraph b) of No. 4 of Article 57 of the CIRS, it could through the information exchange mechanisms of Directive 2010/23/EU clarify this matter.
Paragraph b) of No. 4 of Article 57 of the Personal Income Tax Code
It was proved in 8 of the facts established that "on 05.09.2014 the ... Tax Office addressed to the Belastingdienst/Central Liaison Office of the Netherlands, based on Article 5 of Directive 2010/24/EU, an automatic request for exchange of information concerning the Claimants, requesting information on the address and income and assets for collection purposes, the official entity of the Netherlands indicating the address known as '...-...-NL', providing the IBAN of the bank account in the Netherlands and regarding assets stating 'has real property located at the address ...-... Value EUR 250,000.00. Mortgage EUR 73,922.00'".
Now, this information obtained from the official entity of the Netherlands is capable of being read, in light of the answer given, as confirmatory that the Claimants dedicated, in the Netherlands, the residence acquired there to permanent residence (requirement of paragraph b) of No. 4 of Article 57 of the Personal Income Tax Code), since:
a) No other residence is indicated besides the one acquired;
b) No other domicile or residence they possess there is indicated, even by way of lease.
This information is relevant because, as can be seen in 5. of the facts established: "on 14.10.2008 the Claimants, indicating the address at ... ... – Netherlands, updated their tax registration reporting their residence in the Netherlands, appointing D... SA, Tax ID..., with registered office at Rua ... No. ...-...-... ... Albufeira, an entity which since 22.04.2006 had already represented the Claimant-husband with address in Oslo".
Doubts have thus been dispelled regarding the existence in the Netherlands (or in Oslo regarding the Claimant-husband) of more than one tax domicile of the Claimants, at least at the level of Dutch tax authority records.
This information sufficiently proves that the Claimants, in the Netherlands, dedicated the residence acquired there, on a permanent basis, to their residence, since the only domicile they have there corresponds to the toponymic designation of the property they acquired.
Accordingly, it must be concluded that the requirements are met for the Claimants to benefit from the fiscal regime of exclusion from taxation established in No. 5 – paragraph a) of Article 10 of the Personal Income Tax Code.
Therefore, the request for arbitral pronouncement is well-founded based on the non-compliance of the assessments with the legal norm referred to above.
Even if this were not the case, in light of the evidence produced herein (see No. 14 of the facts established), the assessment would always be non-compliant with law, particularly with Articles 43-1 and 46-3, both of the Personal Income Tax Code, since the costs incurred by the Claimants in constructing the alienated property were not taken into account.
However, as the request for pronouncement is well-founded based on the first of the legal non-compliances alleged by the Claimants, it would be futile to assess in depth the arguments regarding the well-foundedness of the request based on the second of the non-compliances adduced.
Bad Faith Litigation
The Claimants petition for condemnation of the Respondent as a bad faith litigant, alleging essentially that, having been notified by the AT in the Netherlands through the mechanism of administrative cooperation between tax authorities of EU Member States, it would not be lawful to notify the assessments referred to in c) of the Report of this decision to the address of the tax representative in Portugal, whose representation would have been terminated.
First, it must be noted that it was not proven that the letter submitted by the Claimants as document No. 13 annexed to the request for pronouncement was received by the AT's services. Nor does the Respondent admit to having received it.
It is appropriate to cite what the Court of Arbitration states in case 5203/11 CT – 2nd Court, in the judgment of 19.02.2013, Reporting Judge Joaquim Condesso:
"The tax law system does not provide us with the notion of bad faith litigation; it must be sought in the Civil Code, which applies supplementarily (cf. Article 2, paragraph e) of the Tax Procedural Code; Article 104 of the General Tax Law). In this field, the general principle to be observed, resulting from the right of action itself, enshrined in Article 20 of the Constitution, is that the process should provide the parties with ample and unconditional possibility of resolving, with intensity, freedom and comprehensiveness, their reasons of fact and law, according to a spirit of reasonableness and balance, but equally without inhibitions or constraints that might eventually arise from fear of future penalties based on the understanding that the Court will adopt on the matters under discussion. In accordance with Article 266-A of the current Civil Code, which imposes on the parties a general duty of good faith, Article 456, No. 1 of the same legislative instrument provides that the bad faith litigant shall be condemned to pay compensation to the opposing party if it so requests.
In the description of the figure of the bad faith litigant, the legal text tells us that such a party should be considered whoever acts with fraud or gross negligence (cf. Article 456, No. 2 of the Civil Code): a – Has deduced a claim or defense whose lack of foundation should not have been ignored (mode of fraud or gross negligence substantive); b – Has altered the truth of the facts or omitted factuality relevant to the decision of the case (mode of fraud or gross negligence substantive); c – Has committed serious omission of the duty of cooperation or uses the process or procedural means in a manifestly reprehensible manner (modes of fraud or gross negligence instrumental).
Specifically regarding the possibility of condemnation of the Fiscal Authority in payment of a pecuniary sanction to be quantified in accordance with the rules of bad faith litigation, Article 104, No. 1 of the General Tax Law should be taken into account, a norm that aims only at the restricted situations explicitly stated therein of patent violation, on the part of the Public Treasury, of the principles of equality, impartiality and good faith. The conduct sanctioned in the provision is only that of the Administration in judicial proceedings and not also that in administrative relief proceedings (cf. Article 266, No. 2 of the Portuguese Constitution)".
Now, even considering the facts established, particularly those in No. 8 of the facts established (the AT knew since 05.09.2014 the residence of the Claimants in the Netherlands), the fact is that in this process it has always acted with full respect for the principles governing professional relations between procedural parties. Nor is this alleged as the basis for this request by the Claimants.
All the more so because the AT brought to the process all the necessary information, including that which might have a reading contrary to the point of view advocated in light of the facts at issue here and the applicable law.
We see no action by the AT in this process that could integrate the provision of the norms contained in the various paragraphs of Article 456 of the Code of Civil Procedure.
The submission of documents to the process which is then considered, spontaneously, to be a material oversight and is corrected with the submission of the relevant documents is something that occurs with any professional who works in the forum and cannot have any type of assessment other than a mere oversight, often resulting materially not from the action or omission of the parties or forum professionals but from administrative support.
Therefore, in reading the law and the facts referred to above, the request for condemnation of the AT as a bad faith litigant, filed by the Claimants, is not well-founded.
V. OPERATIVE PART
In the terms and with the grounds set out above:
· The subsequent pleading and attached documents filed by the Claimants on 19.12.2016 are definitively admitted, since the requirements of Article 588 of the Code of Civil Procedure are met;
· The request for annulment of the assessments referred to in b) of the report of this decision is judged not well-founded, with acquittal of the AT on the merits, by mootness of the dispute, applying the costs regime of No. 4 of Article 536 of the Code of Civil Procedure, since the subsequent assessment partially satisfied the Claimants' claim;
· The request for annulment of the assessments referred to in c) of the report of this decision and in 12. of the facts established (IRS assessments Nos. 2016... and 2016... and compensatory interest Nos. 2016... and 2016..., in the total amount of EUR 23,964.95) is judged well-founded, as they are non-compliant with the norms contained in No. 5, paragraph a) of Article 10 of the Personal Income Tax Code and Articles 43-1 and 46-3, both of the Personal Income Tax Code, in the reading of law advocated above.
· The request for condemnation of the Respondent for bad faith litigation is judged not well-founded, since the respective requirements are not met.
Value of the Case: in accordance with Article 3, No. 2 of the Regulation of Costs in Tax Arbitration Proceedings (and paragraph a) of No. 1 of Article 97A of the Tax Procedural Code) and taking into account the regime resulting from Article 299 of the Code of Civil Procedure, the value of the case is fixed at EUR 27,369.34.
Costs: in accordance with Article 22, No. 4 of the RJAT, the amount of costs is fixed at EUR 1,530.00 in accordance with Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, 6/7 to be borne by the Respondent (EUR 1,311.43) and 1/7 to be borne by the Claimants (EUR 218.57), taking into account their respective defeats.
Notify.
Lisbon, 28 February 2017
Singular Arbitral Tribunal (TAS),
Text prepared by computer in accordance with Article 131, No. 5 of the Code of Civil Procedure, applicable by reference to Article 29 of the RJAT.
The wording of this decision is governed by the orthography prior to the 1990 Spelling Agreement.
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