Process: 510/2016-T

Date: May 17, 2017

Tax Type: IRS

Source: Original CAAD Decision

Summary

Process 510/2016-T addresses whether temporary tax domicile discrepancies can invalidate common-law union (união de facto) status for IRS joint taxation purposes. Two taxpayers filed for arbitration at CAAD after the Portuguese Tax Authority (AT) issued additional IRS assessments for 2014, claiming they failed to meet legal requirements for de facto union because their registered tax domiciles differed from May 2013 to August 2014. The petitioners argued they continuously cohabited and the domicile discrepancy resulted from administrative delays in updating their Citizen Cards after relocating to a rehabilitated property acquired in 2012. They contended that Article 14 of the IRS Code, referencing Law 7/2001, requires actual cohabitation rather than mere administrative registration synchronization. The AT defended strict compliance with tax domicile identity requirements under Article 19 of the General Tax Law (LGT), citing fraud prevention and the need for timely declaratory obligations when claiming tax benefits. Significantly, the AT had previously ruled favorably for the same taxpayers regarding 2013 in a hierarchical appeal, recognizing they fulfilled união de facto requirements. This prior administrative decision raised the issue of supervening uselessness of proceedings (inutilidade superveniente da lide), potentially rendering the 2014 dispute moot given the identical factual and legal circumstances. The case highlights tensions between formalistic tax domicile registration requirements and substantive cohabitation criteria for common-law union recognition in Portuguese tax law.

Full Decision

ARBITRAL DECISION

I – REPORT

1. On 23 August 2016 the taxpayers A… and B…, residents at Rua…, No. …-…, …-… Lisbon, with tax identification numbers … and …, respectively, (hereinafter referred to as the "Petitioners"), submitted to the Administrative Arbitration Centre (CAAD) a request for constitution of an arbitral tribunal with a view to obtaining an arbitral decision, in accordance with the provisions of articles 3, paragraph 1 and 10 of Decree-Law No. 10/2011, of 20 January (hereinafter referred to as RJAT), following the tax assessment acts for Individual Income Tax (IRS) Nos. 2016 … and 2016 …, relating to the year 2014, dated 20 February 2016.

2. In the request for arbitral decision the Petitioner opted not to appoint an arbitrator.

3. Pursuant to paragraph 1 of article 6 and sub-paragraph b) of paragraph 1 of article 11 of RJAT, as worded by article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council appointed the undersigned as sole arbitrator, who accepted the office within the legally prescribed period.

4. The arbitral tribunal was constituted on 18 November 2016.

5. On 3 January 2017, the Respondent, duly notified for that purpose, filed its response.

6. On the same date as the response the Respondent informed that the administrative process was directly introduced on the CAAD platform.

7. The hearing provided for in article 18 of RJAT was held on 2 February 2017, at 3:00 PM, at which the Parties appeared, and the witnesses summoned by the Petitioners were heard.

8. Duly notified for that purpose, Petitioners and Respondent filed written submissions on 14 February 2017 and 21 February 2017, respectively.

9. The position of the Petitioners, expressed in the request for arbitral decision and in the written submissions, is, in summary, as follows:

9.1. The assessment acts which are the subject of the present arbitral decision are vitiated by errors as to legal presuppositions, errors as to factual presuppositions, and violation of law.

9.2. Indeed, given that the Petitioners and their respective family unit lived together, they cannot accept, as justification for the additional IRS assessments for the year 2014, the fact that they had not fulfilled the legal requirements of de facto union, in particular because between 27.05.2013 and 17.08.2014 the AT verified in the internal system a discrepancy in their tax domiciles.

9.3. Such temporal gap invoked by the AT was due solely to the fact that the Citizen Card and the corresponding address change were not requested simultaneously, upon occupying, in the course of 2013, as permanent residence, the urban property located at Rua …, No. … – …, …-… Lisbon, which was acquired in the course of 2012 for purposes of urban rehabilitation.

9.4. The AT cannot base itself exclusively on the information of the tax domicile contained in the taxpayers' "register" to justify the issuance of the additional assessments.

9.5. Moreover, such information naturally has no effect of dissolution of de facto union, as described in article 8 of Law No. 7/2001, of 11 May (as amended by Law No. 23/2010, of 30 August), nor for tax purposes, when article 14, paragraph 1 itself of the IRS Code refers to Law No. 7/2001, of 11 May.

9.6. The Central Administrative Court itself, in case No. 5659/01, concluded that "(…) the criteria defining persons residing in Portuguese territory for purposes of the personal scope of IRS does not pass either through the requirement of nationality nor through the existence of a register and tax domicile in Portugal, circumstances which are completely irrelevant for the case (…).". It is also the understanding of the Arbitral Tribunal that "(…) It seems clear that the legislator wished to grant to persons living in conditions analogous to those of spouses access to the taxation regime applicable to these. And living in conditions analogous to those of spouses is sharing their habitual residence and not both communicating to the tax authorities the same address as theirs. (…)". (cfr. Case 304/2015-T).

9.7. For all the foregoing reasons, the IRS assessments, relating to the year 2014, corresponding to the fact that the Petitioners, in the AT's understanding, had not fulfilled the legal requirements of de facto union, should be annulled, with all legal consequences, in particular, the payment of compensatory interest.

10. The position of the Respondent expressed in the response and in the counter-submissions is, in abridged summary, as follows:

10.1. The additional IRS assessments for the year 2014 resulted from the failure to verify the presuppositions for the exercise of the option for joint taxation of income earned by taxpayers living in de facto union, since that option, in accordance with the tax legislation in force for the tax year 2014, was conditioned "by the requirement of identity of tax domicile of the taxpayers during that period of time and during the taxation period", which in the concrete case did not occur.

10.2. The truth is that there was a discrepancy in the tax domiciles of the Petitioners which persisted for more than a year, that is, from 27.05.2013 to 17.08.2014.

10.3. In accordance with article 14 of the IRS Code, it is required, for application of the regime of taxpayers married and not judicially separated in respect of persons and assets, that the identity of the tax domicile of the taxpayers claiming to be in de facto union be confirmed. Therefore, the act sub judice deserves no criticism.

10.4. Only on 17.08.2014 did the Petitioners come to have identity of tax domicile, in accordance with the provisions of article 19, paragraphs 3 and 4 of the LGT.

10.5. As such, the application of the taxation regime provided for in paragraph 2 of article 14 of the IRS Code depends on the identity of tax domicile for more than two years and during the taxation period, made in a timely manner in accordance with article 19 of the LGT.

10.6. At stake is the fundamental duty to update the domicile in the Taxpayer Management and Registration System, in accordance with the provisions of article 19 of the LGT, and the imperatives of combating tax fraud and evasion associated therewith.

10.7. At issue is the application of a tax relief, and it is for the legislator to establish the proper criteria for control and prevention intended to prevent undue appropriation of the corresponding tax status. For which reason it is understood that the acquisitive presuppositions of the tax relief provided for in article 14 of the IRS Code incorporate a declaratory obligation relating to the timely communication of the domicile for tax purposes, which is considered adequate and in conformity with the applicable principles of law.

10.8. Such understanding is adopted by the judgment of the Central Administrative Court of 22.01.2015, case No. 6655/13.

10.9. In this vein, the Respondent concludes for the total lack of merit of the request for arbitral decision formulated, the legal conformity of the act which is the subject of the present proceedings being evident.

11. By petition filed on 13 October 2016, the Petitioners communicated that they were notified of the decisions of the Hierarchical Appeals filed regarding the year 2013, in which it was concluded that "(…) the appellants fulfilled the legal conditions to benefit from the taxation regime of married taxpayers, provided for in article 14 (…)", in accordance with the order of 14.08.2016 of the Head of Division of the IRS Services Directorate, by subdelegation. Requesting the revocation of the impugned tax assessment acts, given the similarity of the facts and legal question of the year 2013 extendable to the year 2014.

12. Although the procedure used by the Petitioners on 27.03.2017 was not the correct one, in that the Tribunal's action should be limited to assessing all procedural impulse given by the Parties in the context of the process itself and of the use of the CAAD Process Management System, they communicated that, by order of the Head of the Finance Service of Lisbon … of 14.03.2017, the request for correction of the IRS for the year 2014 was granted, in particular with regard to the consideration of the status of "de facto union", triggering that service the procedures intended for the implementation of that order.

13. Notified to comment on these petitions of the Petitioners (cfr. supra Nos. 11 and 12), the Respondent said nothing.

II – QUESTION TO BE DECIDED

14. Given what is stated in the preceding paragraphs, the main question to be decided is as follows:

− Taking into account the developments that have occurred in the proceedings referred to above (cfr. supra Nos. 11, 12 and 13), the specific questions that presently merit examination and decision in the context of the present arbitral proceedings, taking into account the claims formulated by the Petitioners are as follows:

a) Occurrence of subsequent futility of the litigation regarding the instance concerning the request for declaration of illegality and annulment of the additional IRS assessments for the year 2014;

b) Verification of the invoked right to compensatory interest in accordance with article 43 of the LGT.

III – PROCEDURAL MATTERS

15. The Tribunal is properly constituted and has material competence, in accordance with articles 2, paragraph 1, sub-paragraph a), 5, paragraph 2, and 6, paragraph 1, of RJAT.

The request for arbitral decision is timely, in accordance with paragraph 1 of article 10 of RJAT.

The parties have legal personality and capacity, are proper parties and are legally represented, in accordance with articles 4 and 10, paragraph 2, of RJAT and article 1 of Ordinance No. 112-A/2011, of 22 March.

Taking into account the examination of the same circumstances of fact and the interpretation and application of the same principles and rules of law, the present coalition of plaintiffs and joinder of claims are admissible, in accordance with article 3 of RJAT.

The proceedings are not vitiated by defects that invalidate them.

All things considered, a decision must be rendered.

IV – FACTUAL GROUNDS

16. Taking into account the tax administrative proceedings and the documentary evidence filed in the record, it now falls to present the factual matter relevant to understanding the decision, which is fixed as follows:

- The Petitioners are parents of C… and D… (cfr. document attached to the present proceedings as doc. No. 2 appended to the Arbitral Petition)

- In the years 2007 and 2008, the Petitioners resided at Rua … …, …, …, Lisbon (cfr. document attached to the present proceedings as doc. No. 3 appended to the Arbitral Petition).

- The Petitioners in 2014 filed the IRS Income Declaration as a "de facto union", which gave rise to IRS assessment No. 2015 … (cfr. document attached to the present proceedings as doc. No. 4 appended to the Arbitral Petition).

- Since there was an omission in reporting the income obtained, the aforementioned assessment was subject to an Administrative Claim, to which the number …2015… was assigned, which was subsequently granted (cfr. document attached to the present proceedings as doc. No. 5 appended to the Arbitral Petition).

- On 2 February 2016, the AT notifies the Petitioners to submit submissions, in the context of prior hearing, to the draft correction of the IRS income declaration – Form 3 – for the year 2014, identified by Batch No. …/…, for not meeting, at that date, the requirements of de facto union, with the same to be eliminated and new declarations to be presented for each taxpayer in accordance with the provisions of article 57 of the IRS Code (cfr. p. 49 of the Administrative File).

- On 11 February 2016, the Petitioners exercised the proper prior hearing in writing (cfr. p. 48 of the Administrative File).

- Indeed, the Petitioners were notified of the additional IRS assessments Nos. 2016… and 2016…, relating to the year 2014, dated 20 February 2016 (cfr. document attached to the present proceedings as doc. No. 1 appended to the Arbitral Petition).

- The aforementioned additional assessments issued by the AT originated from the failure of the Petitioners to comply with the legal requirements of de facto union, given that between 27.05.2013 and 17.08.2014 there was a discrepancy in their tax domiciles (cfr. document attached to the present proceedings as doc. No. 6 appended to the Arbitral Petition).

- In the year 2012 the Petitioners acquired an urban property at Rua …, No. …-…, …-… Lisbon, registered in the urban property register of the parish of …, in the municipality of Lisbon, under article … (cfr. document attached to the present proceedings as doc. No. 7 appended to the Arbitral Petition).

- In conformity with the property acquired as their own and permanent residence, the Petitioners, together with their children, in the years 2013 and 2014, demonstrate with bank statements and general expenses (…) that they have a residence at Rua … No. …-…, …-… Lisbon (cfr. document attached to the present proceedings as doc. No. 8 appended to the Arbitral Petition).

- The Civil Parish Council of …, through a certificate, confirms that the Petitioners and their family unit reside in that parish, more specifically at Rua … No. …-…, …-… Lisbon, since September 2013 (cfr. document attached to the present proceedings as doc. No. 9 appended to the Arbitral Petition).

- In the Taxpayer Management and Registration System, Petitioner A… on 22.05.2013, had tax domicile at Rua …, No.…, …, …, …-… Lisbon (cfr. pp. 56 to 58 of the Administrative File).

- Petitioner A… and Petitioner B… have as tax domicile Rua …, No. …-…, …-… Lisbon, producing the due effects as of 30.09.2013 and 17.08.2014, respectively (cfr. pp. 50 to 55 and 59 to 64, respectively, of the Administrative File)

- In the course of the present proceedings, as referred to above in Nos. 11 and 12 of the Report, the Petitioners communicated that they were notified of the decisions of the Hierarchical Appeals filed regarding the year 2013, in which it was concluded that "(…) the appellants fulfilled the legal conditions to benefit from the taxation regime of married taxpayers, provided for in article 14 (…)", in accordance with the order of 14.08.2016 of the Head of Division of the IRS Services Directorate, by subdelegation. Requesting the revocation of the impugned tax assessment acts, given the similarity of the facts and the legal question of the year 2013 being extendable to the year 2014.

- There is moreover the order granting the request of the Head of the Finance Service of Lisbon … of 14.03.2017, relating to the request for correction of the IRS for the year 2014, in particular with regard to the consideration of the status of "de facto union", triggering that service the procedures intended for the implementation of that order.

17. The facts stated in the preceding paragraph constitute matter not contested and documentally demonstrated in the proceedings.

18. There are no facts found to be unproven, because all facts relevant to the examination of the claim were found to be proven.

V – LEGAL GROUNDS

19. We shall now determine the law applicable to the underlying facts, in accordance with the question already stated (vd., supra No. 14).

20. As we referred to earlier in the Report (No. 12), by petition of 27.03.2017, although by erroneous procedure (via email) as opposed to the use of the Process Management System of this Tribunal, in accordance with the order of the Head of the Finance Service of Lisbon … of 14.03.2017, the request for correction of the IRS for the year 2014 was granted, in particular with regard to the consideration of the status of "de facto union", ordering that the services give due follow-up in order to implement that order.

21. It thus falls to this Tribunal to verify the utility of examining the claim formulated by the Petitioner in its initial petition for declaration of illegality and annulment of the additional IRS assessments questioned in the present proceedings.

22. Lebre de Freitas, João Redinha, Rui Pinto observe that subsequent futility or impossibility of litigation "occurs when, by a fact occurring during the pendency of the instance, the plaintiff's claim cannot be maintained, by virtue of the disappearance of the parties or the object of the proceedings, or finds satisfaction outside the scheme of the remedy sought. In one and the other case, the solution of the dispute ceases to matter – moreover, by impossibility of achieving the intended result; here, by its having already been achieved by another means" (Cfr. Annotated Code of Civil Procedure, volume 1, 2nd edition, Coimbra Editora, 2008, p. 555).

That is, subsequent futility of litigation occurs when, by a fact occurring during the pendency of the case, the solution of the dispute ceases to have interest and utility, which justifies the termination of the instance (Cfr. article 277, sub-paragraph e) of the Code of Civil Procedure (CPC)).

23. Thus, if, by virtue of new facts occurring during the pendency of the proceedings, the objective sought with the claim raised in court has already been achieved by another means, then the decision to be rendered does not involve useful effect, and consequently subsequent futility of the litigation occurs in that context.

24. Now, as appears from the circumstances previously referred to (vide point 11 and 12 of the proven facts), by order of the Head of Finance of Lisbon … the request of the Petitioners regarding the correction of the IRS for the year 2014, in particular as regards the consideration of the status of "de facto union", as indeed also happened for the year 2013, was granted, and consequently, the procedures intended for the implementation of such order were set in motion, namely, the annulment of the tax assessment acts for error of law as to the interpretation and application of article 14 of the IRS Code, these having fixed a tax obligation superior to that legally due.

25. It follows from this administrative action that the claim formulated by the Petitioners, which had as its purpose the declaration of illegality and annulment by this Tribunal of the acts questioned, has been rendered moot, in that the suppression of these acts and their effects from the legal order was achieved by another means after the institution of proceedings.

26. Indeed, as this Tribunal has already had occasion to pronounce, through the arbitral judgment relating to Case No. 220/2016-T, "the subsequent performance of the express act of revocation of the impugned assessments (cfr. art. 79, paragraph 1 of the LGT) implies that the instance relating to the examination of the legality of those assessments is extinguished by subsequent futility of litigation, given that, by their effects having been eliminated by annulment revocation, the examination, in relation to such assessments, of the vices alleged with a view to their invalidity loses utility, with the impugning claim against them being left without object.".

27. In this vein, this Tribunal decides that there is subsequent futility of litigation as concerns the request for annulment of the tax assessment acts which are the subject of the present proceedings, which implies the termination of the corresponding instance in accordance with the provisions of article 277, sub-paragraph e) of the CPC, applicable ex vi article 29, paragraph 1, sub-paragraph e) of RJAT.

28. Finally, the Petitioners also petition for payment of the corresponding compensatory interest.

29. Pursuant to article 24, paragraph 5 of RJAT "payment of interest is due, regardless of its nature, in accordance with the terms provided in the general tax law and in the Code of Tax Procedure and Process". This norm allows for recognition of the right to compensatory interest in arbitral proceedings. Thus, the claim is examined.

30. In accordance with article 43, paragraph 1 of the LGT compensatory interest is due when it is determined, in administrative claim or judicial challenge, that there was error attributable to the AT services from which results payment of the tax debt in an amount superior to that legally due.

The right to compensatory interest referred to in the aforementioned norm of the LGT presupposes that tax in an amount superior to that due has been paid and that such derives from an error, of fact or of law, attributable to the AT services (cfr. Judgment of the Supreme Administrative Court, Case No. 01215/12, of 10.04.2013).

31. In the present case, both conditions are shown to be fulfilled, thereby constituting the obligation of compensatory interest in favor of the Petitioners, which is hereby declared.

VI – DECISION

Therefore, this Arbitral Tribunal decides:

a) To declare the instance extinguished as concerns the request for declaration of illegality of the assessment acts now impugned by subsequent futility of litigation, in accordance with article 277, sub-paragraph e) of the CPC, ex vi article 29, paragraph 1, sub-paragraph e) of RJAT;

b) To condemn the Respondent to reimburse the sums unduly assessed and which have been paid by the Petitioners.

c) To further condemn the Respondent to the payment of compensatory interest, in accordance with the terms and conditions provided by law (cfr. articles 43 and 100 of the LGT and article 61 of the CPPT).

The value of the proceedings is fixed at € 5,599.51, in accordance with article 97-A, paragraph 1, a), of the Code of Tax Procedure and Process, applicable by force of sub-paragraphs a) and b) of paragraph 1 of article 29 of RJAT and paragraph 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

The amount of costs is fixed at € 612.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Tax and Customs Authority, since the claim was entirely successful, in accordance with articles 12, paragraph 2, and 22, paragraph 4, both of RJAT, and article 4, paragraph 4, of the aforementioned Regulation.

Let notice be given.

Lisbon, 17 May 2017.

The Arbitrator

(Jorge Carita)

Frequently Asked Questions

Automatically Created

What are the legal requirements for common-law union (união de facto) tax filing in Portugal under IRS rules?
Under Article 14 of the IRS Code, common-law partners may opt for joint taxation similar to married couples if they meet requirements established in Law 7/2001: cohabitation for over two years in conditions analogous to marriage. The Tax Authority interprets this to require identity of registered tax domiciles throughout the two-year period and during the taxation year, verified through the Taxpayer Management System. However, arbitral tribunals have ruled that the substantive requirement is actual shared habitual residence, not merely synchronized administrative registration, as living arrangements define união de facto status, not bureaucratic records.
Can a temporary discrepancy in registered tax domiciles invalidate a common-law union declaration for IRS purposes?
Portuguese tax law creates ambiguity regarding whether temporary domicile discrepancies invalidate união de facto declarations. The Tax Authority maintains that Article 19 of the General Tax Law (LGT) requires timely registration updates and that identity of tax domicile constitutes an acquisitive condition for the tax benefit under Article 14 of the IRS Code. Courts and arbitral tribunals have reached different conclusions, with some holding that administrative delays in updating Citizen Cards or tax records cannot dissolve a de facto union that continues substantively. The Central Administrative Court ruled that tax domicile registration is not determinative of residence status, and Case 304/2015-T stated that cohabitation, not identical registered addresses, defines analogous spousal conditions.
What does supervening uselessness of proceedings (inutilidade superveniente da lide) mean in Portuguese tax arbitration?
Supervening uselessness of proceedings (inutilidade superveniente da lide) occurs when circumstances arising after litigation commences render judicial or arbitral decision unnecessary or ineffective. In Process 510/2016-T, this concept became relevant because the Tax Authority had ruled favorably for the same taxpayers regarding 2013 through hierarchical appeal, recognizing their união de facto status despite identical domicile discrepancy issues. When the tax administration acknowledges error or grants relief for identical facts in related proceedings, continuing litigation for subsequent years with identical circumstances becomes procedurally superfluous, potentially warranting case dismissal or immediate taxpayer victory without substantive adjudication.
How can taxpayers challenge additional IRS tax assessments related to common-law union status at CAAD?
Taxpayers disputing additional IRS assessments related to common-law union status can file arbitration requests at CAAD (Centro de Arbitragem Administrativa) under Decree-Law 10/2011 (RJAT). The process involves: (1) submitting a detailed petition within 90 days of the challenged act's notification, specifying errors in legal or factual presuppositions; (2) presenting evidence of actual cohabitation (witness testimony, utility bills, official documents showing shared residence); (3) demonstrating compliance with substantive união de facto requirements under Law 7/2001; and (4) arguing that administrative registration delays should not override substantive cohabitation. Taxpayers may also reference favorable precedents from arbitral tribunals or administrative courts emphasizing substance over formalistic domicile registration requirements.
What happens when the Portuguese Tax Authority (AT) detects address divergences between common-law partners?
When the Portuguese Tax Authority detects address divergences between common-law partners through the Taxpayer Management System, it typically challenges the validity of their joint taxation election under Article 14 of the IRS Code. The AT issues additional tax assessments, recalculating IRS as if the taxpayers filed separately rather than jointly, often resulting in higher tax liability and compensatory interest. The AT's position prioritizes strict compliance with Article 19 of the LGT regarding timely tax domicile updates, viewing identity of registered addresses as both a substantive requirement and fraud prevention mechanism. Taxpayers facing such challenges must either accept the reassessment, file hierarchical appeals with the AT, or pursue arbitration at CAAD, presenting evidence that substantive cohabitation continued despite temporary registration discrepancies caused by administrative delays in updating Citizen Cards or official documents.