Summary
Full Decision
ARBITRAL DECISION (consult full version in PDF)
REPORT
On 26 September 2017, the taxpayers A... and B..., non-resident in Portugal for tax purposes, with tax identification numbers ... and ..., respectively, with tax domicile in ..., ..., ..., in the United Kingdom of Great Britain and Northern Ireland, hereinafter referred to as the Claimants, requested the constitution of an arbitral tribunal and submitted a request for arbitral pronouncement, pursuant to paragraph a) of article 2(1) and paragraph a) of article 10(1) of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to only as RJAT), with the Tax and Customs Authority as the Respondent (hereinafter referred to as AT).
The Claimants, in the course of these proceedings, appointed Dr. C... as their representative, and the Respondent is represented by legal counsel Dra. D... and Dra. E....
The request for constitution of the arbitral tribunal was accepted by the President of CAAD and was notified to the Respondent on 7 December 2017.
By means of the request for constitution of the arbitral tribunal and for arbitral pronouncement, the Claimants seek the partial annulment of the tax assessment acts for Personal Income Tax (IRS) for the year 2016, no. 2017 ... and no. 2017..., with the amount to be reduced from € 6,824.04 to € 4,462.02 with respect to Claimant A... and from € 4,724.04 to € 2,362.02 with respect to Claimant B..., respectively, and further, as a consequence of the arbitral decision, the Tax and Customs Authority should terminate the enforcement proceedings and administrative violation proceedings underlying the aforementioned assessment acts.
Following verification of the formal regularity of the submitted request, pursuant to paragraph a) of article 6(2) of RJAT, the undersigned was appointed as arbitrator by the President of the Deontological Council of CAAD.
The Arbitrator accepted the appointment, and the arbitral tribunal was constituted on 6 December 2017, at the CAAD headquarters, located at Avenida Duque de Loulé, no. 72-A, in Lisbon, as evidenced by the minutes of constitution of the arbitral tribunal that were recorded and are attached to these proceedings.
After being notified to that effect, the Respondent submitted its reply on 8 January 2018.
By order of 1 March 2018, finding no need for the production of additional evidence beyond what was already documentarily incorporated into the proceedings, seeing no need for the parties to correct their respective procedural submissions, and considering that the process contained all necessary elements for rendering a decision, the Tribunal, for reasons of procedural economy and expedition and the prohibition of useless acts, decided to dispense with the holding of the meeting referred to in article 18 of RJAT, provided the parties did not object. Given the silence of the Parties, said meeting was dispensed with. The Tribunal further decided to grant successive periods of 15 days for the Claimants and the Respondent, in that order, to submit their respective written arguments, with the Respondent's period to commence upon notification of the Claimants' arguments or upon expiration of the period set for that purpose.
In fact, on 6 March 2018 the Claimants submitted their written arguments and, on 20 March 2018, it was the Respondent's turn.
The Tribunal, in compliance with article 18(2) of RJAT, set 6 June 2018 as the date for rendering the arbitral decision, and advised the Claimants, by order of 1 March 2018, that they should proceed with payment of the subsequent arbitral fee, pursuant to article 4(3) of the Regulation of Costs in Tax Arbitration Proceedings, and communicate such payment to CAAD.
The Claimants support their request, in summary, as follows:
The Claimants support their request for partial annulment of the tax assessment acts for IRS for the year 2016, no. 2017... and no. 2017..., consisting in the reduction of the amount from € 6,824.04 to € 4,462.02 and from € 4,724.04 to € 2,362.02, respectively, on the grounds that they are vitiated by the following defects:
The Claimants submit that, in determining their taxable income, AT failed to apply the rule set forth in article 43(2) of the IRS Code, which provides for the reduction to one-half of the gain resulting from capital gains generated by the onerous transfer of the usufruct right they held over the urban property located in the parish of ... and ..., in the municipality of Lagoa, corresponding to article ..., of that parish.
In fact, "the inclusion in taxable income of all capital gains resulting from the transfer of the real right over the property is vitiated by an error of law, since only 50% of the respective value should have been considered, by application of the provision in article 43(2) of the IRS Code, in an interpretation of this norm consistent with European Union law."
In substance, "the non-application of the cited article 43(2) of the IRS Code to residents of another Member State of the European Union constitutes a violation of article 63 of the Treaty on the Functioning of the European Union (corresponding to article 56 of the Treaty establishing the European Community) by virtue of its discriminatory effect."
This divergence in taxation regimes depending on whether taxpayers reside or not in a Member State "has already been addressed by the Court of Justice of the European Union (CJEU), in the Judgment of 11 October 2007, delivered in case C-443/06 ("Hollmann Judgment"), following which the Supreme Administrative Court (STA) concluded that "article 43(2) of the IRS Code, (...) which limits the incidence of tax to 50% of capital gains realized only for residents in Portugal, violates article 56 of the Treaty establishing the European Community, by excluding from this limitation capital gains realized by a resident in another Member State of the European Union." (see STA Judgment of 16 January 2008, case 439/06)."
It should be added, "furthermore in this regard, that the national legislator established, through Law no. 67-A/2007, of 31 December, an optional regime for equating non-residents with residents, with the aim of remedying the differentiated treatment of non-resident EU citizens obtaining real estate capital gains in Portugal, compared to residents in the national territory."
However, "the existence of this regime, merely optional, (in addition to creating an additional burden on non-resident taxpayers compared to residents – which consists in the need to exercise this option –) does not eliminate the invalidity of the discriminatory regime still in force (which was applied to the IRS assessments now being challenged)."
As the CJEU stated, in an analogous situation, in the Judgment delivered in case C-440/08, of 18 March 2010, "the option for equating allows a non-resident taxpayer, (...) to choose between a discriminatory tax regime and another supposedly non-discriminatory regime", this is not sufficient to eliminate the discriminatory effects of the regime."
Faced with the foregoing, the Claimants submit that "it was the Tax Authority that, "upon the declaration of the taxpayers, assessed the tax it considered due... at the rate provided for non-residents... and on the total amount of the capital gain realized and not only on 50% of this value..., thus ignoring the Community case law and that of this Supreme Court which adopted it (see the Judgment of 16 January 2008, case no. 439/06) regarding the incompatibility of that legal provision, as applied, with the (then) article 56 of the CJEC (current article 63 of the Treaty on the Functioning of the European Union), thereby subjecting, as happened, the assessment in question to annulment in that part, given the primacy of Community law." (see STA Judgment of 22 March 2011, case 1031/10)."
Therefore, they request that the Arbitral Tribunal declare: (i.) that the request for partial annulment of the tax assessment acts no. 2017 ... and no. 2017 ..., is well-founded and proven, on the grounds of incorrect quantification and incorrect qualification of the taxable facts; (ii.) namely, that the tax assessment no. 2017 ... be reduced from € 6,824.04 to € 4,462.02, and the tax assessment no. 2017 ... be reduced from € 4,724.00 to € 2,362.02; (iii.) the termination of the enforcement proceedings and administrative violation proceedings underlying the assessment acts annulled by the learned arbitral decision.
In its Reply the Respondent invoked, in summary, the following:
For its part, AT comes to defend itself by way of contestation, in the following manner:
The Respondent submits that "the assessment in question was not based on the premise of failing to recognize, without further ado, the right of the Claimants to opt for the taxation of income generated with real estate capital gains obtained in Portuguese territory, only with incidence on 50% of the amount of gains earned, as is the case with citizens resident."
The issue is "of a procedural nature since paragraph a) of article 76(1) of the IRS Code provides that the assessment of IRS, having had the declaration presented within 30 days after the expiry of the legal deadline, has as its object the taxable income determined and is carried out on the basis of the declared elements, without prejudice to the provision of article 65(4)."
Therefore, "This is a situation in which the law grants relevance to the will of taxpayers and in which these can opt for the regime they consider to be most favorable."
In the specific case, "given the evidence produced in the proceedings, it is verified that it was the Claimants who declared themselves non-residents but residents in the national territory and entered in the income tax return form Model 3 for the year 2016 that they intended taxation under the general regime."
Subsequently, the Claimants did not indicate "the option for the general rates of article 68 of the IRS Code, with respect to income not subject to withholding tax under article 72(9) of the same legal instrument."
Thus, the Respondent, "upon the income tax return of the Claimants, assessed the tax, at the rate of 28%, provided in article 72(1) of the IRS Code, considering the total capital gain realized by them and not only 50% thereof, as prescribed in article 43(2) of the same Code."
If they had done so "the Claimants would be required to declare the total income obtained in Portugal and in the United Kingdom, values that were not included in the Model 3 tax returns."
Now, "what must be emphasized is that it was the Claimants who did not exercise the option made, in time and place appropriate, in order to be taxed as they now seek to rely upon, so that AT did not proceed to any alteration of what was declared by the taxpayers, merely limiting itself to assess the tax in accordance with the elements provided to it by them."
In fact, "responsibility for what was declared is entirely attributed to them as taxpayers because they are, provided they have legal personality under article 15 of the General Tax Law and tax capacity under article 16 thereof, who are bound by the fulfillment of the tax obligation."
In these terms, the legality of the tax act subject to the present arbitral request is evident, and the Claimants should be condemned to pay costs.
CASE MANAGEMENT
The Tribunal is competent and is regularly constituted, pursuant to paragraph a) of article 2(1) and articles 5 and 6, all of RJAT.
Given the assessment of the same factual circumstances and the interpretation and application of the same legal principles and rules, the current joinder of claims and the joinder of parties are admissible, pursuant to article 3(1) of RJAT.
The parties have legal personality and capacity, show themselves to be legitimate, are regularly represented, and the proceedings do not suffer from any nullities.
FINDINGS OF FACT
The following facts are proven as relevant to the decision:
The Claimants, in 2016, were residents of the United Kingdom of Great Britain and Northern Ireland (see documents nos. 1 and 2 attached to the Arbitral Petition).
The Claimants, on 25 October 2016, proceeded with the transfer of the usufruct right they held over the urban property located in the parish of ... and ..., municipality of Lagoa, corresponding to article ..., of said parish (see document no. 3 attached to the Arbitral Petition).
On 2017-07-31, the Claimants individually submitted the IRS income tax return – Model 3, relating to income earned in the year 2016, accompanied by Annex G - Category G, under the title "CAPITAL GAINS AND OTHER PROPERTY INCREMENTS", in which only the onerous transfer of the usufruct right identified above was declared, in the proportion of 50%, with Claimant A... further declaring in Annex A dependent employment income in the amount of € 8,400.00, paid by the entity ... (see facts alleged in articles 7 to 9 of the Arbitral Petition and documents nos. 4 and 5 attached to the initial petition).
In the aforementioned IRS Model 3 income tax returns, the Claimants indicated in section 08B, field 04, as "Non-resident", but with "Residence in EU country" field 06, requesting taxation under the general regime field 07 (see documents nos. 4 and 5 attached to the Arbitral Petition).
In the aforementioned Annex G, of the said income tax returns, the Claimants entered in section 4 the following values:
[Table transcription omitted for clarity – the original contains specific numerical values]
(see documents nos. 4 and 5 attached to the Arbitral Petition).
AT proceeded with assessment no. 2017..., dated 2017-08-04, for the period of 2016, pursuant to which the total income determined for Claimant A... was € 25,271.58 (€ 8,400.00 of Category A income + € 16,871.58 of Category G income) (see document no. 1 attached to the Arbitral Petition).
AT proceeded with assessment no. 2017..., for Claimant B... dated 2017-08-04, for the period of 2016, pursuant to which the total income determined was € 16,871.58, resulting from the capital gain realized (see document no. 2 attached to the Arbitral Petition).
AT considered the entire capital gain determined, in the amount of € 16,871.58, in determining the taxable income for each of the Claimants (see documents nos. 1 and 2 attached to the Arbitral Petition).
Thus, AT determined the tax to be paid in the amount of € 6,824.04 for Claimant A..., and € 4,724.04 for Claimant B..., resulting from the taxation at the rate of 28% of Category G income earned by the now claimants and at the rate of 25% of Category A income (the latter earned only by taxpayer no. ...) (see documents nos. 1 and 2 attached to the Arbitral Petition).
FACTS FOUND NOT PROVEN
There are no facts found not proven, because all facts relevant to the assessment of the request were found proven.
JUSTIFICATION FOR THE FACTS FOUND PROVEN
For the conviction of the Arbitral Tribunal, regarding the facts proven, the documents attached to the proceedings were relevant, as well as the administrative file, all analyzed and weighed in conjunction with the pleadings, from which agreement results regarding the factual circumstances presented by the Claimants in the request for arbitral pronouncement.
QUESTION TO BE DECIDED
In light of what has been stated in the preceding sections, the main question to be decided is the following:
Are the tax assessment acts for IRS, relating to the year 2016, illegal, in that when taxing the entire capital gains resulting from the onerous transfer of real rights over real property, by taxpayers not resident in Portugal (usufruct right), but who are residents in another Member State of the European Union, interpreting and applying thus the provision of article 43(2) of the IRS Code only to taxpayers resident in Portugal, is it in conflict with European Union law, particularly with the freedom of movement of capital, provided for in article 63 of the Treaty on the Functioning of the European Union (corresponding to the earlier article 56 of the Treaty establishing the European Community), constituting a situation of discrimination between residents in Portugal and residents in another Member State of the European Union.
LEGAL GROUNDS
We shall now determine the law applicable to the underlying facts, in accordance with the question already stated (see above no. 11).
Regarding IRS, article 10(1)(a) of the IRS Code provides that, "Capital gains constitute gains obtained that, not being considered business and professional income, capital income or property income, result from: a) Onerous transfer of real rights over real property (…)", with the gain constituted by "the difference between the realization value and the acquisition value, net of the amounts qualified as capital income (…)" (see article 10(4) of the IRS Code).
With respect to the taxation of non-residents in Portuguese territory, article 13(1) of the IRS Code provides that "Personal income tax is owed by natural persons residing in Portuguese territory and those not residing therein who earn income here", with article 15(2) of the same legal instrument adding that, as to non-residents, such tax "is levied solely on income obtained in Portuguese territory". Accordingly, pursuant to article 18(1)(h) of the IRS Code, capital gains resulting from the transfer of real property located therein constitute income obtained in Portuguese territory.
In fact, the "value of income qualified as capital gains is the corresponding balance determined between the capital gains and capital losses realized in the same year", and such balance is considered only in 50% of its value, with respect to transfers carried out by residents provided for in paragraphs a), c) and d) of article 10(1), positive or negative (see article 43(1) and (2) of the IRS Code).
As to the applicable IRS rate, article 72(1)(a) of the IRS Code provides, under the heading "Special rates", that, "1 - The following are taxed at the autonomous rate of 28%: a) Capital gains provided for in paragraphs a) and d) of article 10(1) earned by non-residents in Portuguese territory that are not attributable to a permanent establishment located therein;".
In light of the foregoing, regarding the question at hand, and in accordance with what was mentioned by the Claimants in the Arbitral Petition, the Hollmann Judgment of the CJEU, delivered on 11.10.2007, case C-443/06, found that the provision of article 43(2) of the IRS Code, by limiting taxation to 50% of the balance determined between capital gains and capital losses realized only for residents in Portugal and not for non-residents, for purposes of determining the taxable base in IRS, "constitutes a restriction on the movement of capital, prohibited by article 56 EC" (current article 63 of the Treaty on the Functioning of the European Union - TFEU).
To this end, the Judgment of the Supreme Administrative Court of 16.01.2008, delivered in case no. 0439/06, also decided that the application of article 43(2) of the IRS Code was incompatible and, consequently, that there was a violation of the provision of article 56 of the Treaty establishing the European Community, in obedience to the primacy of European Union law stipulated in our legal system in article 8(4) of the Constitution of the Portuguese Republic (CRP), "The provisions of the treaties governing the European Union and the norms emanating from its institutions, in the exercise of their respective competences, are applicable in the internal legal order, under the terms defined by European Union law, with respect for the fundamental principles of the democratic rule of law state" (see, by way of example, in the same sense, the STA Judgment of 22.03.2011, case no. 01031/10).
Therefore, taking into account the prevalence of CJEU case law on European Union law, one cannot conclude and decide otherwise in the present proceedings, given that the issues addressed therein are similar to those in the present case, as well as the legal rule upon which they were based.
In this sense, at least the CAAD decisions in cases nos. 127/2012-T and 45/2012-T have already pronounced themselves.
Case no. 45/2012-T followed the doctrine emanating from the CJEU in the aforementioned Hollmann Judgment, citing:
"In the Hollmann case law, the CJEU concludes that the relevant national norm [article 43(2) of the IRS Code] violates article 63 of the Treaty on the Functioning of the European Union, as it has a discriminatory character (less favorable) for non-residents and is, consequently, restrictive of the freedom of movement of capital between Member States.
This conclusion is based on the following main arguments:
(a) An operation of liquidation of a real estate investment constitutes a movement of capital, the Treaty providing a specific rule that prohibits all restrictions on movements of capital;
(b) In the case of sale of a real property located in Portugal, with the realization of capital gains, non-residents are subject to a higher tax burden that is applied to residents, thus finding themselves in a less favorable situation than the latter;
(c) Accordingly, while a non-resident is subject to a rate of 25% on the entirety of capital gains realized, the consideration of only half of the taxable base corresponding to capital gains realized by a resident allows that resident to systematically benefit, in this respect, from a lower tax burden, whatever the tax rate applicable to the entirety of their income, given that the taxation of income of residents is subject to a table of progressive rates whose highest bracket is 42%;
(d) This regime makes the transfer of capital less attractive for non-residents and constitutes a restriction on movements of capital prohibited by the Treaty;
(e) The discrimination of the national norm is not justifiable by the objective of avoiding penalizing residents (who are subject to a table of progressive rates that may be much higher and are taxed on a worldwide basis, unlike non-residents, who are taxed at the proportional rate of 25%, with no aggregation occurring), because, as noted above, the highest bracket being 42% always leads, in the same circumstances, to a more onerous taxation of the non-resident, taking into account the reduction to 50% of the taxable income of the resident, there being, objectively, no difference that would justify this inequality of tax treatment regarding the taxation of capital gains between the two categories of taxpayers.
We are thus faced with a discriminatory regime that is incompatible with European Union law, by virtue of a violation of article 63 of the Treaty on the Functioning of the European Union."
Given this situation, we follow the legal reasoning of the aforementioned Judgment delivered by this Tribunal, as well as the Hollman Judgment. Thus, the interpretation and application of article 43(2) of the IRS Code, to the extent of excluding from the limitation of tax incidence to 50% the capital gains resulting from the onerous transfer of real rights over real property, realized by a resident of another Member State of the European Union, with that limitation applying only to residents in Portuguese territory, constitutes a violation of the provision of article 63 of the TFEU, as it amounts to a discriminatory tax regime for residents in another Member State of the European Union.
As to the invocation, by both the Claimants and the Respondent, of Law no. 67-A/2007, of 31 December (State Budget Law for 2008), we state the following.
Following the delivery of the aforementioned Hollman Judgment, with the purpose of removing the incompatibility of the provision in question with European Union law, the legislator established an optional regime for equating non-residents (these being required to be residents of another Member State of the European Union or of the European Economic Area) with residents.
For this purpose, it added paragraphs 7 and 8 to article 72 of the IRS Code (currently paragraphs 9 and 10, in view of the renumbering effected by Law no. 66-B/2012, of 31 December), which, in the wording at the time of the facts under analysis, provided the following:
"9 - Residents 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, may opt, with respect to income referred to in paragraphs a) and b) of paragraph 1 and in paragraph 2, for the taxation of such income at the rate that, in accordance with the table provided for in article 68(1), would be applicable in the event that such income were earned by residents in Portuguese territory.
10 - For purposes of determining the rate referred to in the preceding paragraph, all income is taken into account, including that obtained outside this territory, under the same conditions that are applicable to residents."
The Claimants submit that the existence of this regime "does not eliminate the invalidity of the discriminatory regime still in force (which was applied to the IRS assessments now being challenged)".
With respect to the taxation of income resulting from capital gains from the transfer of real rights over real property located in Portugal, by non-residents in this territory, but residents in another Member State of the European Union or European Economic Area, it results from the provision of articles 72(1) and 72(8) of the IRS Code that two tax regimes coexist: one, pursuant to which such income is subject to a special rate of 28% and, another regime equivalent to that which applies to taxpayers resident in Portuguese territory, according to which, the same income is subject to the rate that, in accordance with the table provided for in article 68(1), would be applicable in the event that such income were earned by residents in Portuguese territory, with all income, including that earned outside Portugal, being taken into account in this regime, with the provision of article 43(2) of the IRS Code remaining in force.
This issue, regarding the application of the regime equivalent to that of taxpayers resident in Portugal, has already been addressed by this Arbitral Tribunal in the aforementioned Judgment delivered in case no. 45/2012-T, whose doctrine we herein adopt, stating that:
"Beyond (…) the provision of this optional regime imposing an additional burden on non-residents compared to residents, the option for equating is not, in our view, capable of excluding the discrimination in question.
The CJEU pronounced itself in this sense in the Judgment of 18 March 2010, delivered in case C-440/08 (Gielen Judgment), in a situation that presents manifest parallelism, with only the difference that in this case what was at issue was the violation of article 49 and not article 63 of the Treaty on the Functioning of the European Union.
That judicial body stresses that "the option for equating allows a non-resident taxpayer, (...) to choose between a discriminatory tax regime and another supposedly non-discriminatory regime", emphasizing that such choice is not capable of excluding the discriminatory effects of the first of these two tax regimes.
And that court continues, revealing the paradox: "recognition of such an effect of the aforementioned choice would have the consequence (…) of validating a tax regime that would continue, in itself, to violate article 49 TFEU by reason of its discriminatory character".
The CJEU concludes that the Treaty "is opposed to national legislation that discriminates against non-resident taxpayers in the granting of a tax benefit (…) even though those taxpayers can opt, with respect to that benefit, for the regime applicable to resident taxpayers."
In fact, following closely the Decision delivered by this Tribunal in case no. 127/2012-T, "the option given to a taxpayer resident in the European Union or European economic area between a regime that continues to be discriminatory, by violation of article 63 of the TFUE, and another allegedly non-discriminatory regime, equating them with residents in Portuguese territory, in addition to having the obligation to opt and declare income earned outside that territory, does not exclude or neutralize the discriminatory effects of the first of those two regimes." (our emphasis).
Concluding that judgment to the effect that "in recognizing that the aforementioned effects are not eliminated, one would be admitting that the aforementioned option validates a tax regime that continues in itself to violate article 63 of the TFUE, for the reasons stated above, which is not consistent with European Union law."
Thus, the Respondent is not correct in submitting that "given the evidence produced in the proceedings, it is verified that it was the Claimants who declared themselves non-residents but residents in the national territory and entered in the income tax return form Model 3 for the year 2016 that they intended taxation under the general regime." And, "Not having, consequently, indicated the option for the general rates of article 68 of the IRS Code, with respect to income not subject to withholding tax under article 72(9) of the same legal instrument. Ending the reasoning by saying that "when the taxpayer does not make any option, taxation operates under the default regime, that is, the general regime".
It was the Respondent itself who, upon the income tax returns of the Claimants, assessed the tax at the rate of 28%, provided for in article 72(1)(a) of the IRS Code, considering the total capital gain realized by them and not only 50% thereof, as prescribed in article 43(2) of the same legal instrument, in an interpretation and application of this legal provision that is not in conformity, either with European Union law, which includes European Union case law, or with Portuguese judicial and arbitral case law.
In this sense, see the Judgment delivered by the STA in case no. 1013/10 of 22-03-2011, "it was the Tax Administration that, upon the declaration of the taxpayers, assessed them the tax it considered due (as indeed always happens in IRS): at the rate provided for non-residents (25%, under article 72(1) of the IRS Code) and on the total amount of the capital gain realized and not only on 50% thereof (article 43(2) of the IRS Code), thus ignoring the European Union case law and that of this Supreme Court that adopted it (see the Judgment of 16 January 2008, case no. 439/06) regarding the incompatibility of that legal provision, as applied, with the (then) article 56 of the CJEC (current article 63 of the Treaty on the Functioning of the European Union), thereby subjecting, as happened, the assessment in question to annulment in that part, given the primacy of European Union law."
It should also be noted that, as is well known, the tax administration is not in absolute dependence on what is presented to it by the taxpayer.
There are several examples in which the administration is given the possibility of correcting what is submitted for its consideration (see articles 19(9), 36(4) and 79(2) all of the LGT and article 48(1) of CPPT).
In fact, article 48(1) of CPPT is very enlightening, which, under the heading "Cooperation of the tax administration and the taxpayer", imposes on AT the duty to clarify taxpayers "on the necessity of presentation of declarations, complaints and petitions and the carrying out of any other acts necessary to the exercise of their rights, including the correction of evident errors or omissions that are noted" (our emphasis).
Furthermore, given the provision of article 55 of the General Tax Law (LGT), in harmony with article 266 of the CRP, it is clear that "The tax administration exercises its functions in pursuance of the public interest, in accordance with the principles of legality, equality, proportionality, fairness, impartiality and expedition, in respect of the guarantees of taxpayers and other taxable persons." This materializes the principle of legality inherent in article 3(1) of the Administrative Procedure Code (CPA), by virtue of article 2(c) of the LGT, which provides that "Public Administration bodies must act in obedience to the law and to law, within the limits of the powers conferred on them and in accordance with their respective objectives".
As Jorge Lopes de Sousa notes, "from this norm it results that the principle of legality, embodying itself in obedience to the law and to law, does not limit itself to the duty of compliance with the law in the strict sense, also encompassing subordination to all legal values, normative or not, such as the norms and principles of international and European Union law, regulatory norms, situations defined judicially or administratively, and obligations contractually assumed." (see in General Tax Law, 4th edition, 2012, p. 446). Continuing to the effect that "thus, the duty to act in accordance with the principle of legality does not translate into mere formal subordination to the norms that specifically provide for the action of the administration, encompassing the duty of the administration to take into account the practical effects of the administrative activity it will carry out." Ending by concluding that "therefore the tax administration should refrain from implementing the legal commands when, given the particularities of the case, the reasons for public interest that justify its action are not verified or when a manifestly unjust result is produced, and in any event should limit itself, in the restriction of individual rights, to what is strictly necessary to ensure the ends it pursues, must not treat administered parties discriminatorily, nor frustrate the expectations that its action in them has generated."
In this line, see also the judgment of CAAD delivered in case no. 14/2012, whose understanding of the principle of legality we subscribe to in full.
In light of the foregoing, the defect of violation of law invoked by the Claimants is well-founded, since the interpretation and application of article 43(2) of the IRS Code, to the extent of excluding from the limitation of tax incidence to 50% the capital gains resulting from the onerous transfer of real rights over real property, realized by a taxpayer resident in another Member State of the European Union, limiting such incidence solely to taxpayers resident in Portuguese territory, constitutes a violation of the provision of article 63 of the Treaty on the Functioning of the European Union.
DECISION
In accordance with what has been stated, it is decided:
To declare well-founded the request filed by the Claimants in the present tax arbitration proceedings, regarding the partial illegality of the tax assessment acts for IRS for the year 2016, requiring the Tax and Customs Authority to issue new IRS assessments that reflect the decision hereby rendered.
VALUE OF THE CASE
The value of the case is fixed at € 4,724.04, pursuant to article 97-A(1)(a) of the Code of Tax Procedure and Process, applicable by force of paragraphs a) and b) of article 29(1) of RJAT and article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings.
The amount of costs is fixed at € 612.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Tax and Customs Authority, since the request was entirely well-founded, pursuant to articles 12(2) and 22(4), both of RJAT, and article 4(4) of said Regulation.
Let it be notified.
Lisbon, 04 June 2018
The Arbitrator
(Jorge Carita)
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