Process: 539/2018-T

Date: April 22, 2019

Tax Type: IRS

Source: Original CAAD Decision

Summary

This 2019 CAAD arbitral decision (Process 539/2018-T) addressed discriminatory taxation of capital gains for EU residents under Portuguese IRS law. A Spanish resident challenged a 2017 IRS assessment of €47,034.56 on capital gains from selling two Lisbon properties and securities. The Tax Authority taxed 100% of real estate capital gains at 28%, while Portuguese residents benefited from taxation on only 50% of gains under Article 43(2) of the IRS Code. The claimant argued this violated Article 62(1) of the Treaty on the Functioning of the European Union (TFEU), constituting unjustified discrimination against EU residents. The case referenced the landmark CJEU Judgment C-443/06 from 2007, which found Portugal's differential treatment of residents versus EU citizens incompatible with Community law on free movement of capital. The claimant calculated that proper taxation should apply the 28% rate only to 50% of the €81,408.63 positive balance, resulting in €22,749.42 tax instead of the assessed amount. The arbitration proceeded without an administrative file since no prior complaint or hierarchical appeal had occurred. The tribunal dispensed with hearings as this was purely a legal matter requiring interpretation of EU law compatibility with Portuguese domestic tax provisions on capital gains taxation for non-residents.

Full Decision

ARBITRAL DECISION

I - REPORT

1 - OF THE PARTIES AND CONSTITUTION OF THE ARBITRAL TRIBUNAL

1.1 - A..., married, taxpayer number ..., resident in ..., no. ..., ..., ..., Madrid, Spain, hereinafter referred to as the Claimant, hereby requests, in accordance with articles 2, no. 1, paragraph a) and 10, no. 1 of the Legal Regime for Arbitration (RJAT), approved by Decree-Law no. 10/2011, of 20 January, an arbitral decision for the declaration of partial illegality of assessment no. 2018..., relating to Personal Income Tax (IRS), for the year 2017, in the amount of €47,034.56.

The assessment in question is duly identified and attached to the file (doc. no. 8), as well as proof of its payment (docs. 9 and 10).

This assessment, contested by the Claimant, constitutes a second assessment, due to an error in the first one by the Tax Administration Services.

1.2 - The request for constitution of the Arbitral Tribunal was submitted by the Claimant on 31 October 2018, and was accepted by the President of CAAD. The Claimant chose not to appoint an arbitrator, therefore, pursuant to the provisions of no. 1 of article 6 of the RJAT, the undersigned, Dr. José Rodrigo de Castro, was designated by the Deontological Council of CAAD on 07-12-2018, a position which he accepted on 10-12-2018, of which the Parties were notified on the 20th of the same month.

1.3 - By order of 10 January 2019, the President of the Deontological Council constituted the arbitral tribunal, determining, in accordance with the provisions of paragraph c) of no. 1 of article 11 of Decree-Law no. 10/2011, of 20 January, with the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, that the relevant legal procedures be carried out.

1.4 - The Parties were notified of the constitution of the tribunal on that same date of 10 January 2019.

1.5 - Also on that same date, an arbitral order was issued, determining notification of the Tax and Customs Authority (AT) to submit a response within the legal period and submission of the respective administrative file, in accordance with and for the purposes of the provisions of nos. 1 and 2 of article 17 of the RJAT.

1.6 - The Respondent attached its response to the file on 13-02-2019, which is hereby reproduced, without an administrative file as none had been opened.

1.7 - On 13 February 2019, an arbitral order was issued, dispensing with the holding of the Meeting provided for in article 18 of the RJAT, on account of the absence of testimonial evidence and given that this was merely a matter of law, with notification of the parties for optional written submissions and setting 30 April for the delivery of the decision.

1.8 - No written submissions were made by either party up to this date, despite the deadline given being until 12 March 2019.

2 - OF THE REQUEST FORMULATED BY THE CLAIMANT

2.1 - The Claimant, resident in 2017 in Madrid, Spain, filed his request for an arbitral decision for the declaration of partial illegality of assessment no. 2018..., relating to Personal Income Tax (IRS), for the year 2017, in the amount of €47,034.56.

2.2 - The contested assessment concerns the taxation of the entire positive balance of real estate capital gains realized, and not merely 50% of its value, a balance which concerns the onerous alienation or encumbrance of the following real estate assets or equity interests:

a) Autonomous unit designated by the letter C, corresponding to the 1st floor Unit, intended for dwelling, of the urban property located at Street ..., no. ..., ..., parish of ..., municipality of Lisbon, registered in the respective matrix of the parish of ... under article ... (Doc. 4), by deed of 15/09/2017, for the price of €255,000.00 (Doc. 3).

The aforementioned unit had been acquired for the price of €90,000.00, by public deed of 20/04/2015 (Doc. 2).

b) Autonomous unit designated by the letter F, corresponding to the 2nd floor Left-hand Unit, intended for dwelling, of the urban property located at Street ..., no. ..., in ..., municipality of Lisbon, registered in the respective matrix under article ... (Doc. 4), by deed of sale of 21/03/2017, for the price of €155,000.00 (Doc. 5).

The aforementioned unit had been acquired for the price of €55,000.00, by public deed of 10/11/2015 (Doc. 4).

c) Equity interests sold on 06/10/2017, for the amount of €21,290.10, which had been acquired on 26/08/2014, for the price of €19,805.40.

d) In the year 2017, the Claimant also earned rental income in the amount of €4,300.00.

2.3 - The Claimant submitted his replacement Model 3 Declaration of IRS, with Annex G, declaring for the purposes of capital gains the acquisition and sale values of the aforementioned urban properties, equity interests, value of expenses and charges and rental income (Doc. 6).

2.4 - His declaration was accepted and validated by the Tax Authority, resulting in assessment no. 2018..., with a tax amount payable of €46,551.36 (Doc. 7), subsequently rectified by a 2nd assessment with no. 2018..., with a tax amount payable of €47,034.56, resulting in a reversal of the amount payable in relation to the 1st assessment of €483.20 (Doc. 8).

2.5 - The Claimant paid the sum of €46,551.31 and also €483.20, for a total of €47,034.56 (Docs. 9 and 10).

2.6 - The Claimant bases his request for an arbitral decision on the fact that the Tax Authority considered the entire positive balance of real estate capital gains realized, and not merely 50% of its value, applying to that total positive balance the rate of 28%, provided for in article 72, no. 1 of the IRS Code, despite being a resident of the European Union.

2.7 - The Claimant therefore considers that the Tax Authority engaged in unjustified negative discrimination against residents, prohibited by Community Law, namely article 62, no. 1 of the Treaty on the Functioning of the European Union (TFEU), which resulted in excessive taxation in IRS.

2.8 - And he considers that the total of the positive balance of real estate capital gains that should have been taxed would be €81,408.63, being €46,862.68 relating to article ... and €34,545.95 relating to article ..., calculated by the Claimant, who considered the monetary correction, expenses and charges and only 50% of the capital gains, to which applying the autonomous taxation rate of 28% would give, according to the Claimant's calculations, the value of tax payable, relating to these capital gains of €22,749.42, that is, (€46,862.68 + €34,545.95) X 28%. [1]

2.9 - He further states that the CJEU, in its Judgment of 11/10/2007, Case C-443/06, considered that article 43, no. 2 of the IRS Code, by establishing a differentiated regime between residents in Portuguese territory and residents in the European Union, violated article 56 of the Treaty Establishing the European Communities.

2.9.1 - He further cites the following case law in the same sense:

a) The Judgments of the Supreme Administrative Court of 22/03/2011, Case no. 1031/10 and of 30/04/2013, Case 01374/12,

b) As well as the Cases of CAAD nos. 45/2012-T, 127/2012-T and 748/2015-T.

3 - OF THE RESPONSE OF THE RESPONDENT

3.1 - The Respondent AT - Tax and Customs Authority submitted its Response in a timely manner, stating ab initio that it has nothing to contest regarding the facts set out in the request for an arbitral decision (articles 1 to 12).

3.2 - And because no administrative procedure occurred - neither an administrative complaint nor hierarchical appeal - there is no administrative file, as this is a matter exclusively of law.

3.3 - And in this regard, it emphasizes that the matter in relation to which the Arbitral Tribunal's review was sought concerns the exclusion of the Claimant (a resident in an EU Member State - Spain) from the incidence of real estate capital gains tax taxed only at 50%, as happens with residents in Portuguese territory, with an alleged violation of Community Law.

3.4 - And the Respondent emphasizes that the Claimant considers that the provisions of no. 2 of article 43 of the IRS Code apply to non-residents in Portugal but who are residents of an EU Member State.

3.5 - The Respondent recognizes that in the Judgment of the Court of Justice of the European Communities of 2007OUT11, the incompatibility with Community Law of the discipline of taxation of real estate capital gains of non-residents, resulting from articles 72, no. 1 and 43, no. 2 of the IRS Code, was decided, on the grounds that "article 56 EC must be interpreted as precluding national legislation, such as that at issue in the main proceedings, which subjects capital gains resulting from the alienation of an immovable property situated in a Member State, in the case in question Portugal, when that alienation is effected by a resident of another Member State, to a tax burden higher than that which would be imposed, in relation to this same type of operation, on capital gains realized by a resident of the State where that immovable property is situated".

3.6 - The AT further states that following that Judgment, the Supreme Administrative Court also, in its Judgment of 2008JAN16 (Case 0439/06), ruled in the same sense.

3.7 - The AT argues, however, that having regard to the content of the CJEU Judgment of 2007OUT11, the national legislation was adapted to those decisions, for which purpose no. 7 (current no. 9) was added to article 72 of the IRS Code, by Law no. 67-A/2007, of 31/12, the content of which was as follows:

"7 (current 9) - Residents in 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 fiscal matters, may opt, in relation to the income referred to in paragraphs a) and b) of no. 1 and in no. 2, for the taxation of that income at the rate which, in accordance with the table provided for in no. 1 of article 68, would be applicable in the case of being earned by residents in Portuguese territory."

3.8 - The Respondent AT further states that no. 8 (current no. 10) of the same article and legal diploma, also added by the aforementioned Law no. 67-A/2007, of 31/12, provided, at the time of the facts, that:

"8 (current 10) - For the purposes of determining the rate referred to in the preceding number, all income is taken into account, including that obtained outside this territory, under the same conditions that are applicable to residents."

3.9 - The Respondent further emphasizes that the aforementioned Law no. 67-A/2007, of 31/12, is the State Budget for 2008.

3.9.1 - And that it is by virtue of the legislative amendments previously referred to that income tax declarations relating to fiscal years 2008 (in force from January 2009) and onwards, more specifically the Model 3, contain a field for exercising the option for the rate of article 68 of the IRS Code, applicable to residents.

3.9.2 - And that, therefore, the application of the rates of article 68 of the IRS Code to residents in an EU Member State depended on the exercise of the option referred to in the added no. 10 of article 72, which the Claimant did not do in his replacement Declaration for the year 2017.

3.9.3 - The Respondent clarifies that it is indeed verified that in box 8 B of the Model 3, the Claimant marked field 4 (non-resident), field 6 (residence in an EU country) and field 7 (requests taxation under the general regime applicable to non-residents).

3.9.4 - The Respondent therefore considers that the Claimant's allegations cannot be upheld, given the amendments introduced by the State Budget Law no. 67-A/2007, of 31/12.

3.9.5 - On the other hand, the Respondent recalls that in accordance with no. 1 of article 15 of the IRS Code, "persons being residents in Portuguese territory, IRS applies to the entirety of their income, including that obtained outside that territory".

3.9.6 - And it concludes that for the purposes of taxation of the Claimant by the rates of article 68, that is, as a resident, it was a necessary condition to have filled in fields 9 (option for the rates of article 68 of the IRS Code) and box 11 (total income obtained abroad) - which did not happen by choice of the Claimant himself.

3.9.7 - The Respondent further emphasizes that the rule of article 43, no. 2 of the IRS Code, which the Claimant wishes to have applied to him, is included in Chapter II of the IRS Code, with the heading "Determination of Taxable Income", which is not legally possible to apply, because for the purposes of the tax charge, as regards the matter of capital gains, the relevant articles are the 9th and 10th of the same Code.

3.9.8 - For all the above stated and because the legal framework existing (as well as the declaration obligation) are no longer the same as those existing at the time of the Judgment of the Court of Justice of the European Communities, by virtue of the aforementioned amendments introduced by the State Budget Law no. 67-A/2007, of 31/12, the Respondent does not see that the Claimant is right and considers that the assessment no. 2018..., relating to IRS for 2017, should be maintained in the legal order.

II - PRELIMINARY EXAMINATION

    • The Arbitral Tribunal is regularly constituted and is materially competent, in accordance with article 2, no. 1, paragraph a) of the RJAT.
    • The parties enjoy procedural personality and capacity, are legitimated and are legally represented, in accordance with articles 4 and 10, no. 2 of the RJAT and article 1 of Order no. 112/2011, of 22 March.
    • The proceedings do not suffer from defects that would invalidate its examination.
    • In light of the documentary evidence attached to the file, not contested by the parties, it is necessary to establish the factual matters relevant to the decision and to proceed to its delivery.

III - FACTUAL MATTERS

A) - Proven Facts

The Tribunal considers the following facts as relevant factual matters:

1 - The Claimant was resident in 2017 in Madrid, Spain, that is, was a resident of an EU Member State, as he proved;

2 - The Claimant submitted his replacement Model 3 Declaration of IRS, with Annex G, declaring for the purposes of capital gains the acquisition and onerous alienation values of two urban properties, equity interests, value of expenses and charges and rental income (Doc. 6).

3 - It is verified from the Face of the Mod. 3 Declaration that in box 8 B the Claimant marked field 4 (non-resident), field 6 (residence in an EU country) and field 7 (requests taxation under the general regime applicable to non-residents).

4 - And it is also verified that the Claimant did not fill in fields 9 (option for the rates of article 68 of the IRS Code) and 11 (total income obtained abroad).

5 - The aforementioned alienated assets and declared income were all earned in Portuguese territory and were as follows:

3.1 - Autonomous unit designated by the letter C, corresponding to the 1st floor Unit, intended for dwelling, of the urban property located at Street ..., no. ..., parish of ..., municipality of Lisbon, registered in the respective matrix of the parish of ... under article ... (Doc. 4), by deed of 15/09/2017, for the price of €255,000.00 (Doc. 3).

The aforementioned unit had been acquired for the price of €90,000.00, by public deed of 20/04/2015 (Doc. 2).

3.2 - Autonomous unit designated by the letter F, corresponding to the 2nd floor Left-hand Unit, intended for dwelling, of the urban property located at Street ..., no. ..., in ..., municipality of Lisbon, registered in the respective matrix under article ... (Doc. 4), by deed of sale of 21/03/2017, for the price of €155,000.00 (Doc. 5).

The aforementioned unit had been acquired for the price of €55,000.00, by public deed of 10/11/2015 (Doc. 4).

3.3 - Equity interests sold on 06/10/2017, for the amount of €21,290.10, which had been acquired on 26/08/2014, for the price of €19,805.40.

3.4 - Rental income of €4,300.00 relating to rents relating to the two autonomous units alienated, referred to in the preceding points, with no mention of charges or withholdings on account.

6 - His declaration was accepted and validated by the Tax Authority, resulting in assessment no. 2018..., with a tax amount payable of €46,551.36 (Doc. 7), subsequently rectified by a 2nd assessment with no. 2018..., with a tax amount payable of €47,034.56, resulting in a reversal of the amount also payable in relation to the 1st assessment of €483.20 (Doc. 8).

7 - The Claimant paid the sum of €46,551.31 on 24-08-2018 and also €483.20 on the same date, for a total of €47,034.56 (Docs. 9 and 10).

8 - By the statement of the 2nd IRS assessment with no. 2018..., as per the certificate attached to the file, it is verified that an overall taxable income of €167,980.58 was calculated and a tax collection of €47,034.56 (at the rate of 28%) was made.

9 - The Claimant paid the sum of €46,551.31 and also €483.20, for a total of €47,034.56, on 24-08-2018 (Docs. 9 and 10).

B) - Unproven Facts

There are no facts invoked that are not proven in the file.

C) - Justification of Proven Facts

All the facts previously described and invoked by the Claimant (there is no administrative file) are based on documentary evidence attached to the file, and are therefore considered proven and uncontested and are relevant to the decision to be delivered.

IV - LAW

Having established the factual matters, it is necessary to determine the law to be applied.

1 - In the present proceedings, according to the petition for challenge, the issue is whether in the case of capital gains resulting from the alienation of the two autonomous units described in the proceedings, the taxation regime applicable to residents should be applied, without negative discrimination as to these, in compliance with Community Law.

2 - The contested assessment concerns the taxation of the entire positive balance of real estate capital gains realized, and not merely 50% of its value, a balance relating to the onerous alienation or encumbrance of the real estate assets and capital gains from the equity interests described.

3 - The Claimant bases his request for an arbitral decision on the fact that the Tax Authority considered the entire positive balance of real estate capital gains realized, and not merely 50% of its value, with a violation of the provisions of article 43, no. 2 of the IRS Code, although accepting that the autonomous rate of 28%, provided for in article 72, no. 1 of the IRS Code, applicable to non-residents, be applied to the positive balance of the aforementioned real estate capital gains, as suggested in his calculations contained in article 20 of the PA.

4 - The Claimant therefore considers that the Tax Authority engaged in unjustified negative discrimination against residents, prohibited by Community Law, namely article 62, no. 1 of the Treaty on the Functioning of the European Union (TFEU), which resulted in excessive taxation in IRS.

5 - And he presents in article 19 of his PA calculations of the determination of capital gains from alienated real estate (articles ... and ...) in the value, respectively, of €46,862.68 and €34,545.95, after applying the respective monetary correction of 1.01 for the years of 2012 and 2015 and the charges and expenses respectively of €70,374.65 and €30,358.10, in addition to the application to the positive balances thus obtained of, respectively, €93,725.35 and €69,091.90, the reduction of 50% in accordance with article 43, no. 2 of the IRS Code.

5 - It is therefore necessary to determine whether the differentiation in treatment given by the AT in the assessment made in accordance with national legislation, provided for in articles 10, no. 1, paragraphs a) and b) and 72, no. 1, both of the IRS Code, as worded at the time of the facts, without consideration of the provisions of article 43, no. 2, violates the provisions of Community Law, namely articles 18 and 63 of the Treaty on the Functioning of the European Union.

6 - It should be noted that the Claimant does not question the application of the aforementioned balance of the autonomous rate of 28% provided for in no. 1, paragraph a) of article 72 of the IRS Code, applicable to the balance of capital gains resulting from alienation of real estate by non-residents.

7 - He only questions, let it be recalled, the non-application of the provisions of article 43, no. 2 of the IRS Code, which reduces to 50% the balance to be taxed of capital gains from real estate obtained by residents.

8 - And the Claimant refers, in defense of his thesis, to the Judgment of 11/10/2007, Case C-443/06, which considered that article 43, no. of the IRS Code, by establishing a differentiated regime for residents in Portugal and for residents in other EU Member States, violated article 56 of the Treaty Establishing the European Community.

9 - And he also cited the Judgments of the SAC of 22/3/2011, Case no. 1031 and that of 30/4/2013, Case 01374/12, as well as the Arbitral Decisions delivered in Cases nos. 45/2012-T, 127/2012-T and 748/2015-T.

10 - The Respondent contends that the legal framework (as well as the declaration obligation) is no longer that which existed at the time of the cited CJEU Judgment, having regard to the amendments introduced by Law (State Budget) no. 67-A/2007, of 31/12, and the addition of nos. 7 and 8 (current 9 and 10) to article 72 of the IRS Code.

11 - With respect to the remaining case law cited by the Claimant, not all of the exact circumstances verified in the case of the present proceedings are present, and therefore it is not relevant to the decision on the merits of the case.

12 - The Respondent further emphasizes that the article which the Claimant wishes to have applied to him (43, no. of the IRS Code), is included in Chapter II of the IRS Code which has the heading "Determination of Taxable Income", when, for the purposes of the tax charge, which is what is at issue (as regards the matters of capital gains), the relevant articles are the 9th and 10th of the IRS Code.

13 - Therefore, it considers that no. 2 of article 43 of the IRS Code cannot be applicable to the case under analysis.

14 - There is thus presented in this proceeding a double situation that contains inconsistencies among themselves regarding what the Claimant seeks, because:

a) On the one hand, he seeks the application of the provisions of no. 2 of article 43 of the IRS Code, which applies to capital gains obtained in Portuguese territory, which in fact mandates the consideration of taxation at 50% balance of capital gains from real estate, relating to transfers made by residents, provided for in paragraph a)[2] of no. 1 of article 10.

b) On the other hand, he demands that a taxation be made of the aforementioned balance, reduced by 50%, with application of the rate applicable to non-residents of 25%, as per option of taxation under the general regime, as per field 07 of box 8B of his Model 3 IRS Declaration, and not by the application of the general rates of article 68 and of the other rules applicable to residents.

15 - Now, this form of mixed taxation, of choice of the best of the taxation regimes, that is, to be considered as a resident for the purposes of application of article 43, no. 2 and a non-resident for the purposes of application of the rate of article 72, no. 1, both of the IRS Code, which is inconsistent and inapplicable, and one cannot even argue that there is a violation of the Treaties of the European Union, as one is not faced with any discrimination.

16 - This is because the Claimant had at his disposal the possibility of seeing his capital gains taxed in accordance with all the rules applicable to residents, if he had made such a choice, pursuant to no. 9 of article 72 of the IRS Code, as the law permits him - which did not happen.

17 - Thus, by not having chosen the taxation of his real estate capital gains, by the application of the rates of article 68 of the IRS Code and of the other rules applicable to residents, but instead by the general rates, the Claimant's claim is not upheld.

18 - Moreover, nor do the rules of the IRS Code permit this duality of treatment even for residents, that is, reduction to 50% of real estate capital gains and application of the rates of article 72 of the IRS Code, always requiring, in this case, the aggregation of this balance with the other income to apply to the entirety of income earned the general rates of article 68 of the IRS Code.

  1. The regime chosen by the Claimant, although he invokes that he is a resident of the European Union, was that of taxation by the rates of article 72 applicable to non-residents and not those applicable to residents, therefore the chosen regime must be applied "in toto", as proceeded, and correctly, the Respondent, in the understanding of this Tribunal.

19 - Thus, one cannot invoke negative discrimination as the Claimant seeks to do, and this is because his choices were respected.

20 - Let it be recalled that the CJEU Judgment of 2007OUT11 (Hollman) was delivered prior to the amendments introduced to article 72 of the IRS Code, already previously cited, precisely to permit equal taxation between residents in Portuguese territory and non-residents, provided that the taxpayers request it - which was not the case.

20 - In this regard, this Tribunal considers that the contested assessment, not being incompatible with the provisions of article 63 of the TFEU, given the Claimant's choice, finds the request for an arbitral decision ungrounded, with the assessment no. 2018..., relating to the year 2017 and in the amount of €47,034.56, remaining in the legal order.

V - COMPENSATORY INTEREST

Although the Claimant is recognized as having legitimacy to request the payment of compensatory interest due in accordance with the provisions of article 43 of the General Tax Law, and the Tribunal is competent ratione materiae, the truth is that no declaration of illegality of the assessment in question and consequent annulment of the IRS amount which he claimed as improperly paid has been delivered, the prerequisites provided for in article 43 of the General Tax Law are not shown to be fulfilled for the legal requirement thereof.

VI - DECISION

In such terms, the decision is as follows:

a) To find the arbitral request unfounded and, in consequence, to maintain in the legal order the contested IRS assessment.

b) To equally find unfounded the request for payment of compensatory interest in favor of the Claimant.

c) To condemn the Claimant to full payment of the costs of the proceedings.

VALUE OF THE PROCEEDINGS

The value of the proceedings is set at €24,794.42, in accordance with article 97-A, no. 1, a) of the CPPT, applicable by virtue of paragraphs a) and b) of no. 1 of article 29 of the RJAT and no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

COSTS

The value of costs is set at €1,530.00, in accordance with Table I of the Regulation of Costs in Arbitration Proceedings, to be paid by the Claimant, given that the request was entirely unfounded, in accordance with articles 12, no. 2 and 22, no. 4, both of the RJAT and article 4, no. 4 of the aforementioned Regulation.

Let notice be given.

Lisbon, 22 April 2019.

The Arbitrator of the Sole Arbitral Tribunal,

José Rodrigo de Castro

[1] It should be noted that this calculation made by the Claimant, even if considered valid in legal terms, proves to be incorrect, since (€46,862.68 + €34,545.95) X 28% = €22,816.20 and not €22,794.42 as he states.

[2] For the case that is relevant to the proceedings.

Frequently Asked Questions

Automatically Created

How are capital gains from real estate and securities taxed in Portugal for EU residents under IRS?
Capital gains from real estate for EU residents in Portugal are subject to IRS taxation at a 28% autonomous rate under Article 72(1) of the IRS Code. However, this case highlights a critical discrimination issue: while Portuguese residents are taxed on only 50% of real estate capital gains, EU residents were historically taxed on 100% of gains. The CJEU ruled in Case C-443/06 that this differential treatment violates Article 56 of the EC Treaty (now Article 63 TFEU) on free movement of capital. Securities gains are also taxed at 28%, but the discrimination primarily concerned real estate. EU residents should receive equivalent treatment to Portuguese residents, meaning taxation on 50% of net capital gains after monetary corrections and deductible expenses.
Can an EU resident challenge a Portuguese IRS tax assessment on capital gains through CAAD arbitration?
Yes, EU residents can challenge Portuguese IRS assessments through the Centro de Arbitragem Administrativa (CAAD) under the Legal Regime for Arbitration in Tax Matters (RJAT), approved by Decree-Law 10/2011. This case demonstrates the process: the Spanish resident filed a request under Articles 2(1)(a) and 10(1) of RJAT, seeking declaration of partial illegality of the assessment. The claimant attached proof of the contested assessment and payment. CAAD accepted the request, appointed an arbitrator, and the Tax Authority submitted a response without an administrative file since no prior complaint existed. The tribunal can rule on Community law violations, dispensing with hearings when only legal issues are involved. This avenue provides EU residents access to specialized tax dispute resolution without exhausting administrative remedies first.
What are the rules for taxing mobile and immobile capital gains (mais-valias) of non-resident EU citizens in Portugal?
Portuguese tax law distinguishes between residents and non-residents for capital gains taxation, but EU law requires equal treatment for EU residents. For non-resident EU citizens, mobile capital gains (securities/equity interests) and immobile capital gains (real estate) are both subject to the 28% autonomous IRS rate under Article 72(1) of the IRS Code. The critical issue addressed in this decision is that Article 43(2) of the IRS Code historically allowed only Portuguese residents to be taxed on 50% of real estate capital gains, while non-residents faced taxation on 100%. Following CJEU Case C-443/06, this differential treatment violates Articles 63-65 TFEU on free movement of capital. EU residents are entitled to the same 50% inclusion rate, monetary corrections for inflation, and deduction of acquisition expenses and charges that Portuguese residents enjoy, preventing discriminatory taxation solely based on residence location within the EU.
What is the procedure for requesting arbitral proceedings at CAAD to dispute an IRS tax assessment?
To request arbitral proceedings at CAAD for disputing an IRS assessment, taxpayers must follow the procedure established in RJAT (Decree-Law 10/2011). First, file a written request identifying the contested assessment, tax year, and amount, attaching proof of the assessment and payment. The request must specify legal grounds for illegality—here, violation of EU law on capital gains taxation. CAAD's President reviews the request for admissibility. Upon acceptance, parties may appoint an arbitrator or have one designated by CAAD's Deontological Council. The tribunal notifies the Tax Authority to submit a response and administrative file within the legal deadline. The arbitrator may dispense with hearings if only legal questions are involved, allowing optional written submissions. The tribunal must issue a decision within the statutory period. No prior administrative complaint or hierarchical appeal is required, making CAAD an accessible first-instance remedy for tax disputes.
Under what circumstances can a second IRS tax assessment be declared partially illegal by a CAAD arbitral tribunal?
A CAAD arbitral tribunal can declare a second IRS assessment partially illegal when it violates Portuguese law or EU law principles. In this case, circumstances for partial illegality included: (1) discriminatory application of capital gains taxation treating EU residents less favorably than Portuguese residents; (2) violation of TFEU Articles 63-65 on free movement of capital by taxing 100% of real estate gains for EU residents versus 50% for domestic residents; (3) incorrect application of Article 43(2) of the IRS Code already ruled incompatible with Community law by CJEU in Case C-443/06; (4) excessive taxation resulting from the discriminatory treatment. The second assessment itself (correcting an administrative error in the first) can be challenged on substantive grounds regardless of being a replacement. The tribunal examines whether the tax calculation methodology violates objective legal standards, not merely computational accuracy, particularly when fundamental EU principles of non-discrimination and free movement are at stake.