Process: 547/2016-T

Date: April 3, 2017

Tax Type: IRS

Source: Original CAAD Decision

Summary

The Tax Arbitration Court (CAAD) examined whether a taxpayer in a de facto union could file a joint IRS return for 2013. The claimant and their partner had cohabited since at least 2010 but only registered the same tax domicile in March 2012. The claimant filed a joint return in 2014, obtaining a €3,681.61 refund. The Tax Authority cancelled this return and issued an ex officio assessment as 'single', reducing the refund to €1,220.02, arguing that on December 31, 2013, the couple had not maintained the same tax domicile for more than two years as required by Article 14 of the IRS Code. The claimant challenged this decision, presenting witness testimony proving actual cohabitation since 2010 and arguing that failure to timely update the registered tax domicile does not invalidate the de facto union status but merely affects its opposability to tax authorities. The central legal issue was whether the two-year requirement refers to actual cohabitation or registered tax domicile. The case highlights the critical importance of maintaining current tax domicile registration for couples wishing to benefit from joint taxation under the de facto union regime, as administrative delays in updating fiscal addresses can result in loss of significant tax benefits and refunds, even when the substantive relationship requirements are satisfied.

Full Decision

ARBITRAL DECISION

I. REPORT

A…, taxpayer number…, resident at Street …, …, …, …-… Maia, hereinafter referred to as the Claimant, filed a request for the constitution of an arbitral tribunal in tax matters and a request for an arbitral pronouncement, pursuant to the provisions of articles 2 no. 1 a) and 10 no. 1 a), both of Decree-Law no. 10/2011 of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to as LRAT), petitioning for:

(i) the declaration that the option made for the tax regime of married taxpayers not judicially separated for persons and assets is valid and effective;

(ii) the annulment of the Personal Income Tax assessment no. 2015…, relating to the Personal Income Tax for the 2013 fiscal year;

(iii) the condemnation of the Respondent to the restitution of the difference between the tax finally due and that which was paid into the State treasury as withholding tax, deducted from the amount already refunded to the Claimant;

(iv) the condemnation of the Respondent to pay compensatory interest, calculated on the total amount of refund due from the date it was due until the date the Claimant was refunded the amount of € 1,220.02 and on accrued and accruing interest, from that date, calculated on the difference between the refund due and the refund made.

To substantiate its request, it alleges, in summary:

a) It has lived in a de facto union with B…, uninterruptedly, since the beginning of 2007;

b) Although it has lived in a de facto union since 2007, only in March 2012 did the Claimant and B… begin to have the same tax domicile officially registered;

c) In 2014, within the statutory deadline, the Claimant jointly with B… filed a Personal Income Tax return model 3 for the 2013 fiscal year, in the capacity of de facto partners, from which resulted a refund in favor of the Claimant in the amount of € 3,681.61;

d) In 2015, the Tax Authority cancelled the model 3 income return filed and processed an official return, in the capacity of single, from which resulted a refund in favor of the Claimant in the amount of € 1,220.02;

e) The Claimant meets the legally required conditions for filing, in the capacity of de facto partner, the Personal Income Tax return model 3 for the 2013 fiscal year;

f) The breach of the obligation to communicate the tax domicile, provided for in article 19 no. 3 of the General Tax Law, does not determine the invalidity of the change of tax domicile but only its ineffectiveness and opposability to the Tax Authority.

With the request for arbitral pronouncement, the Claimant attached 9 documents and listed two witnesses.

Subsequently, the Claimant attached 22 additional documents, such attachment being admitted and subject to contradiction by the Tax Authority.

In the request for arbitral pronouncement, the Claimant chose not to appoint an arbitrator, whereby, pursuant to article 6 no. 2 a) of the LRAT, the undersigned was appointed by the Deontological Council of the Administrative Arbitration Centre, and the appointment was accepted as legally provided.

The arbitral tribunal was constituted on 28 November 2016.

Notified in accordance with article 17 of the LRAT, the Respondent filed its reply, alleging, in summary, the following:

a) The Personal Income Tax return model 3 for the 2013 fiscal year filed by the Claimant was in a state of error and was definitively cancelled, having not resulted in any tax to be paid or refunded;

b) On 31/12/2013, the Claimant did not meet the legally required conditions to benefit from the regime provided for in article 14 of the Personal Income Tax Code, inasmuch as it neither cohabited nor had the same tax domicile as B… for more than two years.

The Respondent attached no documents nor listed any witnesses, having attached a copy of the administrative file.

A hearing took place as referred to in article 18 of the LRAT, in which the two witnesses listed by the Claimant were heard.

The Claimant and Respondent presented, successively, written pleadings, in which they maintained the position previously assumed and defended in their arguments.

II. QUESTION TO BE DECIDED:

Given the positions assumed by the parties, it is found that the only question to be decided is whether, on 31/12/2013, the Claimant met the legally required conditions to benefit from the regime provided for in article 14 of the Personal Income Tax Code.

III. FACTUAL MATTER:

a. Proven Facts:

With relevance for the decision to be rendered in the present proceedings, the following facts were deemed proven:

  1. The Claimant filed, on 29/04/2014, a Personal Income Tax return model 3, for the 2013 fiscal year, marking the option "de facto partners", which gave rise to assessment no. 2014…, from which resulted tax in favor of the Claimant in the amount of € 3,681.61;

  2. By official letter dated 22/05/2014, the Claimant was notified by the Tax Authority to present all supporting documents of its personal and family situation;

  3. On 11/06/2014, the Claimant sent to the Tax Authority the clarifications it deemed necessary;

  4. By official letter dated 14/11/2014, the Tax Authority notified the Claimant of its intention to disregard the clarifications provided by the Claimant regarding its status as a de facto partner and to, if willing, exercise the right to be heard;

  5. The Tax Authority cancelled the income return filed by the Claimant and issued an official return, marking the option of "single", which gave rise to assessment no. 2015…, from which resulted tax in favor of the Claimant in the amount of € 1,220.02, refunded to the Claimant on 24/04/2015;

  6. On 13/08/2015, the Claimant filed a gracious claim against assessment no. 2015…;

  7. By official letter dated 22/10/2015, the Claimant was notified of the draft, dated 22/10/2015, of rejection of the gracious claim filed and to, if willing, exercise prior hearing;

  8. By motion dated 09/11/2015, the Claimant exercised prior hearing;

  9. By official letter dated 30/11/2015, the Claimant was notified of the decision rejecting the gracious claim filed;

  10. The Claimant filed, on 30/12/2015, a hierarchical appeal of the decision rejecting the gracious claim;

  11. By official letter dated 03/06/2016, the Claimant was notified of the decision rejecting the hierarchical appeal filed;

  12. The Claimant lives, uninterruptedly, in the same habitual residence and in community of bed, board and dwelling, in conditions analogous to those of spouses, with B…, since at least 2010;

  13. Between 13/12/1996 and 27/03/2012, the Claimant had the following domicile registered with the System of Management and Registration of Taxpayers: Street …, no. …, …, Coimbra;

  14. On 15/01/2007, B… began to have the following domicile registered with the System of Management and Registration of Taxpayers: Street …, no. …, …, …, Maia;

  15. On 20/03/2012, B… changed its domicile with the System of Management and Registration of Taxpayers to Street …, no. …, …, Maia;

  16. On 27/03/2012, the Claimant changed its domicile with the System of Management and Registration of Taxpayers to Street …, no. …, …, Maia;

  17. On 06/09/2016, the Claimant filed a request for the constitution of an arbitral tribunal.

b. Unproven Facts

With relevance to the proceedings, no other fact was proven.

c. Reasoning on Factual Matter

The conviction regarding points 1 to 11 and 13 to 16 of the proven facts was formed on the basis of documentary evidence attached by the Claimant, indicated for each of the points, and the administrative file.

As to point 12 of the proven facts, decisive for the tribunal's conviction, besides the documents attached by the Claimant whose genuineness was not put in question by the Tax Authority, were the testimonies given by witnesses C… and D…, who, demonstrating direct and personal knowledge of the facts, as they were, respectively, the sister of the Claimant and the sister of his partner, testified correctly and credibly, confirming the facts described.

Also as to this point 12), only was the community of bed, board and dwelling proven from 2010 because the documents attached did not allow conclusive proof of common living prior to that date. As to the witnesses examined, D… stated that the Claimant has lived with her sister since 2007, whereas witness C… said she knew that her brother lived with B… since 2010, whereby, in light of the contradiction in this point of the testimonies, this tribunal cannot deem proven the existence of common living in a moment prior to 2010.

IV. JOINDER:

The Arbitral Tribunal was regularly constituted and is materially competent.

There are no nullities that invalidate the proceedings.

The parties have legal personality and capacity and are legitimate, with no defects in representation.

The proceedings are not affected by defects that compromise its validity, there being no exceptions or preliminary questions that prevent knowledge of the merits and which this tribunal must ex officio address.

V. ON LAW:

Having determined the proven factual matter, it is now necessary, by reference thereto, to establish which law is applicable.

Having analyzed the arguments put forth by the parties, it is readily observed that the crux of the question to be examined in the present proceedings resides in ascertaining whether the Claimant, on 31/12/2013, met the legally required conditions to benefit from the regime provided for in article 14 of the Personal Income Tax Code.

In this regard, the Claimant invokes that it lives in a de facto union with B…, uninterruptedly, since the beginning of 2007, whereby there is no doubt whatsoever that, on 31/12/2013, it met the legally required conditions to benefit from the regime provided for in article 14 of the Personal Income Tax Code.

In the opposite sense, the Tax Authority argues that it is not demonstrated that there is identity of tax domicile between the Claimant and his partner for a period of more than two years, an identity which only began on 27/03/2012, the date on which the Claimant and B… began to have the same tax domicile registered with the System of Management and Registration of Taxpayers.

Thus, according to the Tax Authority, on 31/12/2013 the Claimant did not meet the conditions to benefit from the regime provided for in article 14 of the Personal Income Tax Code.

For the examination of the question at issue in the present proceedings, it is important, first and foremost, to bring to light article 14 of the Personal Income Tax Code, which, at the date of the facts, had the following wording:

"1. Persons who, living in a de facto union, meet the requirements provided in the respective law, may opt for the tax regime of married taxpayers not judicially separated for persons and assets.

  1. The application of the regime referred to in the preceding number depends on the identity of tax domicile of the taxpayers during the period required by law to verify the requirements of the de facto union and during the taxation period, as well as on the signature, by both, of the respective income return.

  2. (…)".

Thus, at the date of the facts, to benefit from the tax regime of married taxpayers not judicially separated for persons and assets, it was necessary to cumulatively verify three requirements: (i) existence of a de facto union; (ii) identity of tax domicile for two years; and (iii) signature of the income return, by both taxpayers.

Pursuant to the provisions of no. 2 of article 1 of Law no. 7/2001 of 11 May, a de facto union is the legal situation of two persons who, regardless of sex, live in conditions analogous to those of spouses for more than two years.

Although the aforementioned law, similarly to what occurred with the previous Law no. 135/99 of 28 August, does not determine what should be understood by "living in conditions analogous to those of spouses", it should be judged as such the situation of two persons who live in community of bed, board and dwelling, just as would occur if they were married. If this community of bed, board and dwelling persists for a period of more than two years, then it shall be considered, for all legal purposes, as a de facto union.

As to the effects of a de facto union, item d) of article 3 of the aforementioned Law no. 7/2001 provides that persons living in a de facto union under the conditions provided in the said law have the right to the application of the income tax regime of individual persons under the same conditions applicable to married taxpayers not judicially separated for persons and assets.

In turn, under the heading "Tax Domicile", article 19 no. 1 of the General Tax Law provides as follows:

"The tax domicile of the taxpayer is, unless otherwise provided:

a) For individual persons, the place of habitual residence;

b) (…)"

Pursuant to the provisions of no. 3 of the same article, communication of the domicile of the taxpayer to the tax administration is mandatory, with no. 4 of the same provision sanctioning the change of domicile with ineffectiveness so long as it is not communicated to the tax administration.

Note that this is, in this case, a mere ineffectiveness of the change, which determines its non-production of effects before the tax authority, and not any invalidity of the change, with the lack of communication not affecting its substance.

In other words, the tax domicile of the individual taxpayer, which is the place of his habitual residence, ceases to be so because he failed to communicate it to the tax administration.

Having fulfilled the obligation provided for in article 19 no. 3 of the General Tax Law, taxpayers have in their favor a presumption that their tax domicile corresponds to the domicile in the System of Management and Registration of Taxpayers.

Conversely, in the event that taxpayers fail to fulfill this obligation, it is incumbent upon them to prove their respective tax domicile.

In fact, pursuant to the provisions of no. 1 of article 74 of the General Tax Law, "the burden of proof of the facts constitutive of the rights of the tax administration or of taxpayers rests on whoever invokes them".

In the case at hand, it was proven – see points 15 and 16 of the proven facts – that the Claimant and his partner only began to have the same domicile registered with the System of Management and Registration of Taxpayers in March 2012.

But from this it does not follow, without more, as the Tax Authority argues, that the Claimant and his partner did not have the same tax domicile at an earlier moment.

This is because what the law requires is the identity of tax domicile, as habitual residence, and not the identity of domicile in the System of Management and Registration of Taxpayers.

And as to the identity of tax domicile, as the place of habitual residence of individual taxpayers, there is no doubt that the Claimant succeeded in demonstrating it.

In fact, it was proven – see point 12 of the proven factual matter – that the Claimant has lived, at least since 2010 and uninterruptedly, in community of bed, board and dwelling with B…, whereby there is no doubt that both had, since at least that date, the same tax domicile, as habitual residence.

And if the Claimant and B… had, since at least 2010, the same habitual residence, living since that date in community of bed, board and dwelling, in conditions analogous to those of spouses, uninterruptedly, there is no doubt that they lived, since then, in a de facto union.

Note that a de facto union requires no special formality, and its proof may be effected by any legally admissible means, as expressly follows from article 2-A no. 1 of Law no. 7/2001 of 11 May.

In the case at hand, the documents attached by the Claimant do not allow the conclusion, with the necessary certainty, that the Claimant lived in a de facto union since 2010.

However, the proof of that fact was effected through testimonial evidence listed, a means which is suitable and sufficient for proof of the Claimant's de facto union.

It is important to mention here that in the course of the administrative proceedings the Tax Authority never questioned that the Claimant lived in a de facto union with his partner, having only rejected the application of the regime provided for in article 14 of the Personal Income Tax Code on the ground that it understood that the taxpayers did not have the same tax domicile for at least two years.

Having analyzed the decision rendered in the context of the hierarchical appeal filed by the Appellant, it is found that the Tax Authority expressly accepts such de facto union since 2007, when, on page 4, it states that "the appellant lives with his partner, since 2007, as if husband and wife".

Whereby one cannot but note that it is reprehensible the position that the Tax Authority assumed in the arbitral proceedings, in questioning the existence of this de facto union when it had never done so before.

Having said that, once proof of the identity of tax domicile has been made and the requirement of identity of tax domicile with the System of Management and Registration of Taxpayers is not constitutive of the taxpayer's right, it must be concluded that the breach of the obligation provided for in article 19 no. 3 of the General Tax Law does not prevent taxpayers from opting for the tax regime of married taxpayers not judicially separated for persons and assets provided for in article 14 no. 2 of the Personal Income Tax Code, when they have succeeded, by other means, in making the proof, which was incumbent upon them, of the identity of tax domicile and of de facto union – in this sense, see Decision of the Central Administrative Court of the South of 19FEB2015, case no. 08313/14, in www.dgsi.pt.

As defended in the decision of the Central Administrative Court of the South of 05MAR2015, case number 05655/12, in www.dgsi.pt, "if two persons, regardless of sex, live in conditions analogous to those of spouses for more than two years, in the same habitual residence (proof which is incumbent on the taxpayers, in the case of breach of the obligation to communicate provided for in no. 3 of art. 19 of the General Tax Law) the identity of tax domicile provided for in the provisions of no. 2 of art. 14 of the Personal Income Tax Code is verified".

Neither let it be said, as the Tax Authority does, that the interpretation it defends is the only one that conforms to the requirements imposed by articles 14 of the Personal Income Tax Code and 19 of the General Tax Law, "inasmuch as the same suffers from a primary error, namely, confusing the obligation to communicate tax domicile (or its change) and the ineffectiveness of a possible change not communicated with the existence or possibility of recognition of the right which may, indeed, become dependent on proof being made regarding said identity of domicile. That is, it is the effectiveness of the joint declaration that becomes dependent on proof of the identity of tax domicile (habitual residence) for two years and not the right to file that declaration which is prevented by failure to communicate a change of tax domicile. What is relevant is that the tax domicile – of the declarants in de facto union for at least two years – be effectively the same and not that they have declared it as such, even though the production of the legal effects intended may be paralyzed in time until such proof (and consequent elimination of presumption that such common residence/common domicile does not exist) is made." (underlining ours) – in this sense, Decision of the Central Administrative Court of the South of 19FEB2015, case number 08313/14, in www.dgsi.pt.

It is further important to note that this interpretation of article 14 of the Personal Income Tax Code also finds support in Recommendation no. 1/A/2013 of the Ombudsman's Office, pursuant to which it was understood that "taxpayers who, living in a de facto union, as defined by the respective law and who have not timely proceeded to change their tax domicile, cannot fail to benefit from the joint taxation regime which they have opted for, without prejudice to the administrative offence responsibility that may apply, pursuant to no. 4 of article 117 of the General Tax Infraction Regulation".

Indeed, any other interpretation of the aforementioned article 14 of the Personal Income Tax Code would violate in an ostensible manner the constitutional principles of protection of family, capacity to pay and equality.

It is thus verified that the two first requirements provided for in article 14 of the Personal Income Tax Code are met for opting for the tax regime of married taxpayers not judicially separated for persons and assets, that is, existence of a de facto union and identity of tax domicile of the taxpayers for more than two years and during the taxation period.

As to the last requirement legally required – signature of the income return by both taxpayers – such not having been put in question by the Tax Authority, it must necessarily be concluded that it is verified.

In light of all that has been stated, given that on 31/12/2013 all the requirements provided for in article 14 of the Personal Income Tax Code were met, the Claimant could opt, as it did, in the income return filed for the 2013 fiscal year, for the tax regime of married taxpayers not judicially separated for persons and assets.

Thus, it is clear that there is no legal basis for the impugned assessment, imposing itself, therefore, its annulment.

The Claimant further petitions for the condemnation of the Respondent to pay compensatory interest, calculated on the total amount of refund due – € 3,681.61 – from the date it was due until the date the Claimant was refunded the amount of € 1,220.02 and on accrued and accruing interest, from that date, calculated on the difference between the refund due and the refund made.

With regard to compensatory interest, article 43 no. 1 of the General Tax Law provides that "compensatory interest is due when it is determined, in a gracious claim or judicial action, that there was error attributable to the services which resulted in payment of the tax debt in an amount greater than legally due."

In the case now under examination, the error affecting the impugned assessment is attributable to the Tax Authority, which assessed the tax with no factual or legal support whatsoever, whereby there is no doubt that the Claimant has the right to the receipt of compensatory interest.

It remains, however, to ascertain from which date such interest shall be due.

This is because, if it is true that the error is attributable to the Tax Authority, it is no less true that, in light of the lack of identity of tax domicile registered with the System of Management and Registration of Taxpayers, the Tax Authority could only become aware of that error and remedy it when properly alerted by the Claimant.

And such alert on the part of the Claimant arose with the gracious claim, in which, moreover, it listed, for proof of the facts alleged by it, the same witnesses that it listed in the context of the present proceedings.

Now, attentive to the inquisitorial principle contained in articles 58 of the General Tax Law and 69 e) of the Code of Tax Procedure and Process, it was incumbent on the Tax Authority to proceed with the examination of the witnesses listed, which, as it came to be verified, proved to be essential for the resolution of the dispute.

Whereby the Tax Authority could and should have altered its decision and corrected the error at the time of examining the gracious claim filed by the Claimant, an examination that took place on 22/10/2015.

Not having done so, it should be condemned to pay compensatory interest from that date, on which, it is insisted, it could and should have remedied the error.

VI. OPERATIVE PART:

In light of the foregoing, it is decided:

a) To uphold the request for declaration of illegality of the Personal Income Tax assessment for the 2013 fiscal year and in consequence:

i) To annul the tax assessment act for Personal Income Tax no. 2015…, from which resulted tax in favor of the Claimant in the amount of € 1,220.02;

ii) To condemn the Tax Authority to pay to the Claimant the amount corresponding to the difference between the tax that would have been due to him if his option for the tax regime of married taxpayers not judicially separated for persons and assets had been accepted and the amount that was refunded to him;

iii) To condemn the Tax Authority to pay to the Claimant compensatory interest, calculated on the amount corresponding to the difference between the tax that would have been due to him if his option for the tax regime of married taxpayers not judicially separated for persons and assets had been accepted and the amount that was refunded to him, from the date of 22/10/2015 and until full and integral payment.

The value of the case is set at € 2,461.59, pursuant to item a) of no. 1 of article 97-A of the Code of Tax Procedure and Process, applicable by virtue of items a) and b) of no. 1 of article 29 of the LRAT and of no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

Pursuant to the provisions of no. 2 of article 12 and no. 4 of article 22 of the LRAT and of article 4 of the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is set at € 612.00 pursuant to Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Respondent, as the party against whom the decision is rendered.

Register and notify.

Lisbon, 03 April 2017.

The Arbitrator,

Alberto Amorim Pereira

Text prepared by computer, pursuant to no. 5 of article 131 of the Code of Civil Procedure, applicable by reference to item e) of no. 1 of article 29 of Decree-Law no. 10/2011, of 20/01.

Frequently Asked Questions

Automatically Created

Can common-law partners (união de facto) file joint IRS tax returns in Portugal?
Yes, common-law partners (união de facto) can file joint IRS tax returns in Portugal under Article 14 of the IRS Code, provided they meet specific legal requirements. They must have lived together in conditions analogous to spouses and maintained the same registered tax domicile for more than two years as of December 31 of the relevant tax year. This regime provides the same tax treatment as married couples not judicially separated.
What are the fiscal domicile requirements for common-law partners to qualify for joint taxation under Portuguese tax law?
For common-law partners to qualify for joint taxation, both partners must have the same fiscal domicile officially registered with the Tax Authority's taxpayer management system for more than two years before December 31 of the tax year in question. Additionally, they must actually cohabit in conditions analogous to marriage. The registered domicile requirement is strictly interpreted - the Tax Authority considers the date of official registration, not the date actual cohabitation began, when calculating the two-year period under Article 14 of the IRS Code.
Does failure to update fiscal domicile address invalidate the right to joint taxation for unmarried couples?
While failure to promptly update fiscal domicile may not invalidate the existence of a de facto union for civil law purposes, it has significant tax consequences. The Tax Authority interprets the two-year cohabitation requirement based on registered tax domicile rather than actual residence. If partners have not maintained the same registered fiscal address for more than two years by December 31 of the tax year, the Tax Authority may refuse joint taxation benefits, even if actual cohabitation existed. However, taxpayers can argue this merely affects opposability to tax authorities under Article 19(3) of the General Tax Law, not the substantive right to joint filing.
Can the Portuguese Tax Authority (AT) annul a joint tax return and issue an ex officio assessment for a single taxpayer?
Yes, the Portuguese Tax Authority has the power to annul a jointly filed IRS return when it determines that legal requirements for joint taxation are not met. Under its supervisory powers, the Tax Authority can cancel the taxpayer's original return and issue an ex officio assessment as 'single' taxpayer. This typically occurs when the Authority verifies that de facto union requirements under Article 14 of the IRS Code were not satisfied, such as insufficient duration of registered common tax domicile. Before cancellation, the Tax Authority must notify the taxpayer and provide an opportunity to present supporting documentation and exercise the right to prior hearing.
Are taxpayers entitled to compensatory interest (juros indemnizatórios) when the Tax Authority incorrectly rejects joint IRS filing?
Taxpayers may be entitled to compensatory interest (juros indemnizatórios) if the Tax Authority incorrectly rejects a joint IRS filing and an arbitral tribunal or court subsequently rules in the taxpayer's favor. Compensatory interest is calculated on the difference between the tax refund that should have been paid and the amount actually refunded, from the date the refund was originally due until full payment. This compensates taxpayers for the State's improper retention of funds. However, entitlement depends on successfully challenging the Tax Authority's decision through administrative appeals (gracious claim, hierarchical appeal) or arbitration, demonstrating that joint filing requirements were indeed met.