Process: 548/2018-T

Date: April 8, 2019

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 548/2018-T) addresses whether Portugal's differential taxation of real estate capital gains for non-EU residents violates EU free movement of capital principles. Two Brazilian tax residents sold Portuguese property in 2017 and were taxed at 28% on the full capital gain under Article 72(1) of the IRS Code. They challenged IRS assessments totaling €94,267, arguing they should benefit from the 50% exclusion under Article 43(2) available to Portuguese residents. The Tax Authority denied this benefit, asserting that non-EU residents could only access the 50% exclusion by opting for progressive taxation under Article 72(9), which requires worldwide income consolidation—an option the taxpayers did not exercise. The Authority argued that Law 67-A/2007 had already addressed EU compatibility concerns raised in CJEU Case C-443/06 by creating alternative taxation regimes. The arbitral tribunal faced a fundamental question: does limiting the 50% capital gains exclusion to residents or those choosing worldwide income taxation discriminate against non-EU residents in violation of Article 63 TFEU? The Tax Authority requested a preliminary ruling from the Court of Justice of the European Union if doubts persisted. This case highlights the tension between Portugal's territorial tax system for non-residents and EU law requirements for capital movement neutrality, particularly affecting taxpayers from third countries like Brazil who lack automatic access to benefits available to EU/EEA residents.

Full Decision

ARBITRAL DECISION

I. REPORT

I.1

  1. On 6 November 2018, the taxpayers A..., holder of Brazilian passport no..., with Portuguese tax identification number..., resident at Rua..., ...–...– São Paulo –..., in Brazil, and B..., holder of Brazilian passport no..., with Portuguese tax identification number..., resident at Rua Dr. .., ...– São Paulo –... ..., in Brazil, requested, pursuant to and for the purposes of Article 2 and Article 10, both of Decree-Law no. 10/2011, of 20 January, the constitution of an Arbitral Tribunal with the appointment of a sole arbitrator by the Ethics Council of the Centre for Administrative Arbitration, in accordance with the provisions of Article 6, paragraph 1 of the aforementioned decree.

  2. The request for the constitution of the Arbitral Tribunal was accepted by the Honourable President of CAAD and was notified to the Tax and Customs Authority (hereinafter referred to as AT or "Respondent") on 12 November 2018.

  3. The Applicants did not proceed to appoint an arbitrator, so, pursuant to Article 5, paragraph 2, subparagraph b) and Article 6, paragraph 1 of RJAT, the undersigned was appointed by the President of the Ethics Council of CAAD to serve on the present sole Arbitral Tribunal, having accepted in accordance with the legally established procedures.

  4. The AT submitted its response on 20 February 2019.

  5. By order of 22.02.2019, the holding of the meeting provided for in Article 18 of RJAT was dispensed with and it was decided that the proceedings would continue with final written submissions.

  6. On 8 March 2019, the Applicants presented their submissions.

  7. The Respondent presented its submissions on 27.03.2019

  8. The Applicants seek that the Arbitral Tribunal partially annul the Personal Income Tax (IRS) assessment no. 2018..., relating to the year 2017, in the amount of 47,133.50 Euros and the IRS assessment no. 2018..., relating to the year 2017, in the amount of 47,133.50 Euros with all legal consequences, namely the reimbursement to the Applicants of the amount of tax improperly paid, plus the corresponding indemnity interest.

I.2. The Applicants support their claim, in summary, on the following grounds:

  1. The Respondent proceeded to calculate the tax due, in accordance with paragraph 1 of Article 43 of the IRS Code, based on the balance determined between capital gains and capital losses realized in the same year and applying a rate of 28% to the entire amount of the capital gains thus determined.

  2. It therefore did not apply the exclusion from taxation regime of 50% provided for in paragraph 2 of Article 43 of the IRS Code on the grounds that, in its understanding, such provision is not applicable to non-residents.

  3. The option for the taxation of income at the rate which, according to the table provided for in paragraph 1 of Article 68, would be applicable in the case of income earned by residents in Portuguese territory, was not applicable to the Applicants, since paragraph 9 of Article 72 of the IRS Code is only applicable to residents in other Member States of the European Union or the European Economic Area, under the conditions defined therein, and not to tax residents of third countries.

  4. The Respondent considers that, in the context of the same transaction, the applicable taxation rules should differ depending on whether the capital gain is realized by a resident or a non-resident.

  5. Ignoring, in this manner, that such distinction constitutes a violation of European Union Law, in particular Article 63 of the TFEU, inasmuch as it discriminates unfavourably against non-residents and thus restricts the free movement of capital.

  6. In the event of the success of the present challenge, the applicants would have the right to be reimbursed, each one, in the amount of 23,566.75 Euros, plus the corresponding indemnity interest, in accordance with paragraph 1 of Article 43 of the LGT.

I.3 In its Response, the AT invoked the following:

  1. It is true that in Judgment C-443/06 of the Court of Justice of the European Communities of 11.10.2007, the incompatibility with Community Law of the discipline of taxation of capital gains on immovable property of non-residents resulting from Articles 72, paragraph 1 and 43, paragraph 2 of the IRS Code was decided.

  2. Having regard to the content of the Judgment of the Court of Justice of the European Communities of 11.10.2007, and in order to adapt national legislation to the decision it upheld, paragraph 7 (current paragraph 9) was added to Article 72 of the IRS Code by Law no. 67-A/2007, of 31/12.

  3. The legal framework (as well as the declaration obligation) is no longer the one that existed on the date of the Judgment of the Court of Justice of the European Communities, having regard to the fact that amendments were made to the law due to the addition of paragraphs 7 and 8 (currently 9 and 10) to Article 72 of the IRS Code by Law no. 67-A/2007, of 31/12.

  4. For the purposes of taxable scope (as regards the matter of capital gains), the relevant articles are Articles 9 and 10 of the IRS Code.

  5. Thus, the provision of paragraph 2 of Article 43 of the IRS Code cannot be applicable to the case under analysis.

  6. That regulatory framework came to provide for two situations/possibilities/alternatives for the taxation of the balance determined between capital gains and capital losses realized in the same year, resulting from the difference between the realization value and the acquisition value by onerous transfer of real rights over immovable property.

  7. Thus, on the one hand, the Applicants could have opted for the taxation of such income (capital gains) at the rate which, according to the table provided for in paragraph 1 of Article 68 of the IRS Code, would be applicable in the case of income earned by residents in Portuguese territory, and the determination of the rate would take into account all income, including that obtained outside this territory, under the same conditions that are applicable to residents, which they did not do.

  8. On the other hand, the Applicants could have opted, as they did, for the autonomous rate of 28%, as provided for in Article 72, paragraph 1, subparagraph a) of the IRS Code.

  9. The amendment made through the introduction of the current paragraphs 9 and 10 of Article 72 of the IRS Code made it possible for both residents and non-residents to benefit from the regime provided for in Article 43, paragraph 2 (consideration of the capital gain balance in only 50% of its value) of the same Code, provided that they OPT for the consolidation of income obtained both in Portugal and outside this territory.

  10. If doubts persist, by virtue of the obligation of preliminary referral under the provisions of Article 267 of the Treaty on the Functioning of the European Union, the proceedings should be suspended so that the CJEU establishes a binding interpretation on the matter.

II. PRELIMINARY DETERMINATION

The Tribunal is competent and is regularly constituted, in accordance with Articles 2, paragraph 1, subparagraph a), 5 and 6, all of RJAT.

The parties have legal personality and capacity.

The parties are entitled and are legally represented, in accordance with Articles 4 and 10 of RJAT and Article 1 of Ordinance no. 112-A/2011, of 22 March.

The proceedings are proper.

There are no preliminary questions to be considered or defects that invalidate the proceedings.

It is now necessary to consider the merits of the claim.

III. THEMA DECIDENDUM

The central issue to be decided, as posed by the Applicants, is whether, in the case of capital gains resulting from the disposal of immovable property, the differentiated taxation regime applicable to residents in the national territory and to non-residents in the territory of the European Union, as regards the limitation of the incidence of IRS to 50% of the balance of capital gains for residents here, constitutes, or does not constitute, discrimination in the field of freedom of movement of capital, in violation of Article 63 of the Treaty on the Functioning of the European Union, when it does not extend to residents in another State not a Member of the European Union.

IV. – FACTUAL MATTERS

IV.1. Proven Facts

Before proceeding to consider the questions, it is necessary to present the factual matters relevant for their understanding and decision, which, having examined the documentary evidence and having regard to the facts alleged, are established as follows:

  1. The taxpayer A... is resident at Rua ..., ...– São Paulo –... ..., Brazil, and the taxpayer B... is resident at Rua ..., ...–...– São Paulo –... ..., Brazil.

  2. In October 2017, the Applicants proceeded to sell an immovable property for the value of 1,010,000.00 Euros, which was acquired in the proportion of 50% each in November 2014, for 605,165.44 Euros.

  3. With the aforementioned sale, each of them incurred expenses and charges in the amount of 31,057.50 Euros (totalling 62,115.00 Euros in expenses and charges related to the property).

  4. The taxpayers respectively submitted their IRS declarations relating to the financial year 2017, both having declared themselves to be non-residents and not having opted for taxation under the general regime or any other regimes.

  5. In the IRS declaration, both Applicants presented Annex G under the heading "Capital Gains and other Increases in Capital Value".

  6. The Respondent made and notified the Applicants of the IRS assessments no. 2018... (A...) and no. 2018... (B...), relating to the year 2017, in the amount of 47,133.50 Euros each.

  7. In the assessments, a monetary adjustment coefficient of 1.01 was considered to determine the respective acquisition value and a result of 168,333.95 Euros was determined for each of the Applicants.

  8. In the quantification of the taxable capital gain, the Respondent considered the entire value of the result — 168,333.95 Euros — disregarding the exclusion from taxation regime of 50%.

  9. The assessments contested were paid on 11.08.2019 (IRS assessment no. 2018...) and on 14.08.2019 (IRS assessment no. 2018...).

IV.2. Unproven Facts

There are no essential unproven facts, since all facts relevant to the consideration of the claim were found to be proven.

IV.3. Reasoning of the Factual Matters

The proven facts constitute uncontested matters and are documentally demonstrated in the records.

The facts contained in items 1 to 9 are accepted as established by the analysis of the documents submitted by the Applicants (documents 1 to 4 of the request for arbitral pronouncement) and by the position taken by the parties.

V. On the Law

I) Preliminary Referral

The Respondent requested a preliminary referral to the Court of Justice of the European Union (CJEU) for verification of the compatibility of the taxation of capital gains of non-residents with European Union legislation.

Pursuant to Article 267 of the Treaty on the Functioning of the European Union (TFEU):

"The Court of Justice of the European Union shall have jurisdiction to give preliminary rulings concerning:

a) the interpretation of the Treaties;

b) the validity and interpretation of acts adopted by the institutions, bodies, offices or agencies of the Union.

Where such a question is raised before any court or tribunal of a Member State, that court or tribunal may, if it considers that a decision on the question is necessary to enable it to give judgment, request the Court to give a preliminary ruling thereon.

Where such a question is raised in a case pending before a court or tribunal of a Member State whose decisions are not subject to a right of appeal governed by national law, that court or tribunal shall bring the matter before the Court.

(…)"

The Arbitral Tribunal is considered a court or tribunal of a Member State for the purposes of Article 267 of the CJEU. See Judgment of the CJEU of 12.06.2014, case no. C-377/13.

It so happens that the issue under consideration (Article 43, paragraph 2 of CIRS and its non-application to non-residents) has already been previously considered by the CJEU, and its non-conformity with the provisions of Article 63 of the TFEU has been recognized - Judgment Hollmann of the Court of Justice of the European Union (CJEU), delivered on 11.10.2007, case C-443/06.

The Respondent further alleges that the legal framework in force in 2017 is not the same as that which existed at the time of the CJEU's consideration in the cited Hollman Judgment. Law no. 67-A/2007, of 31/12 added to Article 72 of the IRS Code paragraph 7 (current paragraph 13), whose content on the date of the facts was as follows: "9 - Residents in another Member State of the European Union or the European Economic Area, provided that, in the latter case, there is an exchange of information on tax matters, may opt, for the income referred to in subparagraphs a) and b) of paragraph 1 and in paragraph 2, for the taxation of such income at the rate which, according to the table provided for in paragraph 1 of Article 68, would be applicable in the case of income earned by residents in Portuguese territory."

For its part, paragraph 8 (current paragraph 14) of the same article and statute, also added by Law no. 67-A/2007, of 31/12, prescribed, on the date of the facts, that: "10 - For the 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."

It is true that legislative amendments have since been made, with effect from 2008. However, they are not applicable to the Applicants because the cited amendments only apply to residents in the European Union or the European Economic Area. Now, the applicants reside in Brazil, which is not included in the EU or the EEA. Therefore, the applicants could not, if they had wished to, adhere to the regime established in 2007.

In this way, the cited legislative amendments are ineffective for the case in question.

For the applicants, the legislative framework in force (2017) and the factual situation are the same as was considered in the CJEU's Hollman Judgment, and therefore no change in interpretation is justified.

The obligation to refer to the CJEU does not exist when the CJEU has already produced an interpretation previously in an analogous case where the factual questions were materially identical. In this sense, see European Union Procedural Law – Community Contentious Proceedings, João Mota de Campos and others, Calouste Gulbenkian Foundation, 2nd Edition, 2014, p. 429

Quoting the Judgment of the CJEU of 27.03.1963, case C-28/62, "the obligation to refer to the CJEU loses its raison d'être when the question raised is materially identical to a question which has already been the subject of a preliminary ruling decision in an analogous case."

Because there is a prior interpretation by the CJEU, the preliminary referral is refused.

II) Violation of Article 63 of the TFEU

The Applicants obtained in 2017 a gain resulting from a capital gain obtained by the onerous disposal of an immovable property.

This income is classified as income from category G – Capital Gain - (Article 10, paragraph 1, subparagraph a) of CIRS), and this gain consists of the difference between the realization value and the acquisition value (Article 10, paragraph 4 of CIRS).

Since the gain was obtained in Portuguese territory (Article 18, paragraph 1, subparagraph h) of CIRS), it is subject to taxation, under IRS, in Portuguese territory (Article 13, paragraph 1 and Article 15, paragraph 2 of CIRS).

After determining the value of the capital gain, Article 43, paragraph 2 of CIRS provides as follows:

"2 - The balance referred to in the preceding paragraph, relating to transfers carried out by residents provided for in subparagraphs a), c) and d) of paragraph 1 of Article 10, positive or negative, is considered only in 50% of its value."

Given the aforementioned provision, the value of the capital gain is considered only in 50%. However, this exclusion from taxation is only applied to residents, with non-residents being excluded from the scope of the provision.

In the case under consideration, as the Applicants are non-residents, this 50% exclusion was not applied to them. Regarding the non-application of this exclusion from taxation, as mentioned by the Applicants in the arbitral petition, the Hollmann Judgment of the Court of Justice of the European Union (CJEU), delivered on 11.10.2007, case C-443/06, came to consider that the provision of paragraph 2 of Article 43 of the IRS Code, in 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 the purposes of determining taxable income for 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).

This conclusion is based on the following principal arguments:

(a) An operation involving the liquidation of an immovable property investment constitutes a movement of capital, and the Treaty provides a specific provision prohibiting all restrictions on the movement of capital;

(b) In the case of the sale of immovable property located in Portugal, with the realization of capital gains, non-residents are subject to a higher tax burden than is applied to residents, and are therefore in a less favourable position than the latter;

(c) In effect, while a non-resident is subject to a rate of 25% (the current rate is 28%) 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, for this purpose, from a lower tax burden, whatever the rate of taxation applicable to the entirety of his or her income, since the taxation of the income of residents is subject to a progressive rate scale whose highest bracket is 42% (the highest bracket today is 48% plus the solidarity surcharge rate);

(d) This regime makes the transfer of capital less attractive for non-residents and constitutes a restriction on the movement of capital prohibited by the Treaty;

(e) The discrimination of the national provision is not justifiable by the objective of avoiding penalizing residents (who are subject to a progressive rate scale that may be much higher and are taxed on a worldwide basis, unlike non-residents, who are taxed at the proportional rate of 25% (the current rate is 28%), with no consolidation), because, as noted above, with the highest bracket being 42% (the highest bracket today is 48% plus the solidarity surcharge rate), it always leads, under the same conditions, to a more burdensome taxation of the non-resident, having regard to the reduction to 50% of the taxable income of the resident, and there being, objectively, no difference that would justify this inequality of tax treatment with respect to the taxation of capital gains between the two categories of taxpayers.

f) We are therefore faced with a discriminatory regime incompatible with Community Law, in violation of Article 63 of the Treaty on the Functioning of the European Union.

In this regard, the Judgment of the Supreme Administrative Court (STA) of 16.01.2008, delivered in case no. 0439/06, also decided on the incompatibility of the application of paragraph 2 of Article 43 of the IRS Code and, consequently, on the violation of the provision of Article 56 (current Article 63) of the Treaty establishing the European Community, in compliance with the primacy of Community law stipulated in our legal order in Article 8, paragraph 4 of the Constitution of the Portuguese Republic (CRP), "The provisions of the Treaties governing the European Union and the rules emanating from its institutions, in the exercise of their respective powers, are applicable in the internal legal order, in the terms defined by European Union law, with respect for the fundamental principles of the democratic rule of law" (See, for example, in the same sense, the judgment of the STA of 22.03.2011, case no. 01031/10).

Wherefore, having regard to the prevalence of the jurisprudence of the CJEU, in matters of Community law, one cannot reach and decide in any other way in these proceedings, given that the issues addressed therein are similar to those of the case at hand, as well as the legal provision upon which they are founded.

Given this situation, we follow the legal reasoning of the aforementioned Judgment delivered by the Supreme Administrative Court, as well as the Hollman Judgment of the CJEU. Thus, the interpretation and application of paragraph 2 of Article 43 of the IRS Code, to the extent that it excludes from the limitation of the tax incidence at 50% capital gains resulting from the onerous disposal of real rights over immovable property, realized by a resident in another State, being that limitation only applicable to residents in Portuguese territory, constitutes a violation of the provision of Article 63 of the TFEU, in that it translates into a discriminatory tax regime for non-residents.

The jurisprudence of the superior courts (TCAS of 19/09/2017, case no. 06021/12) and of CAAD (case no. 45/2012, of 05.07.2012, case no. 748/2015, 27/07/2016, case no. 89/2017 of 05/07/2017, case no. 644/2017 of 30.05.2018, case no. 370/2018 of 18.01.2019), to whose reasoning we adhere, has been unanimous as to the illegality of Article 43, paragraph 2 of CIRS in the face of the provision of Article 63 of the TFEU, and this Tribunal finds no legal basis for altering the direction of these decisions.

The legislative amendments that occurred in 2007 do not apply to the case at hand because the Applicants are not residents in the EU, as has already been duly mentioned and reasoned above.

It remains to analyze the application, or otherwise, of the provisions of the TFEU to a non-resident in the EU. As regards this issue, the CJEU has also considered it, specifically in relation to a factual situation similar to the one sub judice and in relation to the same legal provision (Article 43, paragraph 2 of CIRS), having delivered the following decision:

"Member State legislation, such as that in issue in the main proceedings, which subjects capital gains resulting from the disposal of an immovable property situated in that Member State, carried out by a resident in a third country, to a higher tax burden than that which would apply, in that same type of operation, to capital gains realized by a resident in that Member State, constitutes a restriction on the free movement of capital which, subject to verification by the referring court, is not covered by the exception provided for in Article 64(1) TFEU and cannot be justified by the reasons stated in Article 65(1) TFEU." Case C-184/18 of 06.09.2018

Having regard to the cited CJEU Judgment, it is incumbent upon us at the national level to verify whether the restriction on the free movement of capital is permitted in light of the provisions of Articles 64 and 65 of the TFEU.

Article 64 of the TFEU provides as follows:

  1. Article 63 shall be without prejudice to the application to third countries of restrictions which exist on 31 December 1993 under national legislation of a Member State or at Union level, or which are introduced by agreement with third countries, provided they relate to movements of capital to or from third countries that involve investment of a direct nature, including in real estate, the establishment of branches or the provision of financial services, or the admission of securities to capital markets. With regard to restrictions existing under the national legislation of Bulgaria, Estonia and Hungary, the date in question shall be 31 December 1999.

Article 64, paragraph 1 of the TFEU provides for the non-application of the provisions of Article 63 of the TFEU in the case of restrictions on the free movement of capital with third countries that already existed on 31.12.1993 (temporal requirement) and provided they involve direct investment, including in real estate, the establishment of branches, the provision of financial services or the admission of securities to capital markets (material requirement).

The temporal and material requirements are to be verified cumulatively (Judgment of 10 April 2014, Emerging Markets Series of DFA Investment Trust Company, C 190/12, EU:C:2014:249, paragraph 53).

Examining the national legislation in force on 31.12.1993, Article 41, paragraph 2 of CIRS had the following wording: "The balance referred to in the preceding paragraph, relating to the transfers provided for in subparagraphs a), c) and d) of paragraph 1 of Article 10, positive or negative, is considered only in 50% of its value."

We thus verify that on 31.12.1993 there was no provision similar to the current Article 43, paragraph 2 of CIRS, which distinguishes between residents and non-residents. Wherefore, the exception provided for in Article 64, paragraph 1 of the TFEU, which permits restrictions on the free movement of capital with third countries, is not applicable to the case at hand.

Article 65 of the TFEU provides as follows:

  1. Article 63 shall be without prejudice to the right of the Member States:

a) to apply the relevant provisions of their tax law which establish a distinction between taxpayers who are not in the same situation with regard to their place of residence or the place where their capital is invested;

b) (...).

  1. (...).

  2. The measures and procedures referred to in paragraphs 1 and 2 shall not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments, as defined in Article 63.

  3. (...).

Pursuant to Article 65, paragraph 1 of the TFEU, the distinction between residents and non-residents is permitted provided that the difference in treatment concerns situations that are not comparable and provided that it is not arbitrary discrimination or a disguised restriction on the free movement of capital.

In the case at hand, the income, whether obtained by residents or non-residents, is included in the same category (category G) and the income in both situations is obtained in the national territory.

As residents and non-residents are in identical situations, it does not appear to us that there is any reason that would justify this inequality of treatment.

Quoting the decision of the CJEU in case C-184/18 of 06.09.2018:

It follows from the foregoing that there is no objective difference in the situations of these two categories of taxpayers involved in the main proceedings that would justify the inequality of tax treatment with regard to the taxation of capital gains realized by them as a result of the disposal of immovable property situated in Portugal. Accordingly, the situation in which non-resident taxpayers, such as the appellants in the main proceedings, find themselves is comparable to that of resident taxpayers.

With regard to the existence of justifications based on overriding reasons of public interest, it does not appear to us that such exist, particularly as nothing was alleged in these proceedings. Nevertheless, quoting the Hollmann Judgment of the CJEU:

"Consequently, it must be held that the restriction resulting from the tax legislation in issue in the main proceedings cannot be justified by the need to ensure the coherence of the tax regime."

In conclusion, the restrictions on the free movement of capital with third countries permitted by Articles 64 and 65 of the TFEU do not apply to the case being tried.

Therefore, the provision of Article 43, paragraph 2 of CIRS, when not applicable to non-residents in the EU, violates the provision of Article 63, paragraph 1 of the TFEU. In light of the principle of the primacy of European Union law recognized by Article 8, paragraph 4 of the CRP, the non-application of the provision of Article 43, paragraph 2 of CIRS to non-residents in the EU is illegal.

III) Indemnity Interest

Pursuant to Article 43, paragraph 1, of the LGT, "indemnity interest is due when it is determined, in a voluntary claim for relief or judicial review, that there has been an error attributable to the services resulting in the payment of the tax debt in an amount greater than legally due".

The requirements for the right to indemnity interest provided for in Article 43, paragraph 1 of the LGT are as follows:

1 - That there be an error in a tax assessment act;

2 - That the error be attributable to the services;

3 - That the existence of such error be determined in a process of voluntary claim for relief or judicial review;

4 - That such error has resulted in the payment of a tax debt in an amount greater than legally due.

(See Jorge Lopes de Sousa, CPPT Annotated and Commented, Volume I, Áreas Editora, 6th Edition, 2011, p. 530).

The annulment of the IRS assessments subject to the request for arbitral pronouncement was due to an incorrect interpretation and application of the Law. The incorrect interpretation of the Law leads to the consequent annulment of the consequent tax act which has it as its basis.

The incorrect interpretation and application of the Law falls within the category of error regarding the legal presuppositions, which functions as a requirement for the right to indemnity interest enshrined in the examined Article 43, paragraph 1 of the LGT. The error is attributable to the services of the AT, and has resulted in a payment greater than that which was due.

In these terms, it must be considered that all the presuppositions for condemning the Respondent to payment of indemnity interest to the Applicants are met, by virtue of the annulment of the assessments, given that all the presuppositions provided for in Article 43, paragraph 1 of the LGT are fulfilled.

Accordingly, the claim for indemnity interest is warranted, which should be calculated, at the determined rate, in accordance with the provision of Article 43, paragraph 4 of the LGT, from the days on which the improper payments were made until the date of issuance of the corresponding credit notes.

VI) DECISION

In light of all the foregoing, it is decided:

a) To uphold the claim for a declaration of illegality of assessments no. 2018... and no. 2018..., relating to the year 2017, and consequently to partially annul such assessments, to the extent corresponding to the increase in taxation resulting from the consideration of the entire immovable capital gain;

b) To condemn the Respondent to payment of indemnity interest from the date on which the Applicants made payment of each of the illegal assessments until full payment of the amounts from which they should be reimbursed;

c) To condemn the Respondent in the costs of the proceedings in view of the loss.

The value of the proceedings is fixed at €47,133.50 in accordance with Article 97-A, paragraph 1, a), of the CPPT, applicable by virtue of subparagraph a) of paragraph 1 of Article 29 of RJAT and paragraph 2 of Article 3 of the Regulation on Costs in Tax Arbitration Proceedings.

The arbitration fee is fixed at €2,142.00 in accordance with Table I of the Regulation on Costs of Tax Arbitration Proceedings, to be paid by the Respondent, in accordance with Articles 12, paragraph 2, and 22, paragraph 4, both of RJAT, and Article 4, paragraph 4, of the said Regulation.

Let notification be made.

Lisbon, 8 April 2019

The Arbitrator

(André Festas da Silva)

Frequently Asked Questions

Automatically Created

How are real estate capital gains (mais-valias imobiliárias) taxed for non-residents in Portugal under IRS?
Non-residents in Portugal are generally subject to IRS on real estate capital gains (mais-valias imobiliárias) at a flat rate of 28% under Article 72(1)(a) of the IRS Code, applied to the full amount of the capital gain balance. Alternatively, under Article 72(9), non-residents from EU/EEA countries can opt for progressive taxation using the rates applicable to residents (Article 68 table), which allows access to the 50% exclusion under Article 43(2), but requires declaring and consolidating worldwide income. This option requires specific election and compliance with declaration obligations that differ from the default autonomous taxation regime.
Why was the 50% capital gains exclusion under Article 43(2) of the IRS Code denied to non-residents in this case?
The Tax Authority denied the 50% capital gains exclusion under Article 43(2) because the taxpayers were Brazilian residents (non-EU) who had not elected the alternative taxation regime under Article 72(9) of the IRS Code. The Authority argued that Article 43(2) applies within the framework of progressive taxation and income aggregation, not to the autonomous 28% rate regime that non-residents typically use. Following CJEU Case C-443/06, Portugal amended the law through Law 67-A/2007, adding paragraphs 9 and 10 to Article 72, which the Authority claimed provided EU-compliant alternatives that require active election by the taxpayer, not automatic application.
What is a preliminary ruling request (reenvio prejudicial) in Portuguese tax arbitration proceedings at CAAD?
A preliminary ruling request (pedido de reenvio prejudicial) in Portuguese tax arbitration is a procedural mechanism under Article 267 of the Treaty on the Functioning of the European Union (TFEU) whereby the CAAD arbitral tribunal suspends proceedings to request the Court of Justice of the European Union (CJEU) to provide a binding interpretation of EU law. In this case, the Tax Authority invoked this obligation, suggesting that if doubts existed about whether Portugal's differential treatment of non-EU residents violates Article 63 TFEU (free movement of capital), the tribunal should refer the matter to the CJEU before deciding. This ensures uniform interpretation of EU law across member states and is mandatory for courts against whose decisions there is no judicial remedy.
Does the 28% flat tax rate on capital gains for non-residents violate EU free movement principles?
The 28% flat tax rate itself does not inherently violate EU free movement principles; the alleged violation concerns the denial of the 50% capital gains exclusion available to residents. Under Article 63 TFEU, restrictions on capital movements between Member States and third countries are prohibited. The taxpayers argued that taxing non-residents on 100% of capital gains while residents are taxed on only 50% (under Article 43(2) IRS Code) constitutes discriminatory restriction of capital movement. However, the Tax Authority contended that following CJEU Case C-443/06 and subsequent amendments via Law 67-A/2007, non-residents can access the same 50% benefit by opting for progressive taxation under Article 72(9), making the regimes compatible with EU law provided taxpayers exercise the available option.
Can non-residents in Portugal request annulment of IRS assessments and claim compensatory interest (juros indemnizatórios) through CAAD arbitration?
Yes, non-residents can request annulment of IRS assessments through CAAD arbitration under Decree-Law 10/2011. Article 2(1)(a) grants jurisdiction over tax disputes including those involving non-residents subject to Portuguese taxation. In this case, the Brazilian taxpayers successfully initiated arbitration seeking partial annulment of two IRS assessments (€47,133.50 each) and reimbursement of improperly paid tax plus compensatory interest (juros indemnizatórios) under Article 43(1) of the General Tax Law (LGT). Compensatory interest compensates taxpayers for the State's undue retention of amounts, calculated from payment until reimbursement. The arbitral tribunal has jurisdiction regardless of residency status, as Portuguese tax law subjects non-residents to IRS on Portuguese-source income, creating enforceable tax obligations subject to administrative review.