Process: 572/2016-T

Date: March 31, 2017

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration decision (Process 572/2016-T) addresses the IRS capital gains exclusion regime for primary residence sales under Article 10(5) of the Portuguese IRS Code. The taxpayer sold a property he built and declared €55,000 reinvestment in a new primary residence in Annex G of his 2013 IRS return. The Tax Authority rejected this exclusion, assessing €16,426.36 in tax and compensatory interest, arguing the sold property was not the taxpayer's primary residence because his registered tax domicile differed from the property location. The claimant contested this reassessment through a gracious complaint, which was dismissed, leading to CAAD arbitration. The taxpayer's main argument invokes Supreme Administrative Court precedent (STA 23.11.2011, Case 590/11) establishing that tax domicile registration is not conclusive proof of primary residence. He presented evidence including electricity contracts and insurance policies demonstrating actual habitation of the sold property by his family unit. The case examines whether physical occupancy and legal indicators can override formal tax registry entries. Alternatively, the claimant argues that if the property was not deemed a primary residence, it should be classified as business income under Article 31(2) CIRS with the 0.20 coefficient, since it was built for sale and placed on the market immediately upon completion. This would change the tax treatment from capital gains to business income reported on line 401 of Annex B. The decision illustrates the evidentiary burden on taxpayers to prove primary residence status and the importance of maintaining consistent documentation across tax registries, utility contracts, and actual residence patterns when claiming capital gains exclusions.

Full Decision

ARBITRAL DECISION

Parties

Claimant: A…, NF…, with tax domicile at Rua de …, nº…, …, …, … – … … .

Respondent: TAX AND CUSTOMS AUTHORITY (AT)

I. REPORT

a) On 20 September 2016 the Claimant submitted to CAAD a request for the establishment of a singular arbitral tribunal (TAS) pursuant to the Legal Regime of Arbitration in Tax Matters (RJAT).

THE REQUEST

b) The Claimant contests the assessment of Personal Income Tax (IRS) for the year 2013, in the amount of € 16,426.36 (tax and compensatory interest), on the grounds that it disagrees with the correction of the IRS declaration made by the Tax Authority, which disregarded the entry in Annex G of the IRS Model 3 return of reinvestment in the amount of € 55,000.00.

c) He lodged a gracious complaint (no. …2016…) against the IRS assessment which was dismissed in its entirety.

d) He paid the assessed tax and further petitions for reimbursement of what he paid, plus indemnification interest.

THE BASIS OF CLAIM

e) The Claimant invokes the illegality of the contested assessment, alleging the defect of violation of law through error of law by the AT (non-conformity with the norm contained in no. 5 of Article 10 of the IRS Code).

f) Given that the sole requirement that the AT called into question regarding the income declaration that gave rise to the contested assessment was the fact that the Claimant had not assigned the alienated property as his own and permanent dwelling or that of his family unit (urban property that he built from scratch, located at the Place of …- …– …– Article …º), considering that he resided at the location indicated in the taxpayer registry (at Rua…, … …), he contends that this does not prevent him from proving, in the course of the gracious procedure, that his usual residence was indeed in the alienated property.

g) Citing to this effect the Court of Appeal Decision of the Supreme Administrative Court (STA) of 23.11.2011, Case 590711 – Reporting Counsellor Lino Ribeiro.

h) And even if the property had not been inhabited by the Claimant and his family unit before its sale and had been placed on the market immediately upon completion, it should be considered property constructed for sale and as such could not generate capital gains but rather gains to be recorded on line 401 of Annex B, using the coefficient of 0.20 referred to in no. 2 of Article 31 of the IRS Code.

OF THE SINGULAR ARBITRAL TRIBUNAL (TAS)

i) The request for establishment of the TAS was accepted by the President of CAAD and automatically notified to the AT on 10-10-2016.

j) The signatory of this decision was designated as arbitrator by the CAAD Deontological Council, with the parties being notified on 23-11-2016. The parties did not manifest any intention to refuse the designation, pursuant to Article 11º no. 1 subsections a) and b) of RJAT and Articles 6º and 7º of the Deontological Code.

k) The Singular Arbitral Tribunal (TAS) has been regularly constituted since 12-12-2016 to hear and decide the subject matter of this dispute (Articles 2º, no. 1, subsection a) and 30º, no. 1, of RJAT).

l) All these acts are documented in the communication establishing the Singular Arbitral Tribunal dated 12-12-2016 which is hereby incorporated by reference.

m) The AT was notified on 12-12-2016 pursuant to the terms and purposes of Article 17º-1 of RJAT. It responded on 25.01.2017 attaching the Administrative Case (PA) no. 07/2016, composed of 8 computerized files.

n) On 22.02.2017 the Claimant requested an extension of his claim such that the AT would also be condemned to pay indemnification interest, arguing that, even in situations of error attributable to the services, in case of annulment of assessments, only in situations that form part of the claim does the AT promote their refund.

o) Although the Claimant had in his claim requested reimbursement of the assessed tax "with indemnification interest" the TAS promoted the right to be heard by order of 23.02.2017. The AT did not pronounce itself on this specific matter, certainly because it was a claim without adhesion to procedural reality, since it had already been originally submitted in the request for arbitral decision (PPA).

p) The hearing of parties referred to in Article 18º of RJAT was held on 20.02.2017, with three witnesses listed in the request for arbitral decision (PPA) being heard, namely: B…; C… and D…, on matters of Articles 46º and 47º of the PPA. Their testimonies were recorded in audio format.

q) The parties submitted written arguments on 02.03.2017 and 08.03.2017, respectively the Claimant and the Respondent.

PROCEDURAL REQUIREMENTS

r) Legitimacy, capacity and representation – The parties are legitimate, have legal personality and procedural capacity and are represented (Articles 4º and 10º, no. 2, of RJAT and Article 1º of Ordinance no. 112-A/2011, of 22 March).

s) Principle of the right to be heard - The AT was notified pursuant to subsections m) and o) of this Report. All procedural documents and all documents attached to the case were made available to the respective counterparty in CAAD's Case Management System. Both parties were notified of their attachment.

t) Dilatory exceptions - The arbitral procedure does not suffer from nullities and the request for arbitral decision is timely as it was submitted within the time limit prescribed in subsection a) of no. 1 of Article 10º of RJAT, as appears from the fact that the Claimant submitted the request for decision on 20.09.2016 and the decision dismissing the gracious complaint was notified by letter received on 23.06.2016 by a different person than the Claimant (part 7 of the PA attached by the AT with the Response). The AT itself does not call into question the timeliness of submission of the PPA, corroborating the implicit adhesion to the time computation carried out by the Claimant.

SUMMARY OF THE CLAIMANT'S POSITION

u) The Claimant contends that he assigned the alienated property (which he built from scratch at the Place of…, parish of…, municipality of…, under Article …º), to his own and permanent dwelling or that of his family unit.

v) He begins by arguing that at the time of the IRS assessment for the year 2013, the Claimant never received any notification to pronounce himself on the draft decision regarding the correction of the declaration.

w) Subsequently because the sole requirement that the AT called into question regarding the income declaration that gave rise to the contested assessment was the fact that the taxpayer had not assigned the alienated property as his own and permanent dwelling or that of his family unit (urban property that he built from scratch at the Place of … - …–…– Article…), considering that he resided at the location indicated in the taxpayer registry (at Rua …, …-…), he contends that this does not prevent him from proving, in the gracious procedure, that his habitual residence was indeed in the alienated property.

x) Even if this were not so, he contends that through the documents he attached to the gracious complaint process (namely electricity supply and insurance contracts) he demonstrated "indications" that he and his family unit, before selling the house, established their personal life therein, with the physical conditions (house and furniture) and legal conditions (contracts, declarations and entries in registries) being met as referred to in the STA decision of 23.11.2011 taken in Case 590/11 – Reporting Counsellor Lino Ribeiro, proving that he assigned the own and permanent dwelling to the alienated house.

y) Alternatively, if it is not accepted that the property constituted own and permanent dwelling and given the declared data, the Claimant contends that the gains declared should be classified as business gains.

z) In arguments the Claimant argued for what was already defended in the request for arbitral decision.

SUMMARY OF THE RESPONDENT'S POSITION

aa) The Respondent begins by contesting the first argument adduced by the Claimant: that he had no knowledge of the draft decision regarding the correction of the IRS declaration;

bb) Because a copy of the GIC letter …/…, of 23-06-2014, was received by him and attached to the case in which he was presented with the reasons why his IRS declaration for the year 2013 had been selected for analysis, in the context of an IRS divergencies process, which states that "once the aforementioned period has elapsed, without regularization of the situation detected, the procedure will proceed to correction of the declared values". A letter to which he did not respond.

cc) And concludes "therefore, the Tax Authority made the correction to the IRS declaration presented, based on the grounds made known to the Claimant through the GIC letter …/…, of 23-06-2014: "residence of the taxpayer different from the reinvestment property and/or proof of loan amounts or declared reinvestment values".

dd) As to the consideration that the urban property located at the place of…, in …, …- Article … - did not constitute the Claimant's own and permanent residence and that of his family unit, it argues the fact that the construction licence was for the period of 14.07.2009 to 16-07-2012, it being improper for the Claimant to allege that he inhabited it from 2010, since it was under construction and had no usage licence.

ee) On the other hand the Claimant failed to comply with the provisions of Article 19º - nos 3 and 4 of the General Tax Code (LGT) and from "consultation of information contained in the Tax Authority's computer system, it appears that, on 23-08-2010, the Claimant had his residence at Rua …no.…, in …".

ff) The AT continues stating: "the Claimant's wife, E…, changed on 16-06-2010, her residence to Rua … no.…, in … and on 29-07-2013, changed it to Rua do … no.…, in …, …", concluding: "from which it is concluded that neither the Claimant nor his wife, who compose his family unit, established their own and permanent residence in the property located at the place of…, in …".

gg) Regarding documentary proof the AT states that it was not presented in a manner that would allow the Claimant to succeed in his claim.

hh) The non-acceptance of documentary proof presented in the gracious procedure is related to the distance between …. - … and …(2.7 km) which invalidates the proof of registration of the son in the School of … . The same applies to the proof of the insurance contract arguing that even under construction properties should be covered by insurance. In the documents relating to contracts with the … the address does not appear and do not relate to 2013. The internet contract was not provided.

ii) It concludes that " … the Claimant does not provide unequivocal and irrefutable proof that he had his habitual and permanent residence in the alienated property", "That is, he did not prove that he established his personal life in that location, as permanent dwelling is the center of life, where one receives family, friends and correspondence".

jj) Finally, the AT refutes the possibility of considering the gains in question as "business gain" to be entered in field 401, of Annex B of the IRS Model 3 return, arguing as follows: "… section 4 A of the income declaration model 3, is intended for the entry of gross income arising from the exercise of professional, commercial and industrial activities, or isolated acts of that nature, as defined in Articles 3º and 4º of the IRS Code". And adds: "Being that, in field 401 of Annex B of the income declaration, the values relating to the sale of merchandise and products must be entered and goods acquired without transformation and those manufactured by the businessman must be indicated, including sales arising from the exercise of any commercial and industrial activity (a) of no. 1 of Article 3º of the IRS Code)".

kk) Regarding the request for condemnation to pay indemnification interest the AT contends that they are not due, either because the assessment is in accordance with law, or because there was no error by the services.

ll) In arguments the AT maintains what was already stated in the Response and argues that the testimonies of the witnesses were all vague, not specifying concrete dates, not achieving unequivocal and irrefutable proof that the alienated house was the Claimant's own and permanent residence and that of his family unit.

II - ISSUES FOR THE ARBITRAL TRIBUNAL TO RESOLVE

In the first place, it is necessary to examine whether in cases where the taxpayer does not change his tax domicile to the own and permanent dwelling that he built, failing to comply with the rule of no. 3 of Article 19º of the General Tax Code, this prevents him from subsequently proving, in a gracious complaint or in judicial proceedings, that his tax domicile was there and that it constituted his habitual residence. And that, moreover, it was his only own and permanent dwelling.

Concluding that this possibility is available to him, it is then necessary to determine whether, in this case, sufficient proof was made so that it can be concluded that the urban property that the Claimant built from scratch at the Place of …, parish of…, municipality of … (urban property Article…) was on the date of its sale on 05.11.2013 his own and permanent dwelling (HPP).

Should it be concluded that it was not the HPP of the Claimant and his family unit, it will then be necessary to determine whether the gains obtained from its sale should be integrated in the concept of business gains and not real estate capital gains.

In any case, if the request for decision is well-founded, it will be necessary to determine the claimed right to indemnification interest.

III. PROVEN AND UNPROVEN FACTS.
REASONING

Regarding the facts, the Tribunal does not need to pronounce itself on everything that was alleged by the parties, as its duty is to select the facts that matter for the decision and to distinguish proven facts from unproven facts (as per Article 123º, no. 2, of the Tax Procedure Code (CPPT) and Article 607º, no. 3 of the Code of Civil Procedure (CPC), applicable by reference of Article 29º, no. 1, subsections a) and e), of RJAT).

Accordingly, the facts relevant to the judgment of the case are selected and delimited based on their legal relevance, which is established having regard to the various plausible solutions of the legal question(s) (as per previous Article 511º, no. 1, of the CPC, corresponding to the current Article 596º, applicable by reference of Article 29º, no. 1, subsection e), of RJAT).

Thus, having regard to the positions adopted by the parties and the documentary evidence attached, the following facts were considered proven, with relevance to the decision, as listed below, with the respective documents indicated (proof by documents), as justification.

Proven Facts

1. On 17 June 2008, the Claimant and his spouse E… NF …, acquired, by donation from the parents of the first, the rural property R-…º, located at the Place of …(or…), parish of…, municipality of…, which became land for construction in 2012 with the designation of urban property Article …º - pursuant to Article 1º of the request for arbitral decision (PPA), document no. 1 attached with the PPA and page 55 of part 3 of the PA attached by the AT with the response;

2. The Claimant and his spouse built on the aforementioned land a building intended for dwelling, pursuant to construction license no. …/2009 of the Municipality of…, valid between 14.07.2009 and 16.07.2012 and pursuant to usage license no. …/2013 of the same Municipality, of 29.04.2013, which came to be registered in the respective land registry under Article U-…º, as full ownership, with 1 floor and of type T3, on 21.06.2013 – pursuant to Articles 2º, 3º and 5º of the PPA, documents nos. 2, 3 and 4 attached with the PPA and page 55 of part 3 of the PA attached by the AT with the response;

3. The property referred to in the previous item was assessed on 14.07.2013, after submission of the IMI Model 1 on 21.06.2013, and was assigned the taxable property value (VPT) of 79,230.00 euros – pursuant to Article 4º of the PPA, document no. 4 attached with the PPA and as per page 55 of part 3 of the PA attached by the AT with the response;

4. On 05.11.2013 the Claimant and his spouse sold the urban property referred to in items 2 and 3, for the price of 205,000.00 euros – pursuant to Article 15º of the PPA and page 55 of part 3 of the PA attached by the AT with the response;

5. On 21.11.2014 the Claimant and his spouse purchased, for the price of 130,000.00 euros, the urban property located at the Place of…, parish of …, municipality of …, registered in the land registry under Article …º, using financing from CCA of … and … in the amount of 75,000.00 euros – pursuant to Articles 23º and 24º of the PPA, document no. 10 attached with the PPA and page 55 of part 3 of the PA attached by the AT with the response;

6. The Claimant enrolled his son in the primary school of … for the academic years 2013/2014 and 2014/2015; concluded multi-risk housing insurance contracts for the periods of 27.07.2012 to 27-07-2013 and 27-07-2013 to 27-07-2014, referring to the property referred to in items 2 and 3; used for the construction of the dwelling and for the same after construction, the electricity supply contract … until 22.05.2013 and after that date the contract with identification code … - Articles 6º, 10º, 11º, 12º and 13º of the PPA, document no. 5 attached with the PPA and pages 5 to 12 of part 1 of the PA attached by the AT with the response;

7. On 26 June 2014 the Parish Board of … issued a declaration proving that the Claimant resided at the Place of…, parish of…, municipality of … in the period from December 2010 to November 2013 – as per document attached to the PPA.

8. In the IRS declaration for the year 2013 the Claimant and his spouse indicated in Annex G, the sale for 205,000.00 euros of the urban property U …º, parish code…, with an acquisition value of 79,230.00 euros and a loan amount outstanding of 149,773.43 euros, expressing the intention to reinvest, and the AT proceeded with the IRS assessment with the non-taxation of capital gains (assessment 2014…) – Article 16º of the PPA, document no. 6 attached with the PPA, part 2 of the PA attached by the AT with the response and page 55 of part 3 of the PA attached by the AT with the response;

9. On 23.06.2014 the AT notified the Claimant, regarding the year 2013, that his income declaration "was selected for analysis" because the following had been detected: "residence of the taxpayer different from the reinvestment property and/or proof of the loan amounts or declared reinvestment values" - pursuant to Article 17º of the PPA and document no. 7 attached with the PPA.

10. On 29.12.2014 the AT made an official correction without the aforementioned reinvestment and proceeded with the assessment in question bearing no. 2015… of 02.01.2015, resulting in tax to pay, including interest, of 16,426.36 euros – Articles 19º and 21º of the PPA, document no. 8 attached with the PPA and page 55 of part 3 of the PA attached by the AT with the response;

11. The Claimant paid on 11.02.2015 the amount referred to in the previous number – pursuant to Article 21º of the PPA and payment document by MB attached with the PPA;

12. On 05.11.2013, the date of sale of the property referred to in items 2 and 3, the Claimant and his spouse had as tax domicile entered in the DGI taxpayer registry at Rua…, …, …– pursuant to the Claimant's overall position in the PPA and page 55 of part 3 of the PA attached by the AT with the response;

13. Before the Claimant and spouse sold the urban property referred to in items 2 and 3, the property corresponded to a furnished dwelling house, which had a television and where B… and C… (witnesses identified in this proceeding) were received on undetermined dates to have dinner; a house also frequented by D… (also a witness identified in this proceeding). The Claimant and spouse spent the night in the house – Articles 46º and 47º of the PPA and conjunction of the testimonies of witnesses B…; C… and D…;

14. On 02.06.2015 the Claimant lodged a gracious complaint against the assessment referred to in item 10, which was assigned number …2016…, which was dismissed by order of 22.06.2016 of the Director of Finance of … and notified by letter of the same date received on 23.06.2016 – as per page 18 of the PA (part 1) and page 63 of the PA (part 5) and also single page of the PA (part 6) attached by the AT with the response;

15. On 20 September 2016 the Claimant submitted to CAAD the present request for arbitral decision (PPA) – entry record in CAAD's Case Management System of the request for arbitral decision.

Unproven Facts

No other allegations exist that have not been considered proven and that are relevant to the composition of the procedural dispute.

Regarding testimonial evidence and the principle of free appreciation of evidence, it is worth noting that:

• No conviction of absolute certainty is required of the judge;

• It is sufficient that his conviction be based on a judgment of sufficient probability or plausibility;

• When instead of conviction a doubt forms in the judge's mind regarding the reality of the facts to be proven - the fact cannot be deemed proven, to the prejudice of the burdened party, or, in doubt about the determination thereof, to the prejudice of the party to whom the fact would not benefit.

Judge Ana Maria Barata de Brito states in "Free appreciation of evidence and indirect evidence", CEJ 25.05.2013: "It cannot be a purely subjective or emotional conviction. While being a personal conviction, it is necessarily objectifiable and justifiable.

Figueiredo Dias clarifies that the truth sought is a practical-legal truth, resulting from a judge's conviction regarding the truth of the facts beyond all reasonable doubt".

Regarding testimonial evidence and the matters on which it bore, only what is stated in point 13 of the proven facts was considered proven.

All remaining factual matters are based on the documents attached, notably that which appears in points 6 and 7 of the proven facts, not contested, moreover, by the parties.

The TAS sees no reason not to consider the testimonial evidence produced. The witnesses testified in 2017 about facts from 2013, so if they had very elaborate testimonies with details that could only have come through some contemporary documentation, this would indeed alert whoever is appreciating the evidence about its consistency. Only the facts adduced by the witnesses with some relevance to the case were considered established, taking into account how they testified.

On the other hand, some contradiction that may be found between the dates contained in the parish board declaration (which is issued by declaration of the Claimant) on one hand and the construction license, in light of what the witnesses stated, we must take into account the rules of experience:

· In rural areas - as is the case - it is not uncommon for families to live in unfinished properties or still undergoing completion;

· The proximity between the dwelling in question here (Place of …, parish of …, municipality of…) of the Claimant and his spouse and that of the Claimant's parents (in …, since it was the parents who donated the land to him and sold him the second dwelling), approximately 2.7 km, will lead to the Claimant and members of his family unit frequently sharing the parents' house in …, without this affecting the understanding that the dwelling in …, loses the requirement of "permanence" in the sense of habitual and normal use (according to the STA decision cited by the Claimant).

The evidence must be appreciated as a whole and account must be taken of the rules of common experience, notably the setting in which the facts occurred and the probable family relationships, with a view to establishing a conviction based on a judgment of sufficient probability or plausibility.

This comes to the fore with respect to what the AT expresses as the basis for not giving weight to the documentary evidence presented by the Claimant in the course of the gracious procedure and adduced in this PPA: "did not result in unequivocal and irrefutable proof" that it was in the alienated house that the Claimant had his own and permanent dwelling.

In the first place "own" would always be the dwelling, because it was his property. But as to the level of conviction the TAS cannot subscribe to such a requirement since as stated above "it is sufficient that his conviction be based on a judgment of sufficient probability or plausibility", this even in the consideration of facts that must be deemed established, those that reflect what is possible to determine from the material truth, reconstructed at the date of the subsequent appreciation of a conflict.

IV. ASSESSMENT OF THE ISSUES FOR THE SINGULAR ARBITRAL TRIBUNAL (TAS) TO RESOLVE

It must first be stated that the Claimant is not right when he argues that at the time of the IRS assessment for the year 2013, he never received any notification to pronounce himself on the draft decision regarding the correction of the declaration.

As appears from document no. 7 attached with the request for decision (notification of the AT opening the divergencies process), the Claimant was expressly notified that "once the aforementioned period has elapsed, without regularization of the situation detected, the procedure will proceed to correction of the declared values". A letter to which he did not respond.

Article 19º nos 3 and 4 of the General Tax Code versus no. 5 of Article 10 of the IRS Code - Failure to notify the AT of change of domicile of the taxpayer in the alienated property

We start from one of the conclusions drawn in the STA decision cited by the Claimant (STA Decision of 23.11.2011 – Case 0590/11 – 2nd Section – Reporting Counsellor Lino Ribeiro): "residence at a certain place, the habitatio, can be demonstrated through 'justifying facts' that the beneficiary established the center of his personal life in the property".

The aforementioned decision also states, whose underlying issue is identical to the one being discussed in this proceeding: "being the habitual residence the place where the person normally lives and has the center of his life, there are no great differences between the 'tax domicile' and the 'permanent dwelling': there is between the two figures an intimate relationship, which is expressed in both presupposing a place with which a certain person is in connection, the place where he has his organized existence and which, as such, serves him as a basis of life.

But on the conceptual level, neither does habitual residence identify with permanent residence, nor does domicile coincide with address, that is, the place where the person has his dwelling, as can be inferred from the two numbers of Article 82 of the Civil Code (as per Antunes Varela and Pires de Lima, Annotated Civil Code, Vol. I, p. 98 and Luís Carvalho Fernandes, General Theory of Civil Law, Vol. I, p. 380 and 381)"

The presupposition 'own and permanent dwelling' is the factual situation that conditions … (in this case the eligibility for tax exclusion in IRS). The requirement of permanence in "dwelling" (the law does not use the term "residence"), must be understood in the sense of habitual and normal use and not strictly in the absolute chronological sense of stay without any break in continuity. To ensure the purpose underlying the assignment of (in this case the tax exclusion) … which consists in stimulating and encouraging access to own dwelling (pursuant to subsection c) of no. 2 of Article 65 of the Portuguese Constitution), it is sufficient that the beneficiary organizes in the property the conditions of his normal life and that of his family unit, such that he is seen in it the place of his dwelling.

For this purpose, the acts or facts that demonstrate the beneficiary's connection to the property exempt from Property Tax are not limited to the connection to the fiscal jurisdiction where the property is located or to the correspondence of the dwelling with the tax domicile registered in the finance services. It is true that these elements are indications that the beneficiary intends to fix or has fixed his real and effective address in the property … However, residence at a certain place, the habitatio, must be demonstrated through "justifying facts" that the beneficiary established the center of his personal life in the property.

Now, being only the dwelling in the property subject of (tax exclusion in this case) … essential, the beneficiary's connection to the property necessarily is concretized through certain physical conditions (house, furniture, etc.), legal conditions (contracts, declarations, entries in registries, etc.) and social conditions (integration in the community, acquaintance of and by neighbors, etc.).

…

The circumstance that in the taxpayer registry the address of the appellants was not updated, at their request or of its own motion (as per 19º no. 6 of the General Tax Code), is not sufficient indication that they did not dwell in the property.

The fact that the address in the taxpayer registry is different from the location of the property is not grounds in itself that the appellants dwelled in that other address.

Tax administration procedures for recognition and control of the presuppositions of the tax benefit could lead to the tax administration to rectify of its own motion the tax domicile of the appellants or, at least, in implementation of the principle of reciprocal cooperation set out in Article 59 of the General Tax Code, to request them to correct the address in the central taxpayer registry"

The AT, as appears from the proven facts (point 9), initiated the divergencies process solely because the Claimant's residence was different from the topographical designation of the alienated property.

That is, it considered that the fact that the Claimant and spouse had not changed their tax domicile to the property at the Place of …, pursuant to Article 19 of the General Tax Code, justified in itself, the non-consideration of the income declaration as presented – as to Annex G – and motivated a new (official) IRS assessment, now without the reinvestment value proposed by the taxpayer of 55,000.00 euros.

But the AT is not correct, as appears from what was transcribed in part from the decision.

Moreover, it would even be contradictory with the reasons that led to the official IRS assessment, as described (that is, without first opening an official inspection procedure to ascertain whether in fact the Claimant and spouse had their "habitatio" in the house of Telheirinhas) the fact that the Respondent, later, in the course of the gracious procedure, appreciated the documentary evidence presented by the Claimant, in an implicit posture of accepting that, even though the obligation of Article 19 of the General Tax Code was not complied with, the interested party could prove that the center of their common life was in that dwelling.

No. 5 of Article 10 of the IRS Code - Own and permanent dwelling – Sufficient Proof

The crux of this proceeding lies in the appreciation of the proof that the taxpayer produced (documentary and testimonial) to demonstrate that on the date of sale (05.11.2013) of the urban property he built from scratch at the Place of…, it was his own and permanent dwelling (HPP).

Properly speaking, since it is an urban property built from scratch by the Claimant and spouse, it is only after submission of the IMI Model 1 (on 21.06.2013) that it can be discussed whether the taxpayers assigned or did not assign the property to own and permanent dwelling. Or at most after the date of issuance, by the local municipal authority, of the usage license (on 29.04.2013).

The discussion conducted in this proceeding about whether the Claimant and spouse already lived in the property before (from 2010) has reduced utility, since, by the rules of common experience and in light of the documents brought to the case, it is clear that, having this occurred in terms of material truth (and the witnesses and the Claimant himself affirm it), the urban property was not, at least on the administrative-legal level, fit to be eligible to integrate the concept of HPP, relevant for the normative provision of no. 5 of Article 10 of the IRS Code.

That is, the relevant concept of HPP that the norm of no. 5 of Article 10 of the IRS Code invokes, in the case of property built from scratch, can only be that of an urban property with normal habitability conditions. And only after verification of its habitability by a competent third party or after its manifestation to the Finance services that it possesses this requirement.

In light of the proven facts in points 6, 7 and 13 of the established facts and having regard to what has just been said above, that is, truly what the Claimant and spouse had to prove is that the urban property they built at the Place of…, between 29.04.2013 (date of issuance of the usage license) and 05.11.2013 (date of sale) was their "habitatio"; the TAS concludes that the proof that was made is sufficient to allow for a conclusion based on a sufficient judgment of probability that the Claimant and spouse had in this asset their permanent dwelling.

A furnished house. With contents insurance. A house where visits were received. Where dinners were served. Where the owners slept. The choice of primary school for the son closest to the property (in … and not in …). The electricity supply contract with a construction meter until 22.05.2013. The usage license for the dwelling on 29.04.2013. The IMI Model 1 on 21.06.2013. Its sale on 05.11.2013. All these elements combined are sufficient for the TAS to conclude as it has concluded, having regard to the concept of "permanent dwelling" that results from the content of the STA decision transcribed in part above.

And especially because, given this proof that was also adduced in the course of the gracious procedure, had the AT had well-founded doubts about the sufficient consistency of documentary proof, it was necessary that additional clarifications be sought from the taxpayers or from third parties, notably before the …, seeking information about the contract signed after obtaining the usage license and before the Parish Board of … to clarify how the information contained in the declaration of 26.06.2014 was obtained, which could even be from personal knowledge, given the proximity relationships that exist in these localities.

Therefore, the request for arbitral decision is well-founded.

The assessment of the second ground adduced by the Claimant to justify annulment of the assessment is rendered moot.

On the Request for Indemnification Interest

The Claimant requests, in addition to annulment of the IRS assessment, reimbursement of what he paid, plus indemnification interest.

Article 43, no. 1, of the General Tax Code provides that "indemnification interest is due when it is determined, in gracious complaint or judicial impugnation, that there was error attributable to the services from which results payment of the tax debt in an amount greater than legally due".

As appears from the literal meaning of this norm, the right to indemnification interest depends on "payment of the tax debt in an amount greater than legally due" and the existence of "error attributable to the services".

It was proven that the Claimant paid on 11.02.2015 the amount of 16,426.36 euros, an assessment that is considered here not to be in accordance with the law (point 11 of the established facts).

But it was also proven that when the Claimant and his spouse sold the property they did not have their tax domicile in the property itself which constituted their HPP (point 12 of the established facts).

It results from the proven facts that the Claimant and his spouse breached a legal obligation before the AT: that of changing their tax domicile, pursuant to Article 19-3 and 4 of the General Tax Code. A breach of legal obligation that must have consequences, beyond the application of penalties.

It was also proven that the AT only proceeded with the official IRS assessment because the "residence of the taxpayer" was "different from the reinvestment property" (point 9 of the established facts).

That is, it is demonstrated that the fact that the Claimant and spouse had not, at least after the date of obtaining the usage license or after submission of the IMI Model 1, changed their tax domicile, caused the official assessment to be issued by the AT in the way it was.

However, it must be determined whether the regime of no. 2 of Article 43 of the General Tax Code should apply here.

No. 3 subsection c) of Article 43 of the General Tax Code provides: "Indemnification interest is also due in the following circumstances: when revision of the tax act by initiative of the taxpayer is carried out more than one year after his request, except if the delay is not attributable to the tax administration".

The aforementioned norm only textually applies to cases of revision of the tax act at the request of the taxpayer (no. 6 of Article 78 of the General Tax Code) and is not applicable here since the Claimant lodged a gracious complaint (point 14 of the established facts).

In light of the factual matters proven, it is not possible to impute to the AT an error that would allow its condemnation to pay indemnification interest, since the issuance of the official IRS assessment here contested is due to the fact that the Claimant and spouse did not comply with the legal obligation contained in Article 19-3 and 4 of the General Tax Code.

Therefore, the request for condemnation of the AT to pay indemnification interest is dismissed.

V. OPERATIVE PART

Pursuant to the terms and grounds set out above:

1. The request for arbitral decision is granted, annulling the assessment in question bearing no. 2015 … of 02.01.2015, from which resulted IRS to pay, including interest, of 16,426.36 euros and the order of 22.06.2016 of the Director of Finance of … which dismissed the gracious complaint no. …2016…, because they are in non-conformity with no. 5 of Article 10 of the IRS Code;

2. Consequently, the amount paid must be reimbursed to the Claimant;

3. The request for condemnation of the AT to pay indemnification interest is dismissed as the requirements of Article 43 of the General Tax Code are not met.

Value of the case: in accordance with the provisions of Article 3, no. 2, of the Rules of Costs in Tax Arbitration Proceedings (and subsection a) of no. 1 of Article 97A of the Tax Procedure Code), the value of the case is fixed at 16,426.36 euros.

Costs: pursuant to the provisions of Article 22, no. 4, of RJAT, the amount of costs is fixed at € 1,224.00 according to Table I attached to the Rules of Costs in Tax Arbitration Proceedings, with 6/7 (€ 1,049.14) to be borne by the Respondent and 1/7 (€ 174.86) to be borne by the Claimant, taking into account their respective failures.

Notify.

Lisbon, 31 March 2017

Singular Arbitral Tribunal (TAS),

Augusto Vieira

Text prepared by computer pursuant to the provisions of Article 131, no. 5, of the Code of Civil Procedure, applicable by reference of Article 29 of RJAT.

The drafting of this decision is governed by the spelling prior to the Orthographic Agreement of 1990.

Frequently Asked Questions

Automatically Created

What are the requirements for IRS tax exclusion on capital gains from the sale of a primary residence in Portugal?
Under Article 10(5) of the Portuguese IRS Code, capital gains from selling a primary residence ('habitação própria e permanente') can be excluded from taxation if proceeds are reinvested in another primary residence. Key requirements include: (1) the sold property must have been assigned as the taxpayer's or family unit's own and permanent dwelling, (2) reinvestment must occur within prescribed timeframes, (3) the reinvested amount must be declared in Annex G of IRS Model 3, and (4) both physical conditions (actual habitation) and legal indicators (utility contracts, insurance, registry entries) must demonstrate primary residence status. The exclusion applies proportionally to the reinvested amount.
How does reinvestment in a new primary residence work under Article 10(5) of the Portuguese IRS Code?
Article 10(5) of the Portuguese IRS Code allows taxpayers to exclude capital gains from taxation by reinvesting sale proceeds in a new primary residence. The taxpayer must acquire or construct another property intended as 'habitação própria e permanente' within specific timeframes. The reinvested amount is declared in Annex G of the IRS Model 3 return and reduces taxable capital gains proportionally. If the full sale proceeds are reinvested, the entire gain may be excluded. The new property must be assigned as primary residence, and partial reinvestment results in proportional exclusion. Documentation proving reinvestment and primary residence designation is essential.
Can a taxpayer prove primary residence status even if the tax domicile address differs from the sold property?
Yes, according to Supreme Administrative Court precedent (STA 23.11.2011, Case 590/11), taxpayers can prove primary residence status even when the tax domicile address differs from the sold property. Tax registry entries are not conclusive proof of actual residence. Taxpayers may demonstrate through evidence that the property constituted their habitual residence, including: utility contracts (electricity, water, gas), insurance policies, witness testimony, physical occupancy patterns, and other legal indicators establishing the property as the center of personal and family life. Both physical conditions (actual habitation with furniture and personal effects) and legal conditions (contracts and declarations) must be satisfied to overcome the presumption created by divergent tax domicile registration.
What is the difference between property capital gains and business income for properties built for sale under Article 31(2) CIRS?
Article 31(2) of the Portuguese IRS Code distinguishes property built for sale from investment property. If a property was constructed with the intent of immediate sale and placed on the market upon completion without being used as primary residence, gains may qualify as business income rather than capital gains. Business gains are taxed under Article 31(2) with a 0.20 coefficient applied to the difference between sale price and construction costs, reported on line 401 of Annex B. Capital gains from investment property are taxed differently under Article 10 and reported as capital gains. The classification depends on the taxpayer's intent, the property's actual use, and whether it constitutes habitual economic activity versus isolated sale of personal assets.
What remedies are available to taxpayers who disagree with an IRS tax reassessment by the Portuguese Tax Authority?
Portuguese taxpayers disagreeing with IRS reassessments have several remedies: (1) file a gracious complaint ('reclamação graciosa') with the Tax Authority within the legal deadline, (2) if the complaint is dismissed, request arbitration through CAAD (Centro de Arbitragem Administrativa) under the RJAT regime within 90 days of notification, (3) alternatively, appeal to administrative courts. For CAAD arbitration, taxpayers must typically pay the assessed tax first, then petition for reimbursement with indemnification interest if successful. The arbitration process includes submission of evidence, witness hearings, and written arguments. Taxpayers can claim both reimbursement of illegally assessed taxes and indemnification interest ('juros indemnizatórios') for amounts paid during the dispute period.