Summary
Full Decision
ARBITRAL DECISION
The Arbitrator Suzana Fernandes da Costa, designated by the Ethics Council of the Centre for Administrative Arbitration to form an Arbitral Tribunal, hereby decides as follows:
REPORT
On 20-11-2018, A..., taxpayer no. ..., and husband B..., taxpayer no. ..., both residents in ... – United Kingdom, filed a request for constitution of an arbitral tribunal, with a view to declaring illegal the Personal Income Tax (IRS) assessment no. 2018 ... for the year 2017, relating to the Applicant wife, and the IRS assessment no. 2018 ..., for the year 2017, relating to the Applicant husband, in the total amount of 7,014.76 €.
The request for constitution of the Arbitral Tribunal was accepted by His Excellency the President of CAAD on 20-11-2018 and notified to the Respondent on the same date.
The Applicants did not proceed with the appointment of an arbitrator, therefore, pursuant to the provisions of article 6, no. 2, paragraph a) of the RJAT, the Dra. Suzana Fernandes da Costa was designated as arbitrator by the President of the Ethics Council of CAAD on 10-01-2019, with the appointment being accepted within the legally prescribed timeframe and terms.
On the same date the parties were duly notified of this designation, and they did not manifest any intention to refuse the arbitrator's designation, in accordance with the provisions of article 11, no. 1, paragraphs a) and b) of the RJAT, combined with articles 6 and 7 of the Code of Ethics.
Thus, in accordance with the provisions of paragraph c), no. 1, article 11 of the RJAT, the Arbitral Tribunal was constituted on 30-01-2019.
On 04-02-2019, an order was issued ordering notification of the Respondent to, within a period of 30 days, submit a response and, if it so wished, request the production of additional evidence and remit to the arbitral tribunal a copy of the administrative file within the timeframe for submission of the response.
On 11-03-2019, the Respondent submitted its response and attached to the case file the administrative process, arguing for the dismissal of the request for arbitral pronouncement.
The Respondent also submits that the "present arbitral proceedings should be suspended and the matter should be submitted to the Court of Justice, in accordance with the provisions of the preliminary ruling procedure (article 267 of the TFEU)", on the grounds that there is no case-law of the CJEU addressing the issue to be determined in the present proceedings.
On 15-03-2019, an order was issued, pursuant to the principles of the autonomy of the Arbitral Tribunal in the conduct of the proceedings, expedition, and simplification and informality of procedure, dispensing with the meeting provided for in article 18 of the RJAT, and granting a period of 20 days for the parties to submit pleadings. In the same order, the parties were invited to send the documents produced in Word format, within a period of 30 days, and 04-07-2019 was set for the pronouncement of the arbitral decision. The Applicants were also warned that, by that date, they should pay the subsequent arbitration fee.
On 26-03-2019, the Applicants informed the court that they waived the right to allege and attach proof of payment of the subsequent arbitration fee.
The Respondent chose not to submit pleadings.
On 04-07-2019, an order was issued extending the deadline for the decision to 12-07-2019, as the decision had not been concluded.
The parties have legal personality and capacity and are legitimate (articles 4 and 10, no. 1 and 2 of the RJAT and article 1 of Ordinance no. 112-A/2011 of 22 March).
The arbitral claim is timely, in accordance with article 10, no. 1, paragraph a) of Decree-Law no. 10/2011 of 20 January and article 102, no. 1, paragraph a) of the Tax Procedure and Process Code.
The proceedings do not suffer from nullities and no preliminary issues were raised, with the exception of joinder of parties, which shall be decided below.
The Applicants request joinder of claimants pursuant to the provisions of articles 3, no. 1 of the RJAT, 104 of the CPPT and 36, no. 2 of the CPC.
Article 3, no. 1 of the RJAT provides that joinder of claimants is possible when the merit of the claims depends essentially on the assessment of the same factual circumstances and on the interpretation and application of the same principles or rules of law.
In the present case, joinder of claimants is admissible, and is therefore admitted.
2. Position of the Parties
The Applicants begin by stating that, on 02-01-2014, they acquired fraction J of the urban property registered in the urban property tax register of the union of parishes of ... and ..., municipality of Coimbra, under article ..., for the amount of 170,000 €, having taken out a loan from Bank C..., SA for the amount of 165,000 €.
They also state that, in January 2015, they moved to the United Kingdom, where they began working.
The Applicants allege that, on 24-05-2017, they requested from AT the updating of their tax domiciles with retroactive effect from January 2015. They also declared that on 06-07-2017, they sold the aforementioned property for the price of 215,000 €.
The Applicants state that they individually submitted their 2017 tax return, each declaring their share of the property sold in annex G of the aforementioned tax return, as well as the intention to reinvest the amount from the property sale. The Applicants also reference the fact that they declared that they were non-residents in Portugal, in the aforementioned 2017 IRS declarations.
The Applicants allege that the IRS assessments in question are unlawful due to the vice of lack of legally required reasoning, since, in their view, AT failed to provide reasoning for the motivation underlying the alleged failure to consider the reinvestment amounts declared by them, and the alleged consideration of the totality of capital gains obtained by them from the alienation of the property.
On the other hand, the Applicants allege that the assessments would in any case be unlawful for violation of the principle of participation, pursuant to articles 267, no. 5 of the Constitution of the Portuguese Republic (CRP) and 60, no. 1, paragraph a) of the General Tax Law (LGT), on the ground that AT did not permit the Applicants to exercise the right to prior hearing to which they are legally entitled.
The Applicants also allege that the assessments are unlawful due to failure to notify of the acts modifying the elements declared in their respective IRS returns.
The Applicants further reference the illegality of the assessments in question in the present proceedings for violation of article 63 of the Treaty on the Functioning of the European Union (TFEU). In the Applicants' view, the limitation of the taxation of capital gains to only 50% of their value is applicable to all taxpayers, whether they are residents in Portugal or residents in any other territory of the European Union. And on this issue, the Applicants refer to case-law of the Court of Justice of the European Union, the Supreme Administrative Court and CAAD.
Finally, the Applicants state that they proceeded to pay the IRS assessments in question in these proceedings, and request the condemnation of AT to reimburse the amounts to the Applicants, increased by compensatory interest, in accordance with articles 43 and 100 of the LGT and 61 of the CPPT.
The Respondent, the Tax and Customs Authority (AT), in its response, presented a defense by way of impugnation, arguing, in summary, that the Applicants could have benefited from the limitation to 50% of the taxation of capital gains obtained, provided they had opted for the aggregation of income obtained both in Portugal and outside this territory.
The Respondent further requests the suspension of the arbitral proceedings and the submission of the matter to the Court of Justice, in accordance with the provisions of the preliminary ruling procedure (article 267 of the TFEU), on the grounds that there is no CJEU case-law addressing the issue to be determined in the present proceedings, in particular pronounced in cases with all the factual characteristics pointed out.
3. Facts
3.1. Proven Facts:
Having analyzed the documentary evidence produced and the position of the parties contained in the procedural documents, the following facts are considered proven and of interest for the decision of the case:
1. The Applicants acquired, on 02-01-2014, for the amount of 170,000 €, fraction J of the urban property registered in the urban property tax register of the union of parishes of ... and ..., municipality of Coimbra, under article ..., located in ..., ..., Union of parishes of ... and ..., municipality of Coimbra, having taken out a loan from Bank C..., SA for the amount of 165,000 €, as per document 5 attached to the arbitral claim;
2. The Applicants began to reside in the United Kingdom from January 2015.
3. On 24-05-2017, the Applicants requested from the Head of the Financial Services Office of Coimbra ..., the change of their tax domicile to the United Kingdom with retroactive effect from January 2015, as per document 6 attached to the arbitral claim;
4. The Applicants alienated, on 06-07-2017, for the amount of 215,000 €, the property identified in point 1 which had been acquired on 02-01-2014, as per document 7 attached to the arbitral claim.
5. The Applicants submitted, on 31-05-2018, individually, Model 3 tax return declarations for the year 2017, in which they declared, in annex G, each of the Applicants, by reference to the alienated property and their share thereof (50%), the realization value of 107,500 €, the acquisition value of 85,000 € and the value of expenses and charges of 9,123.63 €, as per documents 8 and 9 attached to the arbitral claim.
6. The Applicant wife also declared in box 5 of the same annex G, the amount of 77,421.77 € of the loan debt value on the date of alienation of the property and the amount of 13,497.09 € as the realization value that she intended to reinvest without recourse to credit, as per document 8 attached to the arbitral claim.
7. The Applicant husband declared in box 5 of the same annex G, the amount of 77,421.77 € of the loan debt value on the date of alienation of the property and the amount of 13,778.03 € as the realization value that he intended to reinvest without recourse to credit, as per document 9 attached to the arbitral claim.
8. The Applicants also declared in field 8 of the cover page of their 2017 IRS declarations, that they were non-residents, that they had residence in a country of the EU or EEA and that they intended taxation under the general regime, as per documents 8 and 9 attached to the arbitral claim.
9. The Applicants were notified, on 11-07-2018, that the IRS declarations submitted had been selected for analysis as the following situations had been detected: alienation of properties not declared or need to prove the values of expenses, alienation value, date of acquisition of alienated properties and allocation to professional activity, as per documents 10 and 11 attached to the arbitral claim.
10. The Applicant wife was notified of the IRS assessment no. 2018 ... for the year 2017, with the amount to be paid of 3,507.38 € by 31-08-2018, as per document 1 attached to the arbitral claim.
11. The Applicant husband was notified of the IRS assessment no. 2018 ... for the year 2017, with the amount to be paid of 3,507.38 € by 31-08-2018, as per document 2 attached to the arbitral claim.
12. The Applicants submitted, on 19-07-2018, through the Finance portal, the documentation requested by AT to justify the declared amounts, as per document 12 attached to the arbitral claim.
13. The Applicants proceeded to pay the aforementioned assessments, on 29-08-2018, as per documents 3 and 4 attached to the arbitral claim.
14. The Applicants filed the present request for arbitral pronouncement on 20-11-2018.
No other facts of relevance for the decision of the case were proven.
3.2. Unproven Facts
No facts occurred that were not proven.
3.3. Reasoning of the Proven Factual Matter:
The arbitrator's conviction was based on the documents attached to the proceedings by the Applicant and on the position of the parties demonstrated in the procedural documents produced.
4. Legal Matters:
4.1. Object and Scope of the Present Proceedings
The essential legal questions that arise in this proceedings are as follows:
1. Whether the assessments are unlawful due to violation of article 63 of the Treaty on the Functioning of the European Union (TFEU).
Should this be justified:
2. Whether the assessments in question in these proceedings are or are not unlawful due to the vice of lack of legally required reasoning;
3. Whether the assessments are or are not unlawful for violation of the principle of participation, pursuant to articles 267, no. 5 of the Constitution of the Portuguese Republic (CRP) and 60, no. 1, paragraph a) of the General Tax Law (LGT);
4. Whether the assessments suffer from illegality due to failure to notify of the acts modifying the elements declared in their respective IRS declarations.
Regarding the Alleged Vice of Violation of Article 63 of the Treaty on the Functioning of the European Union (TFEU)
The essential issue to be decided concerns the compatibility with European Union Law (in particular, the free movement of capital, established in article 63 of the TFEU) of the non-application of the regime excluding taxation of real property capital gains by 50%, as provided for in article 43, no. 2 of the IRS Code, to tax residents of another Member State of the European Union.
Let us examine this.
With regard to IRS, article 10, no. 1, paragraph a) of the IRS Code determines that, "Capital gains are constituted by gains obtained which, not being considered business and professional income, capital or real property income, result from: a) Paid alienation of real rights over immovable property (...), with the gain constituted by the difference between the realization value and the acquisition value, net of the parts qualified as capital income (...)" (cf. no. 4 of article 10 of the Personal Income Tax Code, hereinafter IRS Code).
With respect to the taxation of non-residents in Portuguese territory, article 13, no. 1 of the IRS Code provides that "Persons subject to IRS are those natural persons resident in Portuguese territory and those not residing there, who obtain income there", with article 15, no. 2 of the same legal instrument adding that, regarding non-residents, such tax "applies solely to income obtained in Portuguese territory".
Thus, in accordance with article 18, no. 1, paragraph h) of the IRS Code, capital gains resulting from the transfer of immovable property located there constitute income obtained in Portuguese territory.
In accordance with the Applicants' tax return declaration, the Respondent AT assessed the tax at the rate of 28%, provided for in paragraph a), no. 1, article 72 of the IRS Code.
This normative provision determines the following: "Special rates" "1 - The following are taxed at the autonomous rate of 28%: a) Capital gains provided for in paragraphs a) and d) of no. 1 of article 10 earned by non-residents in Portuguese territory that are not attributable to a permanent establishment located there;".
The rate of 28% was applied to the total global income which resulted in a tax to be paid by the Applicant wife of €3,507.30 and by the Applicant husband of €3,507.38.
Regarding the Compatibility of the National Regime of Taxation of Real Property Capital Gains with European Union Law:
Article 63, no. 1 of the TFEU presents the free movement of capital as a structuring element of the process of European integration, determining that "all restrictions on the movement of capital between Member States and between Member States and third countries are prohibited".
In accordance with the provisions of article 18 of the TFEU, "Within the scope of application of the Treaties, and without prejudice to their special provisions, all discrimination is prohibited."
It is pursuant to the provisions of these articles of the TFEU that the Applicant invokes the non-conformity of Portuguese tax legislation with European Union legislation.
The CJEU, in the judgment of 11-10-2007, in case C-443/06, Hollman versus Public Treasury, found incompatible with European Union Law, as it constitutes undifferentiated treatment incompatible with the free movement of capital guaranteed by article 63 of the TFEU, the regime of article 72, no. 1 of the CIRS, as previously worded by Law no. 67-A/2007 of 31 December, by taxing capital gains of non-resident taxpayers at a fixed rate, while residents are subject to a progressive tax on income.
The CJEU states in that judgment that it is incompatible with the provision ensuring the freedom of movement of capital a regime that "subjects capital gains resulting from the alienation of immovable property situated in a Member State, in the case at hand Portugal, when that alienation is carried out by a resident of another Member State, to a tax burden superior to that which would apply, in relation to this same type of operation, to capital gains realized by a resident of the State in which that immovable property is situated".
This understanding was also recently upheld in the Order of the CJEU (Seventh Chamber) of 06-09-2018, case C-184/18, in which it was held that "legislation of a Member State, such as that at issue in the main proceedings, which subjects capital gains resulting from the alienation of immovable property situated in that Member State, carried out by a resident of a third State, to a tax burden superior to that which would apply, in that same type of operations, to capital gains realized by a resident of 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, no. 1, TFEU and cannot be justified by the reasons referred to in article 65, no. 1, Treaty on the Functioning of the European Union".
This latter decision was also pronounced on the basis of the wording of article 72 introduced by Law no. 109/2001, of 27 December, prior to Law no. 67-A/2007, so that, as the Respondent states, there is no specific CJEU case-law on the compatibility of the regime introduced by Law no. 67-A/2007, in nos. 7 and 8 of the CIRS with article 63 of the TFEU.
However, the CJEU held in that judgment of case C-443/06, that the essential nature of the incompatibility of the regime of article 71, no. 1, with European Union law results from establishing "unequal tax treatment for non-residents, to the extent that it permits, in the case of realization of capital gains, more onerous taxation and, therefore, a higher tax burden than that borne by residents in an objectively comparable situation".
Thus, what essentially matters for this purpose is to determine whether or not there exists negative discrimination in the application to the Applicants of the regime applied to them.
Now, in the case of sale of immovable property located in Portugal, where capital gains are realized, non-residents are subject to a higher tax burden than that applied to residents, and are therefore in a less favorable situation than the latter.
Indeed, while a non-resident is subject to a rate of 28% on the totality of capital gains realized, the consideration of only half of the taxable matter corresponding to capital gains realized by a resident allows such resident to benefit from a lower tax burden, regardless of the tax rate applied to the totality of their income, since the taxation of income of residents is subject to a table of progressive rates whose highest bracket is 48%.
In other words, the regime provided for, in the absence of an option, in no. 1 of article 72 is more onerous for non-residents than for residents, as the maximum rate applicable to capital gains realized by residents is 24% of their value (maximum rate of 48% provided for in article 68, applicable to 50% of the net capital gains), the rate provided for in no. 1 of article 72 is 28%, applicable to the totality of the net amount.
Thus, it is certain that the regime of taxation at the exempt rate provided for in article 7 of the CIRS, as worded in force in 2017, is incompatible with article 63 of the TFEU, as it makes the transfer of capital less attractive for non-residents and constitutes a restriction on the movement of capital prohibited by the Treaty.
This difference in treatment cannot be justified by the verification of any of the exceptions provided for in article 65 of the TFEU and the discrimination of the national rule resulting therefrom cannot be justified by the objective of avoiding penalizing residents, because, as the highest bracket is 48%, it always leads, in the same circumstances, to more onerous taxation of the non-resident, having regard to the reduction to 50% of the taxable income of the resident, there being no objective difference that would justify this inequality of tax treatment with respect to the taxation of capital gains between the two categories of taxpayers.
It was this negatively discriminatory regime for non-residents that was applied in the assessments impugned.
The fact that this regime may now be set aside by taxpayers, if they make a choice, does not eliminate the negative discrimination, as it imposes an obligation of choice on them that is not extended to residents.
An optional regime such as that provided for in article 72 of the CIRS places an additional burden on non-residents, compared to residents, the option of equalization being incapable of excluding the discrimination in question.
In this regard, the case-law of the CJEU in the judgment of 28-02-2013, case C168/11 states that "Even admitting that such a system be compatible with European Union law, it nevertheless follows from the case-law that a national regime restrictive of the freedoms of movement can remain incompatible with European Union law, even if its application is optional (see, in this sense, judgment of 12 December 2006, Test Claimants in the FII Group Litigation, C-446/04, Rec., p. I-11753, no. 162, and of 18 March 2010, Gielen, C-440/08, Rec., p. I-2323, no. 53). In this regard, the existence of an option that would eventually make a situation compatible with European Union law does not therefore have the effect of curing, by itself, the unlawful character of a system, such as that provided for by the contested regulation, which comprises a mechanism of taxation not compatible with such law. It should be added that this applies all the more in the case where, as in the case at hand, the mechanism incompatible with European Union law is the one that is automatically applied in the absence of a choice made by the taxpayer." (the CJEU expressed itself in the same sense in the judgment of 18-03-2010, case C-440/08 and judgment of 08-06-2016, case C-479/14).
Indeed, the equalization regime currently provided for in article 72 of the IRS Code does not eliminate the discriminatory character of article 43, no. 2 of the IRS Code, the taxpayer not being able to find himself in the circumstance of opting between two regimes, one legal and one unlawful. In this sense, the CJEU states in the judgment of 18-03-2018, in case C-440/08, "the equalization option allows a non-resident taxpayer, (...) to choose between a discriminatory tax regime and another supposedly more discriminatory regime".
The Decisions of CAAD pronounced in this sense, in particular, in the cases 45/2012-T, 127/2012-T, 748/2015-T, 89/2017-T and 74/2019-T.
It is in light of the case-law referred to that the Respondent's request for a preliminary ruling should be analyzed.
The preliminary ruling procedure, provided for in article 267 of the TFEU, can be used by this Arbitral Tribunal as, moreover, has already been recognized by the CJEU in case C-377/13, of 12 June 2014.
In these terms, and in accordance with the aforementioned article 267, national courts – which naturally includes this Tribunal – must proceed with the referral of preliminary questions, as provided for in article 267 of the TFEU, when questions or doubts arise regarding the validity, interpretation and compatibility of internal law rules with European Union law.
This means that, if no doubts are raised regarding the rules in question or they have already been clarified by the CJEU – considering, in particular the so-called "clear law doctrine" (cf. judgment of the CJEU CILFIT, of 6 October 1982, case C-283/81) – national courts should not proceed with the preliminary referral.
Thus, if jurisprudence already exists on the matter (and when the possibly new framework does not raise any real doubt as to the possibility of applying that jurisprudence to the concrete case); or (ii) when the correct way of interpreting the legal rule in question is unequivocal, a national court may "itself decide on the correct interpretation of European Union law and its application to the factual situation of which it is aware", as per points 12 and 13 of the recommendations to national courts concerning the preparation of preliminary ruling requests (2012/C 338/01), of the CJEU.
In the present case, it is concluded, in the light of the reiterated case-law of the CJEU on the matter sub judice, that it is not necessary to proceed with a referral to the CJEU of alleged doubts regarding the interpretation of European Union law rules.
There is, moreover, national case-law, in particular from the Supreme Administrative Court, in case 0901/11.0BEALM 0692/17, of 20-02-2019, which concluded that the regime resulting from articles 43, no. 2 and 72, both of the IRS Code, is illegal, without it having proceeded with the referral.
In light of what has been stated, the request for arbitral pronouncement lodged by the Applicant is upheld as the assessments are in clear violation of article 63, no. 1 of the TFEU, making the examination of the other vices alleged by the Applicant moot.
In these terms the acts of IRS assessment no. 2018 ... and no. 2018 ..., relating to Personal Income Tax (IRS) for the fiscal year 2017, in the total amount of 7,014.76 €, are illegal and must be annulled in accordance with article 163, no. 1 of the CPA subsidiarily applicable in accordance with article 2, paragraph c) of the LGT.
4.2. Compensatory Interest
The Applicants request that the Respondent be condemned to reimburse the tax improperly paid, plus compensatory interest, in accordance with article 43, no. 1 of the LGT.
Article 43, no. 1 of the LGT determines that "compensatory interest is due when it is determined, in a gracious claim or judicial impugnation, that there was error attributable to the services from which results payment of the tax debt in an amount superior to that legally due", with no. 4 of art. 61 of the CPPT providing that "if the decision recognizing the right to compensatory interest is judicial, the payment period is counted from the beginning of the period of spontaneous execution thereof".
In the present proceedings, it is verified that the illegality of the assessed amounts in dispute is attributable to AT.
Thus, the Applicants have the right, in accordance with the provisions of arts. 24, no. 1, paragraph b), of the RJAT and 100 of the LGT, to the reimbursement of the amount of tax improperly paid and to compensatory interest, in accordance with the provisions of arts. 43, no. 1, of the LGT and 61 of the CPPT, calculated from the date of payment of the tax, at the rate resulting from no. 4 of art. 43 of the LGT, until the date of processing of the respective credit note, in which they will be included.
5. Decision
In light of the foregoing, it is determined:
1. To uphold the claim filed by the Applicants in the present arbitral proceedings, as to the Personal Income Tax (IRS) assessment no. 2018... for the year 2017, relating to the Applicant wife, and the IRS assessment no. 2018..., for the year 2017, relating to the Applicant husband, in the total amount of 7,014.76 €, in the part corresponding to the increase in taxation resulting from the consideration of the total real property capital gain;
2. To uphold the request to condemn AT to reimburse the Applicants for the amount of tax improperly paid, and to pay compensatory interest in accordance with the law, from the date on which such payment was made until the date of full reimbursement thereof;
3. To condemn the Respondent to the payment of the costs of the present proceedings.
6. Value of the Action:
In accordance with the provisions of article 306, no. 2, of the CPC and 97-A, no. 1, paragraph a) of the CPPT and 3, no. 2 of the Regulations of Costs in Tax Arbitration Proceedings, the value of the action is set at 7,014.76 €.
7. Costs:
In accordance with article 22, no. 4, of the RJAT, and Table I attached to the Regulations of Costs in Tax Arbitration Proceedings, the amount of costs is set at 612.00 €, to be borne by the Respondent, in accordance with article 22, no. 4 of the RJAT.
Let notification be made.
Lisbon, 12 July 2019.
Text prepared by computer, in accordance with article 138, no. 5 of the Code of Civil Procedure (CPC), applicable by referral from article 29, no. 1, paragraph e) of the Tax Arbitration Regulations, reviewed by me.
The Judge-Arbitrator
(Suzana Fernandes da Costa)
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