Process: 583/2018-T

Date: April 15, 2019

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 583/2018-T) addresses the taxation of capital gains from property sales by non-residents in Portugal. A Czech Republic tax resident sold Portuguese real property in 2017 and challenged the IRS assessment, arguing that Portugal's failure to apply the 50% capital gains exclusion under Article 43(2) of the Portuguese IRS Code (CIRS) to non-EU residents violated EU law on free movement of capital (Article 63 TFEU). The claimant contended that resident taxpayers benefit from taxation on only 50% of capital gains, while non-residents are taxed on 100% of gains, creating discriminatory treatment incompatible with EU law. The Tax Authority responded that the legislative framework changed through Law 67-A/2007, which added sections 9 and 10 to Article 72 CIRS, allowing EU residents to opt for the progressive rate system applicable to Portuguese residents. Since the taxpayer marked field 7 on Form 3, requesting taxation under the general non-resident regime rather than exercising the option for resident treatment, the Authority argued Article 43(2) did not apply. The case highlights the tension between Portugal's territorial tax system for non-residents and EU principles requiring equal treatment of capital movements. The decision examines whether non-residents can access the same capital gains benefits as residents and the procedural requirements for making such elections under Portuguese tax law.

Full Decision

ARBITRAL DECISION

REPORT

A – PARTIES

A... with the Tax Identification Number (NIF) ... resident in ..., ..., Czech Republic, hereinafter referred to as the Claimant or Taxpayer.

THE TAX AND CUSTOMS AUTHORITY (which succeeded the General Directorate of Taxes, by means of Decree-Law No. 118/2011, of 15 December) hereinafter referred to as the Respondent or TA.

On 22-11-2018, the request for constitution of the Arbitral Tribunal was accepted by the President of CAAD, and the Tax and Customs Authority was automatically notified on 04-02-2019, as recorded in the respective minutes.

The Claimant did not proceed with the appointment of an arbitrator, and therefore, pursuant to the provisions of Article 6(1) and Article 11(1)(b) of Decree-Law No. 10/2011, of 20 January, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council appointed Paulo Ferreira Alves as arbitrator, who communicated his acceptance in accordance with legal provisions.

On 14-01-2019, the parties were duly notified of this appointment, and did not express any intention to refuse the arbitrator's appointment, in accordance with Article 11(1)(a) and (b) of the Arbitration Regulations and Articles 6 and 7 of the Deontological Code.

Thus, in conformity with the provisions of Article 11(1)(c) of Decree-Law No. 10/2011, of 20 January, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the single Arbitral Tribunal was regularly constituted on 04-02-2019.

Both parties agreed to waive the holding of the meeting provided for in Article 18 of the Arbitration Regulations.

The Arbitral Tribunal was regularly constituted and is materially competent, in accordance with Articles 2(1)(a) and 30(1) of Decree-Law No. 10/2011, of 20 January.

The parties possess legal personality and legal capacity, are legitimate, and are legally represented (Articles 4 and 10(2) of the same decree and Article 1 of Ordinance No. 112-A/2011, of 22 March).

The proceedings do not contain defects that invalidate them.

B – CLAIM

The Claimant petitions for a declaration of partial illegality of the tax assessment act relating to Personal Income Tax (IRS) for 2017, No. 2018..., in the partial amount of €7,955.08.

C – CAUSE OF ACTION

To substantiate his request for arbitral pronouncement, the Claimant alleged, with a view to declaring the tax assessment act relating to Personal Income Tax (IRS) illegal, as already described in point 1 of this decision, in summary, the following:

The Claimant is a Portuguese citizen and has tax residence in the Czech Republic.

In 2017, the Claimant obtained in Portugal capital gains relating to a real property acquired in February 2003, through a public deed of purchase and sale.

On 11-05-2018, the Claimant filed the income statement Form 3 of IRS, accompanied by Annex G – Category G, under the title "CAPITAL GAINS AND OTHER PATRIMONY INCREMENTS", having declared therein solely the onerous transfer of the real property.

He argues that in calculating the taxable capital gain, the TA considered the entire capital gain without taking into account the regime excluding 50% of taxation provided for in Article 43(2) of the IRS Code, from which it follows that the TA applies the provisions of Article 43(2) of the IRS Code solely to taxpayers resident in Portugal and taxes the entirety of capital gains resulting from the transfer of real property rights to non-residents in Portugal but resident in another Member State of the European Union.

The Claimant contends that the inclusion by the TA, in the taxable income, of the entirety of capital gains resulting from the transfer of the real property right, contains an error of law, since only 50% of the respective value should have been considered, by application of the provisions of Article 43(2) of the IRS Code, in an interpretation of this rule in conformity with Community law.

That is, the non-applicability of the aforementioned Article 43(2) of the IRS Code to residents of another Member State of the European Union constitutes a violation of Article 63 of the Treaty on the Functioning of the European Union (corresponding to Article 56 of the Treaty establishing the European Community) due to its discriminatory effect.

The Claimant understands that it was the Tax Authority that, based on his IRS declaration, assessed the tax it considered due at the rate applicable to non-residents and on the total amount of the capital gain realized and not merely on 50% of that value, thereby ignoring both Community case law and that of the Supreme Administrative Court which has adopted it, and therefore there is a partial illegality of the tax assessment act under analysis.

D – RESPONSE OF THE RESPONDENT

The Respondent, duly notified for that purpose, timely presented its response in which, in brief summary, it alleged the following:

The matter regarding which the Arbitral Tribunal's assessment was requested concerns the exclusion of capital gains tax at 50% (as applies to residents) obtained by a non-resident in Portugal but resident in a Member State of the European Union, and whether this violates Community Law.

That is, the Claimant contends that the provision in Article 43(2) of the IRS Code applies to non-residents in Portugal but residents in a Member State of the European Union.

The Respondent argues that, in light of the judgment of the Court of Justice of the European Communities of 2007 October 11, and with a view to adapting national legislation to the decision endorsed therein, Article 72 of the IRS Code was amended by Law No. 67-A/2007, of 31/12, with the addition of section 7 (now section 9), the content of which at the time of the relevant events was as follows: "9 - Residents in another Member State of the European Union or of the European Economic Area, provided that, in the latter case, there is an exchange of information on tax matters, may opt, with respect to the income referred to in items (a) and (b) of section 1 and in section 2, for the taxation of such income at the rate which, in accordance with the table provided for in section 1 of Article 68, would be applicable if the income were obtained by residents in Portuguese territory." (emphasis added)

For its part, section 8 (now section 10) of the same article and statute, also added by Law No. 67-A/2007, of 31/12, provided, at the time of the relevant events, that: "10 - For purposes of determining the rate referred to in the preceding section, all income is taken into account, including that obtained outside this territory, under the same conditions as apply to residents." (emphasis added)

It should be noted that Law No. 67-A/2007, of 31/12 is the State Budget for 2008.

And, by virtue of this legislative amendment, income statements relating to the fiscal years of 2008 (in force from January 2009) and thereafter, more specifically Form 3, contain a field for exercising the option for the rate of Article 68 of the IRS Code.

This means that the legal framework (as well as the reporting obligation) is no longer that which existed at the time of the judgment of the Court of Justice of the European Communities, given that amendments to the law were made through the addition of sections 7 and 8 (now 9 and 10) to Article 72 of the IRS Code by Law No. 67-A/2007, of 31/12.

Consulting the Form 3 IRS statement filed in the name of the Claimant (relating to the fiscal year 2017), it is found that in box 8 B of Form 3, field 4 was marked (non-resident), field 6 (residence in an EU country), and field 7 (requests taxation under the general regime applicable to non-residents).

For purposes of taxability (regarding capital gains), the relevant articles are sections 9 and 10 of the IRS Code.

Thus, the provision in Article 43(2) of the IRS Code cannot be applicable to the case under analysis.

The Respondent concludes by arguing that a decision should be issued finding the present request for arbitral pronouncement unproven and therefore dismissing the Respondent.

E – FACTUAL BASIS

Prior to addressing the matters submitted by the parties, it is necessary to present the facts relevant to their understanding and subsequent decision, based on the documentary evidence submitted to the proceedings.

Regarding the relevant factual matters, this tribunal establishes as proven the following facts:

The Claimant is a Portuguese citizen and has tax residence in the Czech Republic.

The Czech Republic is a member state of the European Union and of the Schengen Area.

The Claimant sold, through a public deed of purchase and sale, the real property corresponding to an autonomous fraction intended for housing, designated by the letter "V" and corresponding to the Tenth Floor, Letter - E, of the urban property situated on Rua ..., in the Parish of ... in Lisbon, described in the Lisbon Real Property Registry under registration No. ... and recorded in the respective land register under No. ..., of the said parish.

On 11-05-2018, the Claimant filed the income statement Form 3 of IRS, accompanied by Annex G – Category G, under the title "CAPITAL GAINS AND OTHER PATRIMONY INCREMENTS", having declared therein solely the capital gain resulting from the transfer of the real property.

The TA taxed the entirety of capital gains obtained by the Claimant at a rate of 28%.

F – UNPROVEN FACTS

Of the facts with interest for the decision of the case, all subject to concrete analysis, those not included in the factual description above were not proven.

G – ISSUES TO BE DECIDED

Given the positions of the parties as set out in their arguments, the central issues to be determined are the following, which must be addressed and decided:

Those alleged by the Claimant:

Declaration of partial illegality of the tax assessment act relating to Personal Income Tax (IRS) for 2017, No. 2018..., in the partial amount of €7,955.08.

Condemnation to payment of compensatory interest.

J – MATTERS OF LAW

Therefore, considering the positions of the parties, the central issue for this Arbitral Tribunal to determine is whether the tax assessment act for Personal Income Tax (IRS) for 2017, No. 2018..., in the partial amount of €7,955.08, is (partially) lawful.

The fundamental issue is whether the rule established by national legislation in Article 42 of the IRS Code creates a differentiation between residents and non-residents, specifically whether the taxable basis for IRS purposes of capital gains derived from the onerous transfer of real property rights is compatible with the freedom of movement of capital provided for in Article 63 of the Treaty on the Functioning of the European Union, which corresponds to Article 56 of the Treaty establishing the European Community, given that it results in a less favorable tax regime for non-residents.

The Claimant argues on this issue that the inclusion by the TA, in the taxable income, of the entirety of capital gains resulting from the transfer of the real property right, contains an error of law, since only 50% of the respective value should have been considered, by application of the provisions of Article 43(2) of the IRS Code, thereby constituting a violation of Article 63 of the Treaty on the Functioning of the European Union (corresponding to Article 56 of the Treaty establishing the European Community) due to its discriminatory effect.

The Respondent, for its part, argues that the legal framework, as well as the reporting obligation, is no longer that which existed at the time of the judgment of the Court of Justice of the European Communities, given that amendments to the law were made by virtue of the addition of sections 7 and 8 (now 9 and 10) to Article 72 of the IRS Code by Law No. 67-A/2007, of 31/12, and therefore the provision in Article 43(2) of the IRS Code cannot be applicable to the case under analysis.

The issue thus centers on whether such differentiation provided for by the legislator is or is not consistent with Community law, in particular with the freedom of movement of capital and with the principle of non-discrimination, provided for in Articles 63 and 18 of the Treaty on the Functioning of the European Union (TFEU).

On this matter, there is extensive case law from the Court of Justice of the European Union, as well as from the Supreme Administrative Court and from the Arbitral Tribunal of CAAD, to the effect that Article 72(2) of the IRS Code is discriminatory, as it limits the scope of taxation to 50% of capital gains realized only for residents in Portugal and excludes from this limitation capital gains realized by a resident of another member state, thereby violating the freedom of movement of capital provided for in Article 63 of the TFEU.

Indeed, there are two moments to consider regarding Article 72 of the IRS Code: before and after the amendments introduced by the 2008 State Budget through Law No. 67-A/2007.

Regarding the legislation in force at the time of the relevant events, we note Articles 43(1) and (2) and Article 72(1)(a) and sections 9 and 10.

Article 43(1) and (2) provides as follows: 1 - The value of income qualified as capital gains is the amount corresponding to the balance determined between capital gains and losses realized in the same year, determined in accordance with the following articles. 2 - The balance referred to in the preceding section, relating to transfers carried out by residents provided for in items (a), (c), and (d) of section 1 of Article 10, whether positive or negative, is only considered at 50% of its value.

Regarding Article 72(1)(a) and sections 9 and 10, it provides as follows: 1 - The following are taxed at the autonomous rate of 28%: (a) Capital gains provided for in items (a) and (d) of section 1 of Article 10 earned by non-residents in Portuguese territory that are not attributable to a permanent establishment situated therein; (...) 9 - Residents in another Member State of the European Union or of the European Economic Area, provided that, in the latter case, there is an exchange of information on tax matters, may opt, with respect to the income referred to in items (a) and (b) of section 1 and in section 2, for the taxation of such income at the rate which, in accordance with the table provided for in section 1 of Article 68, would be applicable if such income were obtained by residents in Portuguese territory. 10 - For purposes of determining the rate referred to in the preceding section, all income is taken into account, including that obtained outside this territory, under the same conditions as apply to residents.

Regarding the amendments of Law No. 67-A/2007, in essence it maintained the taxation of capital gains at the special rate, adding sections 7 and 8, now sections 9 and 10 (resulting from the amendment by Law No. 66-B/2012, of 31 December).

The rule in Article 43(2) of the IRS Code was the subject of review by the Court of Justice of the European Union before those amendments of Law No. 67-A/2007, of 31/12.

It is unanimous in the case law, as will be discussed further, that the amendments of Law No. 67-A/2007 did not eliminate the discriminatory effect, and thus the violation of Community rules continues.

Case No. C-443/06, of 11 October, of the Court of Justice of the European Union, known as the Hollmann judgment, although prior to Law No. 67-A/2007, addressed this issue, where it decided that "Article 56 EC [now Article 63 TFEU] must be interpreted as prohibiting national legislation such as that at issue in the main proceedings which subjects capital gains resulting from the transfer of real property situated in a Member State, in this case Portugal, where the transfer is carried out by a resident of another Member State, to a higher tax burden than that which would apply, in relation to this same type of transaction, to capital gains realized by a resident of the Member State in which that real property is situated."

In the same sense, national case law has ruled on this question before and after the amendments of Law No. 67-A/2007, of 31/12, respectively in the judgments of the Supreme Administrative Court of 16 January 2008, in case number 439/06; of 22 March 2011, in case number 1031/10; of 30 April 2013, in case number 1374/12, and more recently, case number 1172/14 of 3 February 2016, all on www.dgsi.pt.

Following the case law of the CJEU and the Supreme Administrative Court, there is abundant arbitral case law issued by CAAD, in particular the decisions issued in case numbers: 45/2012-T; 127/2012-T; 748/2015-T; 89/2017-T; 370/2018-T; 617/2017-T; 520/2017-T; 399/2017-T; 89/2017-T; 478/2015-T; 96/2015-T, all on www.caad.pt, decisions to the effect that the rule is discriminatory, including after the amendments of Law No. 67-A/2007, of 31/12.

The issue submitted to this tribunal's consideration is identical to the issue on which the aforementioned judgments have already pronounced, which were, moreover, issued in the context of the same legislation, and therefore we see no reason not to follow this case law which, we believe, unanimously has been followed, and with which we agree and subscribe in full.

Adhering entirely to the case law, as for non-residents in Portugal, as prescribed by Article 72(1) of the IRS Code, where the national legislator provides that, for residents in Portugal, capital gains are only considered at 50% of their value, whereas for non-residents in Portugal, capital gains are considered in their entirety.

The differentiated regime for the taxation of real property capital gains realized by non-residents in Portuguese territory establishes a discrimination incompatible with the principle of freedom of movement of capital, a fundamental principle of the European Union, notwithstanding the amendments introduced to the IRS Code by Law No. 67-A/2007, of 31 December, reflected in the addition of the current sections 9 and 10 of Article 72 of the IRS Code.

The CJEU considered, in the Hollmann judgment, that "although direct taxation is the responsibility of the Member States, they must exercise this responsibility in compliance with Community law" and that discriminatory treatment of non-residents was based on the fact that "while a non-resident is subjected to a rate of 25% [28% in 2017] on the taxable amount corresponding to the entirety of capital gains realized, the consideration of only half of the taxable amount corresponding to capital gains realized by a resident allows the latter systematically, for this reason, to benefit from a lower tax burden, whatever the rate of taxation applicable to the totality of his income, since, according to the observations made by the Portuguese Government, the taxation of residents' income is subject to a table of progressive rates whose highest bracket is 42%". (48% in 2017, plus the solidarity surcharge of 2.5% or 5%).

As decided by the CJEU in the Gielen judgment, issued on 18/03/2010, "the option of equalization allows a non-resident taxpayer (...) to choose between a discriminatory tax regime and another supposedly non-discriminatory regime", and that "this choice is not capable of eliminating the discriminatory effects of the first of these two tax regimes."

The Supreme Administrative Court has also pronounced itself in the same manner, notably stating that "I - The provisions of the EC Treaty, which governs the European Union, prevail over the rules of ordinary national law, in accordance with the terms defined by the organs of Community law, provided that they respect the fundamental principles of the democratic rule of law. II - It is incompatible with Community law, as it limits the movement of capital which Article 56 of the EC Treaty provides for, the provision in section 2 of Article 43 of the IRS Code, by non-application to residents outside the national territory of the limitation of taxation to 50% of capital gains realized that it establishes for residents in the national territory." – cf. the judgment issued in case No. 01172/14, on 3 February 2016.

Although in this judgment the issue was not the violation of Article 63 TFEU but of Article 49 TFEU, we understand that the conclusion reached by that court is entirely applicable to the hypothesis now under consideration, namely that recognizing such an effect on said choice would have the consequence of validating a tax regime that would continue, in itself, to be discriminatory.

It was proven in the proceedings that, in the assessment in question, the TA taxed the entirety of capital gains obtained by the Claimant at a rate of 28%.

As stated in, among others, the arbitral decisions No. 45/2012-T and No. 127/2012-T, considering the provision in Article 43(2) of the IRS Code, we are faced with a discriminatory regime incompatible with Community Law, by virtue of the violation of Article 63 of the Treaty on the Functioning of the European Union. It remains to be seen whether the equalization option, introduced into the Portuguese tax system after the Hollmann judgment was issued, contained in sections 8 to 10 of Article 72 of the IRS Code, in force at the time of the relevant tax event, permits the discrimination judgment of the CJEU regarding the restrictive provision of section 2 of Article 43 of the IRS Code to resident taxpayers to be set aside.

It is true that, after the judgment issued by the CJEU on 11/10/2007, case number C-443/06, known as the Hollmann judgment, the national legislator, with the aim of adapting the national tax system to the decision issued in this judgment, introduced, through Law No. 67-A/2007, of 31 December, the possibility for residents in another Member State of the European Union to opt, with respect to the income referred to in sections 1 and 2 of Article 72 of the IRS Code, for the taxation of such income at the rate which, in accordance with the table provided for in section 1 of Article 68, would be applicable if such income were obtained by residents in Portuguese territory.

On this legislative amendment, the case law has also pronounced, specifically in the arbitral decision issued in case No. 748/2015-T, to which we adhere, "First of all, it must be noted that the solution introduced by the legislator to circumvent the discrimination contained in the aforementioned national rule places an additional burden on non-residents as compared to residents. To this is added another objection that results from the complexity of the tax operation, aggravated by the "option for aggregation" of all income obtained in the other country, in addition to other relevant issues associated with the principle of territoriality provided in Article 15 of the IRS Code, the conditions for personalizing the tax and the progressivity of the tax, hardly compatible with proper consideration of the amounts earned in another member state, in the current state of Community law." (...) "The TA argues that the solution adopted in Article 72, sections 8 to 10, is sufficient, since for residents in Portuguese territory, these income are also subject to aggregation. This argument does not seem adequate since it does not take into account all the other taxation conditions inherent to the functioning of a tax with the characteristics of personal income tax and reveals an intention to tax based on income earned in the other country (when aggregated), knowing full well that these are incomparable realities, easily distorted by an entire underlying reality that escapes the fiscal sovereignty of the Portuguese state."

Therefore, although the national legislator has provided for the possibility of a non-resident taxpayer opting for the taxation applicable to residents, the truth is that this does not remove the essential discriminatory effect of the differentiation of regimes provided for in national legislation between residents and non-residents, which is thus a violation of Articles 63 and 18 of the TFEU.

In light of the principle of the primacy of Community law, enshrined in Article 8, section 4 of the Constitution of the Portuguese Republic, the case law of the CJEU, in the sphere of Community law, binds national courts, and therefore this tribunal cannot decide differently from what has already been decided, in the context of the same legal issue and the same legislation, by the CJEU.

In these terms, there is no doubt that the assessment in question, in the part that considers as the basis for taxation of capital gains realized by the Claimant more than 50% of its value, lacks legal foundation, leading to the conclusion that the incompatibility of section 2 of Article 43 of the IRS Code with Article 63 of the TFEU, which determines the illegality of the assessments now in question, and thus the claim for arbitral pronouncement is well-founded.

I – ISSUES OF IMPAIRED COGNIZANCE

In the judgment to be issued, the judge must rule on all issues he is to address, refraining from ruling on issues of which he should not have cognizance (final part of section 1 of Article 125 of the Tax Procedural Code). However, the issues within the tribunal's powers of cognizance are, in accordance with section 2 of Article 608 of the Code of Civil Procedure, applicable subsidiarily to the tax arbitration proceedings by reference to Article 29(1)(e) of the Arbitration Regulations, "the issues which the parties have submitted to its consideration, except those whose decision is prejudiced by the solution given to others (...)".

Given the solution provided to the issue regarding the requirements for taxation of the Claimant's income under the regime applicable to non-residents, the cognizance of the remaining issues included in the request for arbitral pronouncement is impaired.

L – COMPENSATORY INTEREST

The Claimant also petitions for payment of compensatory interest.

In light of the foregoing, the assessment of IRS, in the part affected by the annulment to be decreed, results from an error of fact and of law attributable exclusively to the tax administration, insofar as the Claimant fulfilled his reporting duty and it was committed by the latter and the same could not be unaware of a different understanding.

Article 43 of the General Tax Law, under the heading "undue payment of the tax obligation," has as its purpose the intention to compensate the taxpayer for the deprivation of the amount paid unduly.

Article 43(2) of the General Tax Law – "There is also deemed to be an error attributable to the services where, although the assessment is made on the basis of the taxpayer's declaration, the taxpayer has followed in its completion the generic guidelines of the tax administration, properly published."

In fact, being demonstrated that the claimant paid the tax assessed in the part exceeding what is due, by virtue of the provisions of Articles 61 of the Tax Procedural Code and 43 of the General Tax Law, the Claimant is entitled to the compensatory interest due, such interest to be calculated from the date of payment of the undue tax (annulled) until the date of issuance of the respective credit note, counting the period for such payment from the beginning of the period for voluntary execution of this decision (Article 61, sections 2 to 5 of the Tax Procedural Code), all at the rate determined in accordance with the provisions of section 4 of Article 43 of the General Tax Law.

For the foregoing, the Claimant's petition is granted.

M – DECISION

Accordingly, in light of all the foregoing, this Arbitral Tribunal decides:

To declare well-founded the claim for declaration of illegality of the tax assessment act relating to Personal Income Tax (IRS) for 2017, No. 2018..., in the partial amount of €7,955.08 (seven thousand nine hundred and fifty-five euros and eight cents), for defect of violation of law, by error regarding the requirements of law, which justifies the declaration of its illegality and annulment.

To condemn the Respondent to refund to the Claimant this amount unduly assessed and paid in the amount of €7,955.08, plus payment of compensatory interest already accrued for the period, counting from the payment of the tax in accordance with sections 2 to 5 of Article 61 of the Tax Procedural Code at the rate determined in accordance with the provisions of section 4 of Article 43 of the General Tax Law until full and effective reimbursement.

The process value is fixed at €7,955.08 of the assessment value, in view of the economic value of the proceedings as measured by the value of the tax assessment in dispute, and accordingly the costs are fixed at the respective amount of €612.00 (six hundred and twelve euros), at the charge of the Respondent in accordance with Article 12(2) of the Tax Arbitration Regime, Article 4 of the Rules of Procedure for Tax Arbitration and Table I annexed thereto – section 10 of Article 35, and sections 1, 4, and 5 of Article 43 of the General Tax Law, Articles 5(1)(a) of the Rules of Procedure for Tax Arbitration, 97-A(1)(a) of the Tax Procedural Code and 559 of the Code of Civil Procedure.

Notify.

Lisbon, 15 April 2019

The Arbitrator

Dr. Paulo Ferreira Alves

Frequently Asked Questions

Automatically Created

How are capital gains from property sales taxed for non-residents under Portuguese IRS?
Non-resident capital gains from Portuguese property sales are generally taxed at a flat rate of 28% on the entire gain under Article 72 CIRS. However, EU/EEA residents can opt under Article 72(9) CIRS to be taxed at progressive rates applicable to residents (Article 68 CIRS), which requires declaring all worldwide income. This option must be explicitly elected on Form 3 IRS declaration. Without exercising this option, non-residents face taxation on 100% of capital gains, unlike residents who benefit from the 50% exclusion under Article 43(2) CIRS.
Why was Article 43(2) of the Portuguese IRS Code (CIRS) found incompatible with EU law on free movement of capital?
Article 43(2) CIRS was found incompatible with EU law because it creates discriminatory treatment between residents and non-residents. The provision allows Portuguese residents to exclude 50% of capital gains from property sales from taxation, while non-residents are taxed on 100% of gains unless they opt for the alternative regime under Article 72(9) CIRS. This differential treatment restricts the free movement of capital guaranteed by Article 63 TFEU, as it discourages EU residents from investing in Portuguese real estate and creates a tax disadvantage based solely on residence status, violating EU non-discrimination principles established by Court of Justice case law.
What does Article 63 of the Treaty on the Functioning of the European Union (TFEU) mean for non-resident taxpayers in Portugal?
Article 63 TFEU prohibits restrictions on capital movements between EU Member States and between Member States and third countries. For non-resident taxpayers in Portugal, this means they must receive substantially equivalent tax treatment to residents regarding capital gains taxation. Portuguese tax law cannot impose discriminatory conditions that make property investment less attractive for non-residents. Following the 2007 Court of Justice ruling, Portugal amended Article 72 CIRS to allow EU/EEA residents to elect taxation under the progressive resident regime, attempting to comply with Article 63 TFEU by providing an option for equivalent treatment.
Can non-residents claim the 50% capital gains exclusion under Article 43(2) CIRS that applies to Portuguese residents?
Non-residents can potentially benefit from the 50% capital gains exclusion under Article 43(2) CIRS, but only indirectly by exercising the option under Article 72(9) CIRS to be taxed as residents. This requires marking the appropriate field on Form 3 IRS declaration and declaring all worldwide income. If the non-resident opts for standard non-resident taxation (flat 28% rate), Article 43(2) does not apply directly. However, EU law jurisprudence suggests that denying this benefit constitutes discrimination. The CAAD arbitral tribunal has considered whether Article 43(2) should apply automatically to EU residents regardless of the election, interpreting Portuguese law in conformity with Article 63 TFEU.
What is the CAAD arbitral tribunal procedure for challenging IRS tax assessments on non-resident capital gains?
The CAAD (Administrative Arbitration Centre) procedure for challenging non-resident capital gains IRS assessments begins with filing a request for arbitration within the legal deadline. The taxpayer does not need to appoint an arbitrator for single-arbitrator cases; the Deontological Council appoints one. The process involves submitting a claim detailing the legal grounds (such as incompatibility with EU law), followed by the Tax Authority's response. The tribunal examines the assessment's legality, including whether proper tax regimes were applied and whether EU law principles were respected. Parties can waive oral hearings. The arbitrator issues a binding decision on the assessment's legality, which can order partial or full annulment and tax refunds if discrimination or legal errors are found.