Process: 592/2018-T

Date: April 12, 2019

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD arbitration process 592/2018-T examined the tax residency status of a married couple who worked in Spain but purchased property in Portugal in 2015. The Portuguese Tax Authority (AT) issued an IRS assessment of €20,333.15 for 2015, treating the taxpayers as Portuguese tax residents. The claimants argued they lived and worked in Spain throughout 2015, visiting Portugal only three times (totaling approximately 4 months), and that the Portuguese property served merely as a holiday home. The AT challenged the arbitration on multiple procedural grounds, including incompetence of the arbitral court, lapse of action deadlines, and argued the taxpayers failed to prove non-residency. Key evidence included the taxpayers' declaration that the property was for 'own and permanent residence' when claiming IMI exemption under Article 46(1) of the Tax Benefits Statute, and registration in the Portuguese taxpayer system from June 2015. The case involves interpretation of Article 16(1)(b) of CIRS regarding tax residency criteria, specifically the 'permanent dwelling' test, and application of the Portugal-Spain Double Taxation Convention to resolve dual residency conflicts. The tribunal also addressed procedural exceptions regarding competence to suspend enforcement proceedings and review of non-habitual resident status decisions. This decision clarifies how Portuguese tax authorities determine residency when taxpayers maintain connections in both countries, particularly regarding property ownership versus actual habitual residence.

Full Decision

ARBITRAL DECISION

I - REPORT

  1. A..., of age, holder of passport no..., tax identification number... and B..., of age, holder of passport no..., tax identification number..., both resident at Street..., no..., ...-... ... (hereinafter referred to as Claimants or Taxpayers), submitted on 26/11/2018 a request for arbitral pronouncement, pursuant to the provisions of paragraph a) of no. 1 of article 2 and article 10, no. 1, paragraph a) of Decree Law no. 10/2011, of 20 January (hereinafter referred to as RJAT), in which the Tax and Customs Authority is required (hereinafter referred to as AT or Defendant), with a view to the declaration of illegality and consequent annulment of the Personal Income Tax (IRS) assessment deed no. 2017..., for the year 2015, in the amount of €20,333.15.

  2. The request for constitution of a Tax Arbitral Court was accepted by His Excellency the President of CAAD, and notified to the Defendant in accordance with legal requirements on 2018-11-27.

  3. Pursuant to and for the purposes of the provisions of paragraph a) of no. 2 of article 6 of RJAT, by decision of His Excellency the President of the Deontological Council of CAAD, duly notified to the parties within the prescribed timeframes, the undersigned arbitrator was appointed, who communicated to that Council the acceptance of the appointment within the timeframe provided for in article 4 of the Code of Ethics of the Administrative Arbitration Center.

  4. On 2019-01-17 the parties were notified of this appointment, and did not manifest any will to refuse the arbitrator's appointment, in accordance with the combined provisions of article 11, no.... paragraphs a) and b) in the wording given to them by Law no. 66-B/2012, of 31 December.

  5. The Singular Arbitral Tribunal was constituted on 2019-02-06, in accordance with the requirement of paragraph c) of no. 1 of article 11 of RJAT, in the wording given to it by article 228 of Law no. 66-A/2012, of 31 December.

  6. Duly notified for this purpose, through an order issued on 2019-03-12, the Defendant submitted its response, and on that date proceeded to attach the administrative file to the proceedings.

  7. Through an order issued on 2019-03-13, the Claimants were notified to make submissions, if they wished, on the matter of exception raised by AT within the scope of its response.

  8. Having done so on 2019-03-26.

  9. By order issued on that same date, duly notified to the parties, which also provided grounds for the waiver of the hearing referred to in article 18 of RJAT, and the submission of final arguments, the twenty-second day of April of two thousand and nineteen was indicated as the probable deadline for the pronouncement and notification of the final decision.

  10. To support their request, the Claimants invoked in summary, and with relevance to what matters here, the following (mentioned mostly by transcription):

10.1. The (...) Claimants, during the year 2015 and prior years, lived and worked in Spain (see article 9 of the request for arbitral pronouncement);

10.2. in the future prospect of moving to Portugal they acquired a property in the municipality of ... on 26/06/2015 (see article 10 of the request for arbitral pronouncement);

10.3. "At the time of acquisition of the property and throughout the year 2015, the residence of the present Claimants was located in Spain (...)" [see article 12 of the request for arbitral pronouncement];

10.4. "The property purchased in Portugal served only as a holiday home for the couple until the end of 2015, which they visited periodically (...)" [see article 21 of the request for arbitral pronouncement];

10.5. "(...) in 2015, the Claimants were present in Portugal only 3 (three) times, on the following dates:

  1. From 29/12/2014 to 21/01/2015;

  2. From 04/06/2015 to 02/09/2015;

  3. From 19/10/2015 to 26/10/2015 (see article 22 of the request for arbitral pronouncement);

10.6. "On 09/11/2016, the Claimants submitted a Form 3 income declaration, in the context of Personal Income Tax (...) relating to the year 2015" (see article 31 of the request for arbitral pronouncement);

10.7. "Subsequently, on 23/06/2017, a replacement declaration was submitted, relating to the same tax year from which resulted the assessment note no. 2017..., indicating as the value of IRS to be paid €18,716.50 (see article 33 of the request for arbitral pronouncement and document no. 13 attached thereto);

10.8. "The Claimants, on 27/12/2017, filed a gracious reclamation against this tax act, and were notified of its dismissal on 30/05/2018 (see article 35 of the request for arbitral pronouncement and document no. 1 attached thereto);

10.9. "Against this dismissal the Claimants filed a hierarchical appeal, on 28/06/2018 (see article 36 of the request for arbitral pronouncement and document no. 2 attached thereto);

10.10. The Claimants further proceed with various legal considerations on the subject of tax residency and competence to tax income;

10.11. The taxpayers conclude, as appears from their request, requesting: "1. The admission of this request; 2. The annulment for illegality of Assessment no. 2017... in the amount of €20,333.15, including the respective default interest and other charges, relating to IRS for 2015, and the extinction of the respective enforcement proceedings underway; 3. The condemnation of the Respondent in the costs of the proceedings, with the other legal consequences"

  1. As mentioned, on 2019-03-12 the Tax and Customs Authority proceeded to attach the administrative file (PA) and submitted its response, by exception and by challenge

11.1. The AT raises and enumerates four exceptions;

A- Of absolute material incompetence of the Arbitral Court to proceed with the suspension of enforcement proceedings,

B- Of material incompetence of the arbitral court for the examination of the status of the claimants as non-habitual residents, arising from the act of deferment of the request for recognition of that status for the year 2015,

C- Of lapse of the right of action,

D- Of lapse of the right to action in this arbitral court

It argues, essentially with respect to the first of the invoked exceptions, that it is not within the competence of the tax arbitral court to examine matters of enforcement jurisdiction, referring for this purpose to articles 2 and 4 of RJAT and article 2 of Ordinance no. 112-A/2011 of 22 March, and invoking arbitral decisions, to conclude regarding the incompetence of this tribunal.

As for the second of the invoked exceptions, it argues, in brief summary and with relevance, that "any judicial review of the deferment of the request for recognition of the status of non-habitual resident for the year 2015 (...) on the grounds of illegality for any error in the factual and legal assumptions of the administrative decision that had previously deferred it, presented by the Claimants, could only be done through administrative action."

Regarding the lapse of the right of action, with special emphasis in this arbitral court, the Defendant argues that the deadline for submission of the underlying arbitral pronouncement request has been exceeded in light of the provisions of article 10 of RJAT.

11.2. In challenging the merits, the Tax and Customs Authority invoked, in brief summary, the following:

11.3. that the Claimants do not prove that they were not residents in Portugal for tax purposes in 2015,

11.4. that they stated that the acquisition of the property was intended, according to their own declaration, as their own and permanent residence,

11.5. that they accordingly requested, and were granted, the exemption from payment of IMI (Municipal Property Tax), covered by article 46, no. 1 of the Tax Benefits Statute,

11.6. that from consultation of the Taxpayer Registration System it appears that Claimant A... is registered as resident in Portugal since 2015-06-12, having had from 2012-11-21 until that date as tax representative C...,

11.7. that Claimant B... is registered as resident in Portugal since 2015-06-26, having had from 2012-11-21 until that date as tax representative C...,

11.8. that they now contradict what was requested and asserted by the Claimants constitutes conduct of bad faith, constituting "venire contra factum proprium",

11.9. that both Claimants, in 2015, initiated a series of procedures with a view to obtaining certain tax benefits only recognized by those who have a connection with Portugal (residence and permanence).

11.10. The Defendant concludes its response pleading that "the above-mentioned dilatory exceptions should be judged as well-founded, and the Defendant should accordingly be absolved of the instance, without prejudice, and should this not be understood, the present request for arbitral pronouncement should be judged as unfounded as not proven, and consequently the Defendant absolved of the claims, with the due and legal consequences."

  1. The Singular Arbitral Tribunal is materially competent, and is regularly constituted in accordance with the provisions of articles 2, no. 1, paragraph a), 5 and 6, no. 1 of RJAT.

  2. The parties have legal personality and capacity, are legitimate and are duly and legally represented (articles 3, 6 and 15 of the Code of Tax Procedure and Process, ex vi, article 29, no. 1, paragraph e) of RJAT).

  3. The proceedings do not suffer from nullities, and apart from those mentioned, there are no other exceptions of which cognizance should be taken.

II - GROUNDS

A. FACTS

A.1. Facts Established as Proven

With relevance to the examination of the issues raised, the following facts are established as proven:

i. On 2015-06-26 the Claimants executed as buyers a contract of sale and purchase and mortgage deed, having as object the urban property registered in the registry..., situated in the parish of..., on Street..., no...,

ii. the property in question and as appears from the respective deeds is intended for the Claimants' own permanent residence (see document no. 3 attached with the request for arbitral pronouncement),

iii. in the contracts in question the Claimants indicated as their place of residence Street..., no... place of..., ...,

iv. on that same date the Claimants requested, pursuant to the provisions of article 46, no. 1 of the Tax Benefits Statute (EBF), the exemption from payment of IMI, which was granted to them,

v. Claimant A... is registered as resident in Portugal since 2015-06-12, having had from 2012-11-21 until that date as tax representative C...,

vi. on 2016-07-19 the status of non-habitual resident was recognized for the Claimant, with effect from 2015-01-01 to 2014,

vii. Claimant B... is registered as resident in Portugal since 2015-06-26, having had from 2012-11-21 until that date as tax representative C...,

viii. on 2016-08-10 the status of non-habitual resident was recognized for the Claimant, with effect from 2015-01-10 to 2014,

ix. on 2016-11-09 the Claimants submitted Form 3 IRS income declaration, in the capacity of residents in Portugal,

x. as a result of inconsistencies in the Form 3 declaration a procedure for divergence was initiated,

xi. the Claimants on 2017-06-23 submitted a replacement declaration which, while maintaining the divergence of values declared in the form, was the origin of the IRS assessment, relating to the year 2015, in the amount of €18,716.50,

xii. the Claimants reacted against such assessment through the submission of the respective gracious reclamation which was assigned the number,

xiii. on 2018-05-30 the Claimants were notified of the dismissal of the gracious reclamation,

xiv. from such dismissal, they filed with the Tax Services of the... a hierarchical appeal on 2018-06-28,

xvi. the Claimants were not until the date of submission of the request for arbitral pronouncement notified of any decision concerning the hierarchical appeal,

xvii. on 2018-11-26 the Claimants sent to CAAD a request for arbitral constitution which gave rise to the present proceedings.

A.2. Facts Established as Not Proven

It is not established as proven that the debt arising from the underlying IRS assessment is in coercive collection under enforcement proceedings no...2017..., with no other facts existing that should be considered as not proven.

A.3. Grounds for the Facts Established as Proven and Not Proven

With respect to the facts, the tribunal need not pronounce on everything that was alleged by the parties, but rather has the duty to select the facts that matter for the decision and distinguish the proven from the not proven matter (see article 123, no. 2 of CPPT and articles 607, no. 3 of the Code of Civil Procedure, applicable ex vi article 29, no. 1, paragraphs a) and e) of RJAT).

Thus, the facts relevant to the judgment of the case are chosen and outlined according to their legal relevance, which is established in light of the various plausible solutions of the question(s) of law. (see article 596 of the Civil Procedure Code, applicable ex vi article 29, no. 1, paragraph e) of RJAT).

Therefore, taking into account the positions assumed by the parties in light of article 110, no. 7 of CPPT, the documentary evidence and the attached PA, the facts listed above are considered proven, with relevance for the decision, as recognized and accepted by the parties.

B. THE LAW

- On the Exceptions

In accordance with the provisions of articles 16 of CPPT, 13 of CPTA and 101 of the CPC subsidiarily applicable ex vi of no. 1 of article 29 of RJAT, the determination of the material competence of courts is a matter of public order and its cognizance precedes that of any other matter.

Consequently, given that the merits of the exceptions invoked by AT relating to material incompetence, if verified, may prevent the cognizance of the other issues raised, it is important to delimit the scope of the competence of the tax arbitral jurisdiction in the situations invoked by AT.

Thus,

As already stated, AT in its response raised four different (apparently) exceptions, two relating to the material incompetence of the arbitral court "A" and "B" and the remaining concerning lapse, presented under "C" and "D" of its pleading.

Being interconnected, those relating to the invoked material incompetencies will be examined together and subsequently those related to the lapses raised.

(i) - Of the absolute material incompetence of the arbitral court to proceed with the suspension of enforcement proceedings (see articles 19 to 29 of the response)

(ii) - Of the material incompetence of the arbitral court for the examination of the status of the claimants as non-habitual residents, arising from the act of deferment of the request for recognition of that status for the year 2015 (see articles 30 to 54 of the response)

Tax arbitral courts are constitutionally recognized as true courts (article 209, no. 2 of CRP), and voluntary arbitration, in general, finds its legal basis in Law no. 63/2011, of 14 December, in force, which repealed Law no. 31/86, of 29 August, which provides that "the State and other collective entities of public law may enter into arbitration agreements, if authorized to do so by special law or if these have as their object disputes relating to private law relationships" (article 1, no. 5).

The legislative authorization contained in article 124 of Law no. 3-B/2010, of 28 April, relating to arbitration in tax matters, configures tax arbitration as an alternative means to the process of judicial challenge and the action for recognition of a right or legitimate interest enshrined in the Code of Tax Procedure and Process.

In exercise of that authorization, Law no. 10/2011, of 20 January, was approved, which disciplines arbitration in tax matters.

In accordance with its preamble, the competence of the arbitral courts functioning under the aegis of CAAD was set in the following terms: they are covered by the "competence of arbitral courts, the examination of declaration of illegality of tax assessments, self-assessments, withholding at source and payments on account, the declaration of illegality of acts determining taxable matter, of acts determining collective matter and of acts setting patrimonial values, whenever the law does not ensure the faculty of deducing the aforesaid claim".

The material scope of tax arbitration is defined in paragraphs a) and b) of article 2 of RJAT:

Article 2

Competence of arbitral courts and applicable law

  1. The competence of the courts comprises the examination of the following claims:

a) The declaration of illegality of acts of assessment of taxes, withholding at source and payments on account,

b) The declaration of illegality of acts determining taxable matter when this does not give rise to assessment of any taxes.

This competence of the arbitral courts is, however, limited by the terms in which the Tax and Customs Authority expressed its will to bind itself to this jurisdiction, embodied in Ordinance no. 112-A/2011 of 22 March, an ordinance of binding that already derived from the provisions of article 4 of RJAT.

In accordance with the teaching of the distinguished Counselor Jorge Lopes de Sousa, the competence of the tax courts [1] "is restricted to activity connected with acts of tax assessment, falling outside its competence the examination of the legality of administrative acts of total or partial dismissal or revocation of exemptions or other tax benefits as dependent on recognition by the Tax Administration, as well as other administrative acts relating to tax issues that do not involve examination of the legality of the assessment act referred to in paragraph p) of no. 1 of article 97 of CPPT."

Given what has just been expounded, it is clear that it is not within the jurisdiction of tax arbitral courts to examine matters within the scope of tax enforcement proceedings, with AT being correct in this segment.

The same applies to the material incompetence to take cognizance of any changes to the status of resident or non-habitual resident, since although it is a tax matter, it does not involve examination of any legality related to the assessment here disputed.

(iii) - Of the lapse of the right of action (see articles 55 to 62 of the response) and,

(iv) - Of the lapse of the right to action in this arbitral court. (see articles 63 to 89 of the response).

In support of its thesis, and necessarily briefly, the Defendant argues that the Claimants having made no reference either to the order dismissing the gracious reclamation or to the tacit dismissal of the hierarchical appeal, petitioned nothing in the present request for arbitral pronouncement as to these, "nor pointing out any defect in them", from which to conclude that the deadline for challenge by arbitration has been exceeded.

It bases this understanding on the provisions of article 10 of RJAT, which establishes, regarding assessment acts, that the deadline for submission of an arbitral request is ninety days, with the same normative referring to the moment of the start of counting to what is inscribed in nos. 1 and 2 of article 102 of the Code of Tax Procedure and Process, arguing, consequently, for the untimeliness of the underlying request given that the final term that it refers to as being the last day of August 2017 and the request for arbitral pronouncement being submitted to CAAD on 2018-11-26, "much time after the 90 days for submission of the arbitral request had passed".

The Claimants responded to the exception raised by AT, asserting, for what is relevant here, that the deadline for decision of the hierarchical appeal ended on 27/08/2018, concluding that the request for constitution of arbitral tribunal submitted on 26/11/2018 is timely as it falls within the deadline established in article 10, no. 1, paragraph a), latter part of RJAT.

The issue that emerges from the exception raised concerns, in brief terms, the fact that, given the circumstance that the taxpayer had previously attempted a gracious remedy (gracious reclamation, hierarchical appeal or request for official review), the same had not been expressly referred to in the request as to its declaration of illegality.

This issue has been the subject of various decisions, not coincident within the scope of tax arbitration, under the aegis of CAAD.

AT itself in support of its thesis invoked various arbitral decisions, which would confirm its interpretation.

All based essentially on the fact that the court exceeds its competencies, by excess of pronouncement in the circumstance of pronouncing itself beyond what is expressly requested by the Claimant.

Referring to the situation of the present proceedings, there will be no doubt as to either the content of the request which is of interest here, as being that formulated by the Claimants in the present "annulment for illegality of assessment no. 2017..., in the amount of €20,333.15 including default interest and other charges, relating to IRS for 2015" or as to the absence of any express request regarding the declaration of illegality or the hierarchical appeal.

It is anticipated here that this tribunal does not subscribe to the position upheld by AT [2], endorsing that;

In situations similar to those that emerge in the present proceedings, "it clearly results from the norm of article 10, no. 1, paragraph a) of RJAT, that in situations such as that which emerges in the present proceedings, in which there has been a gracious reclamation and/or hierarchical appeal, the deadline for presenting a request for arbitral pronouncement is counted from notification of the decision pronounced in those or, where applicable, from the formation of a presumption of tacit dismissal" [3]

Data venia, the following is invoked from what is stated in the arbitral decision issued on 2015-12-15, in the context of proceedings no. 419/2014-T;

"As follows from the competence attributed to the arbitral courts functioning at CAAD to examine the legality of assessment acts, and not decisions dismissing hierarchical appeals or gracious reclamations, when there is administrative challenge of assessment acts, these assessment acts are always challengeable within a deadline counting from notification of the dismissal decision, as article 10, no. 1 indicates them as initial terms. Therefore, the party requesting arbitration does not have to challenge the acts of the second or third degree and, even when it does challenge these, the object of the arbitral proceedings is always deemed to be the mediate object which constitutes the assessment acts, maintained by acts of second or third degree whenever the Claimant does not impute to these defects of their own. But, obviously, if the party requesting arbitration merely intends to see declared the illegality of assessment acts, which are those that, being susceptible to coercive enforcement, affect its legal sphere, it does not have to challenge the acts of second and third degree, which lack autonomous harmfulness.

Moreover, a hypothetical deficiency in the formulation of the request would not have as a corollary the absolution of the instance, only giving rise, if necessary, but always when necessary, to a correction, as required by paragraph c) of no. 1 of article 18 of RJAT, in harmony with the constitutional right to contentious challenge of all acts of the Administration that harm the rights of taxpayers (articles 20, no. 1 and 268, no. 4 of CRP)"

In identical sense is extracted from the arbitral decision of 27/10/2015, issued in the context of proceedings no. 124/2015-T, which we equally endorse;

"We are once again in that case in which it seems to confuse the material scope of arbitration (article 2 of RJAT) with the date from which the request for arbitral pronouncement can be filed (article 10 of RJAT) and also and once again, it is here the approach to the question of recourse, through arbitration, of acts of second or third degree. The problematic of acts of second and third degree in tax arbitration is linked, as it is judged, with at least two distinct issues: a first, to know whether having attempted an administrative gracious remedy, the object of the arbitral proceedings will be the decision to be pronounced by the Tax Administration - in the context of gracious reclamation, hierarchical appeal or request for official review - or, on the contrary, the act of assessment, self-assessment, withholding at source or payment on account; a second that interlinks questions of competence and questions of deadline, and which is to know whether the court will have competence - and if so, to what extent - to examine an act of the first degree when the request is presented in the consequence of a tacit dismissal of a gracious reclamation, hierarchical appeal or request for official review previously presented.

With respect to the first question, already within the scope of judicial challenge, it was debatable whether, faced with an express decision of gracious reclamation, hierarchical appeal or request for official review, the taxpayer directly challenged the assessment act previously reclaimed, appealed or reviewed (the act of the first degree) or the very decision (of dismissal) of reclamation, appeal or request for official review which, in turn examined the (i)legality of the challenged act - the act of the second degree. The Supreme Administrative Court (STA) came to pronounce itself on the question, in a decision dated 18 May 2011, issued in the context of proceedings no. 0156/11 [1], admitting that "(...) the real object of the challenge is the assessment act and not the act that decided the reclamation, so it is the 'defects of that and not of this order that are truly at issue (...)"

"(...) the challenge is therefore not limited by the grounds invoked in the gracious reclamation, and can have as grounds any illegality of the tax act (....)"

This is the first question that must be made clear: the object of the arbitral proceedings is the IRS assessment act.

Different from this is the question of whether the request for arbitral pronouncement was presented within the deadline. Here the Court understands that the arbitration legislator was clear in compartmentalizing questions of competence and questions of deadlines.

Thus it is that regarding competence or material scope, the object of arbitration is, as concluded, the examination of the illegality of IRS assessment acts.

As regards the deadline, the taxpayer can resort to arbitration, immediately upon notification of the acts of assessment of taxes, self-assessments, withholding at source and payments on account or, having resorted to the administrative route, after notification of the dismissal decision or formation of tacit dismissal.

This answer is, in turn, found in article 10. From this norm should not, however, be drawn the competence to directly examine acts of the second degree.

This is a norm that concerns solely and exclusively the dies a quo of the deadline for submission of the request for arbitral pronouncement. It is a norm that therefore concerns the moment from which the deadline for requesting the constitution of the arbitral tribunal begins to run.

Indeed, article 2, no. 1, paragraph a) determines that the arbitral courts have competence to examine "the declaration of illegality of acts of assessment of taxes, self-assessments, withholding at source and payments on account". There is no reference to acts of dismissal of hierarchical appeals or gracious reclamations or requests for official review, i.e., there is no mention of the arbitrability of decisions of dismissal, express or tacit, of the administrative routes previously used. There is nor did there have to be.

It is understood in this regard that acts of second or third degree may always be arbitrable, insofar as they themselves involve, and only to this extent, the (i)legality of the assessment acts in question. At the basis of this understanding will be, for part of Doctrine, a teleological interpretation, specifically because paragraph a) of no. 1 of article 10 expressly refers to "decision of hierarchical appeal" and is also, as it is judged, the fact that the act of second or third degree is examining the assessment act, self-assessment, withholding at source or payment on account which is the object of arbitration.

It is argued here, therefore, for an interpretation according to which the acts of dismissal of gracious reclamations, hierarchical appeals or requests for review of the tax act are not arbitrable because they fall outside the material scope of tax arbitration. In other words, those acts of dismissal may be "brought" to the arbitral jurisdiction, in the strict condition that they themselves have examined the (i)legality of the tax act which the taxpayer, truly and effectively intends to challenge by the arbitral route.

In this sense, see the arbitral decision issued in the context of proceedings no. 272/2014-T:

"65- The dismissal of gracious reclamation embodies, in the framework of judicial challenge, the case provided for in no. 2 of article 102 of CPPT, raising the question of whether, given the competencies legally entrusted to the arbitral courts, the same will be competent to, in any circumstances examine the acts of dismissal of gracious reclamations.

66- Given that the competence of the arbitral courts functioning at CAAD is circumscribed and limited, as already mentioned above, to the declaration of illegality of acts of assessment of taxes, self-assessments, withholding at source and payments on account, the examination of the acts of dismissal of gracious reclamations, by the aforesaid courts, must be conditioned to the actual knowledge that such acts had of the legality of the assessment acts to which they are related.

67- The decision dismissing the gracious reclamation, pronounced in the aforesaid circumstances, reaffirms the legality of the assessment act in question and confirms it again, as it had initially been configured.

68- The dismissal of gracious reclamation is a harmful act susceptible of challenge by the interested party, which, insofar as it reaffirms the primary act of underlying assessment and is inseparable from which, cannot but have its examination entrusted to the arbitral courts which, as already mentioned, have their competence fundamentally centered on the declaration of illegality of acts of assessment of taxes."

Endorsing without any reservations the grounds and decision sense, regarding this segment that is expressed in the aforesaid arbitral decisions, [4] and briefly transcribed, it appears that the act of formation of the tacit dismissal of the hierarchical appeal promoted by the Claimants occurred on 27/08/2018, with the request for arbitral pronouncement being submitted to CAAD on 26/11/2018,

From which it follows that the request for arbitral pronouncement submitted to CAAD is timely, and consequently the exceptions of lapse of the right of action in this arbitral court, raised by AT, are unfounded.

*** ***

- On the merits

The question to be decided is whether the Claimants should or should not be considered tax residents in Portugal in the year 2015, that is, it will be important to determine whether the Claimants meet or do not meet any legal criterion capable of determining their tax residency in Portugal in the period in question, in light of the provisions of article 16, no. 1, paragraphs a) and b) of the Personal Income Tax Code (CIRS), the possible recourse to the Double Taxation Treaty (CDT) celebrated between Portugal and Spain, and to conclude (or not) for the maintenance of the IRS assessment in question.

- Legal Framework

In the version applicable to the time of the factual circumstances underlying, article 13, no. 1 of CIRS provided regarding the subjective incidence of the tax that: "individuals residing in Portuguese territory and those not residing therein but obtaining income therein are subject to IRS".

In turn providing no. 1 of article 15 of CIRS (version at the time) that "persons being residents of Portuguese territory, IRS is incident on the totality of their income, including that obtained outside that territory"

It is thus apparent, from the outset, and in unison with doctrine and case law, that the concept of residence becomes fundamental so that, if verified with respect to any tax subject, it "legitimizes taxation of income on a world-wide basis, i.e., of all income regardless of where it is obtained ("world income principle")

According to RUI DUARTE MORAIS, [5] "residence is today generally accepted as constituting the element of connection that expresses the most intimate economic relationship between persons and the State".

"(...) Being a resident of a given State normally implies being subject therein to a tax on the totality of income (including) that obtained outside the borders of that State."

For what is relevant here, articles a) and b) of no. 1 of article 16 of CIRS provided as follows:

Article 16

Residence

  1. Residents of Portuguese territory are persons who, in the year to which the income relates:

a) Have remained therein for more than 183 days, consecutive or non-consecutive, in any 12-month period starting or ending in the year in question,

b) Even if remaining for less time, have therein, on any day of the period referred to in the preceding paragraph, a dwelling under conditions that suggest present intention to maintain and occupy it as habitual residence".

Article 16 also contemplates, in addition to those invoked, a plurality of situations that in the words of the arbitral decision issued in the context of proceedings no. 462/2015-T, of 05/04/2015 "raises the danger of double taxation, by virtue of the element of connection residence, given that these can result both from diverse definitions in the fiscal spaces in question as from equal definitions, provided that integrated by a plurality of criteria that are repeated in the legislation of those fiscal spaces, with the situation being framed within different criteria"

"To avoid conflicts derived from the application of tax norms in case of situations with connections to other territories, it assumes special importance the negotiation and celebration of Conventions signed between Portugal and other States to Avoid Double Taxation (CDTs)".

Descending to the concrete case, and admitting that the Claimants did not remain in the year 2015 for more than 183 days in Portuguese territory and cannot be considered as such domestic tax residents in light of the provisions of paragraph a) of no. 1 of article 16 of CIRS, the same does not appear to be verified regarding the provision of paragraph b) of the normative.

The requirement of criteria for qualification of an individual as resident, time of permanence (corpus) and dwelling (animus), of which doctrine profusely informs us, (emphasizing in particular that the legislator does not specify how the individual's intention is to be assessed), appear in the present proceedings, in our understanding, to be easily perceptible and free of any reasonable doubts.

Thus:

  • On 2015-06-26 the Claimants executed a contract of sale and purchase, and another of mortgage having as object a property, situated in..., intended, according to their declaration, for their own and permanent residence (see document 3 attached with the request for arbitral pronouncement)

  • In the contracts in question the Claimants expressly declared as their place of residence Street..., no..., place of..., ...,

  • With respect to the described property and on the same date of execution of the aforesaid deeds the Claimants requested the exemption from payment of IMI on the grounds of the provisions of article 46, no. 1 of the Tax Benefits Statute (EBF),

  • The benefit requested was deferred to the Claimants taking into account the provisions of article 46, no. 1 of the EBF.

In sum, expressly, the Claimants declared themselves as residents in Portugal.

As is emphasized in proceedings no. 332/2016-T, of 2017/01/31, paragraph b) of no. 1 of article 16 of CIRS "imposes three requirements, of whose cumulative verification depends the qualification as resident: (i) permanence in Portugal: (ii) the availability of a dwelling: and (iii) the verification of conditions that suggest that the dwelling will be maintained and occupied as habitual residence"

With no doubts being raised regarding the first two requirements, the existence of conditions that suggest that the dwelling will be maintained and occupied as habitual residence, appears, in the concrete case, not to be subject to any doubts.

For this purpose will contribute from the outset the fact that the Claimants, upon acquisition of the property in question, declared that it is intended for their own and permanent residence, a circumstance reinforced by the request for IMI exemption that they formulated (and which was granted to them) in light of the provisions of no. 1 of article 46 of the Tax Benefits Statute which determines that "are exempted from municipal tax on property, in accordance with no. 5, urban property or part thereof constructed, enlarged, improved or acquired for consideration, intended for the owner's own and permanent residence or that of their family group (....)"

In this particular segment, see the Decision of 07/72/2012 of the Central Administrative Court of the North, in the context of proceedings no. 05350/12 "(...) had, on December 31, a dwelling, with respect to which he manifested, expressly and unequivocally, intention to occupy and maintain as his own and permanent habitual residence, by means of a request for IMI exemption which he formalized with the Portuguese tax authorities on 27.11. 2007, is unassailable the conclusion that that person, in the referred year, had residence in Portugal, by meeting the requirements demanded in article 16, no. 1, paragraph b) CIRS"

Unless of a better opinion, the facts described, embodied in the declarations of the Claimants themselves, are such as to exclude any doubts as to the intention and materialization of maintaining and occupying the property in question as their own and permanent residence.

From this it follows that, in light of the provisions of paragraph b) of no. 1 of article 16 of CIRS, the Claimants were tax residents in Portugal in 2015.

*** ***

Regarding the "Convention between the Portuguese Republic and the Kingdom of Spain to Avoid Double Taxation and Prevent Tax Evasion in Matters of Income Tax" (Resolution of the Assembly of the Republic no. 6/95, approved on 29 June 1994), we cannot but endorse - by manifest factual similarity with the present case - the pertinent observation, which we endorse, evidenced in the context of the decision issued in proceedings no. 634/2017-T:

"(...) it is important, from the outset, to clarify the order of application of the various legal instruments to which the Claimant and Respondent allude in this case, in particular between CIRS and the CDT celebrated between Portugal and Spain, by undertaking an exercise of delimitation of the scope of both regimes and the relationship between them.

Given that the establishment of the (non) residence of an individual is in question, this must be, prima facie, assessed in light of the provisions of article 16 of the Personal Income Tax Code.

This means that the quality of (non) resident in Portugal of the Claimant, even in a situation such as that of the present proceedings, must be assessed solely and exclusively in light of the provisions of CIRS, with the concept of residence contained in the CDT being relevant only for the purposes of the aforesaid CDT, as will be analyzed hereinafter.

In fact, the conventional concept of residence does not carry its own autonomous value applicable independently, being rather limited, solely, to the effects necessary and derived from the application of the CDT.

It is the very wording of article 4 of the aforesaid CDT that confirms this when it establishes that the concept of residence therein established is relevant only "For the purpose of this (that) convention (...)"

This means that the concept of residence established in that CDT (in CDTs in general) holds, in the generality of cases, and certainly in the Portuguese case only for purposes of application of the CDT itself, that is for purposes of elimination of double taxation (or other aspects related to the CDT in question) without any impact on the tax status of the subject in light of domestic law.

Thus, the determination of residence or non-residence in a given country (in this case Portugal) under the criteria of the CDT does not have any effect on the qualification as (non) tax resident of the subject under domestic law. Similarly, from the fact that a person is not considered resident in Portugal under the CDT and for the purposes of the CDT (for example because the so-called tie-braker rules make residence in the other State prevail) cannot result - does not result - any legal consequence as to the tax status of the subject in Portugal.

That is, even if a given subject were to be considered non-resident in Portugal under the CDT, no conclusion could be drawn therefrom as to its tax status (of resident or non-resident) for the purposes of domestic law.

It could very well be, thus, that a person who had just been qualified as non-resident for purposes of application of the CDT would continue, for purposes of application of CIRS and other domestic legislation, to be considered tax resident in Portugal (...)".

Accompanying the position expressed in the aforesaid excerpt, and in light of what has already been expounded above, it is concluded that in 2015 the Claimants were tax residents in Portugal, in light of the provisions of paragraph b) of no. 1 of article 16 of CIRS, with no positive conflict existing regarding tax residency that would require recourse to the CDT celebrated between Portugal and Spain.

III - DEFAULT INTEREST

The Claimants formulate a request for "default interest and other charges".

The reimbursement of amounts due to them depends on the merits of the declaration of illegality of the assessment act.

Consequently, as the request is unfounded, the requests for reimbursement and interest are necessarily unfounded.

IV - DECISION

In accordance with what has been expounded, this Singular Arbitral Tribunal decides:

a. to judge as well-founded the exception of material incompetence of this tribunal to proceed with the suspension of enforcement proceedings,

b. to judge as well-founded the exception of material incompetence of this tribunal to take cognizance of any request for recognition of the status of non-residents,

c. to judge as unfounded the exceptions of lapse of the right of action,

d. to judge as unfounded the request formulated by the Claimants, absolving therefrom the Tax and Customs Authority,

e. to maintain in the legal order the tax act which is the object of the present proceedings,

f. to condemn the Claimants in the payment of court costs.

V - VALUE OF THE PROCEEDINGS

In accordance with the provisions of articles 206, nos. 1 and 3 of the Code of Civil Procedure, approved by Law no. 47/2013, of 26 June, 97-A, no. 1, paragraph a) of the Code of Tax Procedure and Process and article 3, no. 3 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at €20,333.15 (twenty thousand, three hundred and thirty-three euros and fifteen cents)

VI - COSTS

In accordance with the provisions of articles 12, no. 1, 22, ??? no. 4 of RJAT, and articles 2 and 4 of the Regulation of Costs in Arbitration Proceedings, and Table I annexed hereto, the amount of costs is fixed at €1,224.00 (one thousand two hundred and twenty-four euros)

NOTIFY

Text prepared by computer, in accordance with the provisions of article 131 of the Code of Civil Procedure, applicable by referral of article 29, no. 1, paragraph e) of the Legal Regime of Tax Arbitration, with blank lines and reviewed by the arbitrator.

[The drafting of the present decision is governed by the spelling prior to the Orthographic Agreement of 1990, except with respect to transcriptions made.]

Twelve April two thousand and nineteen.

The arbitrator,

(José Coutinho Pires)

Frequently Asked Questions

Automatically Created

What is the concept of tax residency under Article 16(1)(b) of the Portuguese IRS Code (CIRS)?
Article 16(1)(b) of CIRS establishes that individuals are considered tax resident in Portugal if they maintain a dwelling in Portuguese territory under circumstances suggesting intention to hold and occupy it as a habitual residence. This provision focuses on the availability of permanent accommodation combined with indicators of intent to use it as a principal residence, rather than merely the number of days physically present in Portugal.
How does the Portugal-Spain Double Taxation Convention resolve conflicts of tax residency between the two countries?
The Portugal-Spain Double Taxation Convention provides tie-breaker rules when a taxpayer qualifies as resident in both countries. The Convention typically applies criteria including: permanent home availability, center of vital interests (personal and economic relations), habitual abode, and nationality. Where one country has a permanent dwelling and the other does not, residency is attributed to the country with the permanent home. These Convention provisions override domestic tax residency rules to prevent double taxation.
Can Portuguese tax authorities (AT) levy IRS on income earned in Spain by taxpayers who purchased property in Portugal?
Portuguese tax authorities can levy IRS on worldwide income of taxpayers deemed Portuguese tax residents under Article 16 CIRS, even if income is earned in Spain. However, this is subject to the Portugal-Spain Double Taxation Convention, which allocates taxing rights and provides relief mechanisms. The key issue is establishing tax residency status first. If taxpayers are Spanish residents under the Convention's tie-breaker rules, Portugal generally cannot tax Spanish-source income, though specific income categories have particular rules regarding source taxation.
What was the outcome of CAAD arbitration process 592/2018-T regarding the IRS assessment of €20,333.15?
The complete outcome of process 592/2018-T is not provided in the excerpt, which ends before the tribunal's final decision. The document shows the procedural history through March 2019, including AT's response raising four exceptions (incompetence for enforcement suspension, incompetence regarding non-habitual resident status review, and two grounds of lapse of action), and merit-based defenses arguing the claimants were Portuguese tax residents based on property acquisition declarations and taxpayer registration from June 2015.
What criteria determine habitual residence for IRS purposes when a taxpayer owns property in Portugal but lives and works in Spain?
Habitual residence for IRS purposes requires examining multiple factors beyond property ownership: physical presence days in each country, location of employment and professional activity, center of family and social ties, location of economic interests, declarations made to authorities regarding residence intention (such as IMI exemption applications), and taxpayer registration status. Owning property in Portugal while working in Spain does not automatically establish Portuguese tax residency; rather, authorities analyze whether the dwelling is maintained under circumstances indicating intention to occupy it as a habitual (not occasional or holiday) residence, considering the totality of the taxpayer's personal and economic connections.