Process: 594/2018-T

Date: September 30, 2019

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration decision (Process 594/2018-T, decided September 30, 2019) addresses whether Portugal's differential treatment of non-residents in capital gains taxation violates EU law principles of free movement of capital. The claimant, a non-resident taxpayer, challenged an IRS assessment of €12,617.32, arguing that Article 43(2) of the Portuguese Personal Income Tax Code (CIRS) discriminates against non-residents by denying them the 50% capital gains reduction available to residents on property sales. The claimant relied on the CJEU's Hollmann case (C-443/06) and Portuguese Supreme Administrative Court precedents establishing such discrimination violates Article 63 TFEU. The Tax Authority defended by arguing that subsequent legislative amendments (Law 67-A/2007) to Article 72 CIRS remedied the discriminatory framework by allowing non-residents to opt for income aggregation and thereby access the 50% reduction. The Authority requested suspension and preliminary reference to the CJEU, contending the amended legislative framework had not been assessed by European courts. The case highlights the ongoing tension between Portugal's territorial tax system and EU free movement principles, particularly regarding capital gains taxation of non-residents. The arbitrator must determine whether the 2007 legislative amendments genuinely eliminated discrimination or whether non-residents continue to face unjustified restrictions on capital movement, potentially warranting tax refunds plus compensatory interest for affected taxpayers.

Full Decision

ARBITRAL TAX JURISPRUDENCE

Case No. 594/2018-T

Date of Decision: 2019-09-30

Personal Income Tax (IRS)

Value of Claim: € 12,617.32

Subject Matter: IRS – Non-resident Capital Gains; No. 2 of Article 43 of the Personal Income Tax Code (CIRS); Non-discrimination; Free Movement of Capital; TFEU.

ARBITRAL DECISION

The Arbitrator Dr. Henrique Nogueira Nunes designated by the Ethics Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 6 February 2019, hereby decides as follows:

I – REPORT

1.1 A..., with tax identification number ..., hereinafter referred to as the "Claimant," requested the constitution of the Arbitral Tribunal pursuant to Articles 2, No. 1, paragraph a) and 10 of Decree-Law No. 10/2011, of 20 January (hereinafter "RJAT").

1.2 The request for arbitral pronouncement, as initially configured, has as its object the partial annulment of the Personal Income Tax assessment No. 2018..., in the amount of € 12,617.32, further requesting the restitution of the tax unduly paid, plus compensatory interest.

1.3 To support its request, the Claimant alleges, in summary, the following defects:

(i) It cannot conform to this assessment, because the same, as will be seen, represents discriminatory tax treatment, clearly violating rules of European Union Law ("EU") to which Portugal, as a Member State, is bound.

(ii) And that the different treatment between residents – for whom gains resulting from the alienation of property contribute to the taxable income of the taxpayer at only 50% of their respective value – and non-residents – whose taxable base in this type of case is 100% of the gain – constitutes, in its view, a situation of inadmissible discrimination in light of EU Law.

(iii) And that, in the present case, we are faced with an evident situation of discrimination embodying a clear restriction on the exercise of the freedom of movement of capital provided for in Article 63 of the TFEU without any justification accepted by the CJEU.

(iv) And that the Court of Administrative Supremacy (STA) itself, relying on the understanding in the Hollmann case, has already held that "No. 2 of Article 43 of the CIRS, limiting to residents in national territory, for purposes of determining the taxable base for IRS, the 50% reduction of the balance calculated between capital gains and losses realized in each year is incompatible with the aforesaid Article 56 [current 63 TFEU]" (see judgment rendered in case No. 01172/14 of 03.02.2016, attached to the present Challenge as document No. 8 and, in the same sense, the judgment rendered in case No. 0439/06, of 16.01.2008).

(v) Therefore, it argues that given such a manifest restriction of the freedom of movement of capital set forth in Article 43, No. 2 of the CIRS, it is elementary inference that the impugned assessment constitutes a violation of EU law and must necessarily be corrected.

(vi) For all the foregoing, it seeks the partial annulment of the tax act at issue in these proceedings with all legal consequences, as well as petitions for the payment of compensatory interest.

1.4 The Tax and Customs Authority, hereinafter referred to as the "Respondent" or "TA," responded, in summary, as follows:

(i) It comes to defend itself by impugning.

(ii) That No. 8 (current No. 10) of Article 72 of the CIRS, added by Law No. 67-A/2007, of 31/12, prescribed, at the date of the facts, that:

"10 - For purposes of determining the rate referred to in the preceding number, all income is taken into consideration, including that obtained outside this territory, under the same conditions as are applicable to residents." (emphasis ours)

(iii) And that by virtue of the amendment introduced by the State Budget for 2008, income declarations for the fiscal years 2008 (in force from January 2009) and thereafter, more specifically the Form 3, have a field for exercising the option for the rate of Article 68 of the Personal Income Tax Code.

(iv) And that the Claimant did not exercise this option, although it could have done so.

(v) It seeks referral to the CJEU, alleging that the legal framework (as well as the declaratory obligation) is no longer that which existed at the date of the Judgment of the Court of Justice of the European Communities C-443/06, of 11 October 2007, taking into account that the amendment to the law was made by virtue of the addition of Nos. 7 and 8 (current 9 and 10) to Article 72 of the Personal Income Tax Code by Law No. 67-A/2007, of 31/12.

(vi) It argues that following the decision rendered in Judgment C-443/06 of the Court of Justice of the European Communities of 11 October 2007 (Hollmann), the national legislator adapted national legislation to the decision endorsed there, adding to Article 72 of the Personal Income Tax Code.

(vii) And that the decision rendered in Judgment Hollmann refers to situations occurring during the validity of the wording prior to Law No. 67-A/2007, of 31/12, of Article 72 of the Personal Income Tax Code.

(viii) It alleges that the legislative amendment introduced to Article 72 of the Personal Income Tax Code by Law No. 67-A/2007, of 31/12, has not yet been subject to appreciation by the CJEU, in the context of a preliminary ruling, for purposes of assessing compliance with the combined provisions of Articles 18, 63, 64, and 65 TFEU.

(ix) For which reason, the amendment introduced to Article 72 of the Personal Income Tax Code by Law No. 67-A/2007, of 31/12, remedied the defect from which national legislation suffered, according to the terms judged by the aforesaid Judgment, as per Article 61 of the ruling, namely:

"61 - In light of the considerations set forth, it is important to respond to the question raised that Article 56 EC must be interpreted to mean that it precludes national legislation, such as that at issue in the dispute in the main proceedings, which subjects capital gains resulting from the alienation of real property situated in a Member State, in the present case Portugal, when such alienation is effected by a resident of another Member State, to a tax burden higher than that which would apply, in relation to this same type of operation, to capital gains realized by a resident of the State where that real property is situated"

(x) In sum, it considers that the amendment made by the introduction of current Nos. 9 and 10 of Article 72 of the Personal Income Tax Code has made it possible for both residents and non-residents to benefit from the regime provided for in Article 43, No. 2 (consideration of the balance of capital gains at only 50% of its value), of the same Code, provided they opt for the aggregation of income obtained both in Portugal and outside this territory.

(xi) Not finding by the Arbitral Tribunal for the lack of merit of the claim, it seeks the suspension of the arbitral proceedings and the submission of the matter to the Court of Justice, pursuant to the institution of preliminary ruling (Article 267 TFEU), to which the Portuguese State is bound pursuant to the TFEU.

1.5 On 22-03-2019 the Claimant responded to the request for referral formulated by the Respondent in its Answer, opposing it on substantive grounds. On the same date, by arbitral order, the Respondent was notified to respond, if it wished, which it did on 05-04-2019, strengthening its request for referral with the presentation of concrete questions to be submitted in the context of the referral. By arbitral order dated 27-06-2019 the Claimant was notified to pronounce itself on the content of the concrete questions suggested by the Respondent, which it did on 09-07-2019.

1.6 The Tribunal decided to dispense with the holding of the first meeting of the Arbitral Tribunal pursuant to the arbitral order notified to the parties in accordance with Article 18 of the RJAT. By Arbitral Order dated 11-07-2019, both parties were equally notified to submit Submissions, if they wished, and both chose to do so, reinforcing their positions. In light of the judicial recess, the legal deadline for rendering the arbitral decision was extended by two months.

1.7 The Tribunal was regularly constituted and is competent ratione materiae, in accordance with Article 2 of the RJAT.

The parties have legal personality and capacity, show themselves to be legitimate and are regularly represented (cf. Articles 4 and 10, No. 2 of the RJAT and Article 1 of Ordinance No. 112-A/2011, of 22 March).

No nullities in the proceedings were identified.

2. MATTERS TO BE DECIDED

  1. Request for preliminary ruling submitted by the Respondent.

  2. Request for suspension of proceedings formulated by the Respondent already in the context of Submissions invoking the request for referral made in arbitral case No. 598/2018-T.

  3. The regime provided for in No. 2 of Article 43 of the Personal Income Tax Code with the wording at the date of the facts at issue in these proceedings, in providing that non-resident taxpayers in Portugal are taxed on the entirety of real property capital gains realized in Portugal unlike the regime provided for resident taxpayers who are taxed at 50%, is violative of European Union Law and as such illegal.

3. FACTS ESTABLISHED

With relevance to the assessment and decision on the merits, the following facts are established:

a) In the fiscal year 2017, the Claimant resided and conducted his professional activity in Slovakia, as evidenced by the lease contract for real property in Bratislava, as well as the employment contract, attached to the proceedings (cfr. Document No. 1 and Document No. 2 attached by the Claimant).

b) In the course of fiscal year 2017, specifically on 02.03.2017, the Claimant alienated for the sum of € 192,000.00 real property situated in Portuguese territory of which he was the owner (cfr. public deed of sale attached to the proceedings by the Claimant as Document No. 3).

c) The Claimant acquired the aforesaid real property for the price of € 100,000.00 (cfr. Document No. 4 attached to the proceedings by the Claimant where the acquisition value appears).

d) The Claimant declared to the Portuguese State, on 02.05.2018, the gain obtained from the aforesaid alienation, through the submission of the Personal Income Tax declaration model No. 3 (cfr. document No. 4 attached to the proceedings by the Claimant).

e) The Claimant was notified of Personal Income Tax assessment No. 2018..., from which resulted a payment amount of € 25,234.74 (cfr. document No. 5 attached to the proceedings by the Claimant).

f) The Claimant made the payment of the tax assessment at issue on 28.08.2018, as evidenced by the respective payment proof attached to the proceedings by the Claimant (cfr. Document No. 6).

g) The Claimant selected in field B of Table 8 of the declaration model No. 3, the option "non-resident," in accordance with his cadastral registration and, as well as with his personal situation, because in the fiscal year 2017 he resided outside Portugal (cfr. Document No. 4 attached to the proceedings by the Claimant).

h) On 28 November 2018, the Claimant filed a request for constitution of the Arbitral Tribunal with CAAD – cf. electronic request in the CAAD system.

4. FACTS NOT ESTABLISHED

There are no other facts with relevance to the decision on the merits of these proceedings that have not been established.

5. REASONING OF THE DECISION ON FACTS

As to the essential facts, the established matter is conformed identically by both parties and the conviction of the Tribunal was formed on the basis of the documentary (official) elements attached to the proceedings and identified above whose authenticity and veracity was not questioned by either party.

It should be noted that the Tribunal has no duty to rule on all alleged matters, but rather the duty to select only that which is relevant to the decision, taking into account the cause (or causes) of action that grounds the claim formulated by the Claimant as plaintiff (cfr. Articles 596, No. 1 and 607, Nos. 2 to 4, of the Civil Procedure Code, as amended by Law 41/2013, of 26/6) and to record whether it considers it established or not established (cfr. Article 123, No. 2, of the Tax Procedure Code).

According to the principle of free evaluation of evidence, the Tribunal bases its decision, in relation to the evidence produced, on its intimate conviction, formed from the examination and evaluation it makes of the means of proof brought to the proceedings and in accordance with its experience of life and knowledge of persons (cfr. Article 607, No. 5, of the Civil Procedure Code, as amended by Law No. 41/2013, of 26/6). Only when the probative force of certain means is pre-established in Law (e.g., full probative force of authentic documents - cfr. Article 371 of the Civil Code) does the principle of free evaluation of evidence not dominate in the assessment of the evidence produced.

6. ON THE LAW

As the Respondent correctly states, the matter at issue in these proceedings is essentially one of law, with no controversial factual matter.

The substantive question to be assessed consists of determining whether the norm established by national legislation in Article 43 of the CIRS consecrates a differentiation between residents and non-residents, and in particular, whether the tax base for Personal Income Tax of capital gains derived from the onerous alienation of real rights over real property is (in)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, because it results in a less favorable tax regime for non-residents.

i. Beginning with the analysis of the first question submitted to the Tribunal's assessment.

The institution of the preliminary ruling, provided for in Article 267 TFEU, may 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 aforesaid Article 267, whenever a question concerning the interpretation of the Treaties or concerning the validity and interpretation of acts adopted by the institutions, bodies or agencies of the Union is raised before any court or tribunal of a Member State, that court or tribunal may, if it considers that a decision on that question is necessary for it to give judgment, request the Court to give a ruling thereon.

That is, national courts – which include this Tribunal – must proceed to refer preliminary questions, as provided for in Article 267 TFEU - as a consequence of questions or doubts concerning the validity or interpretation of norms of European Union law.

This means that, if no doubts whatsoever arise as to the norms in question or if the same have already been clarified by the CJEU – considering, in particular, the so-called "acte clair" doctrine (cfr. judgment of the CJEU CILFIT, of 6 October 1982, case C-283/81) – national courts should not proceed with preliminary referral.

Thus, if there already exists (i) case law on the subject matter (and when the possibly new framework does not raise any real doubt as to the possibility of applying that case law to the concrete case); or (ii) when the correct way to interpret the legal rule in question is unequivocal, a national court may and should decide.

As was well decided in the judgment rendered in case No. 600/2018-T, where an identical question was submitted to the assessment of that Tribunal:

"(...) However, when community law is clear and when there is already a precedent in European case law, the interpretation of European Union Law already results from the case law of the CJEU, it is not necessary to proceed with such consultation, as the CJEU concluded in the Judgment of 06-10-1982, Case Cilfit, Proc. 283/81. Even when the questions at issue are not strictly identical (doctrine of the acte clair) and when the correct application of European Union Law is so obvious that it leaves no room for any reasonable doubt as to how to resolve the issue of EU law raised (doctrine of the acte clair) (idem, No. 14).

In the case at hand, it is concluded with certainty from the reiterated case law of the CJEU that the illegality of the application of the discriminatory regime is not remedied by the possibility of its avoidance, which eliminates the need for preliminary referral.

Moreover, the Court of Administrative Supremacy, in its recent judgment of 20-02-2019, case No. 0901/11.0BEALM 0692/17, without raising the need for referral, concluded as to the illegality of the regime that results from the combination of Article 43, No. 2, with Article 72 of the CIRS, with respect to a situation in which the capital gains were realized in 2010, therefore already in force under Law No. 67-A/2007."

In the case sub judice, it is considered unnecessary to proceed with referral to the CJEU of supposed doubts concerning the interpretation of norms of European Union Law which in the judgment of this Tribunal do not exist.

ii. As to the request for suspension of proceedings formulated by the Respondent already in the context of Submissions invoking the request for referral made in arbitral case No. 598/2018-T, this Tribunal considers it should deny the same because, determining no referral for the reasons better substantiated in the preceding point, it does not see how this Tribunal could decide the suspension of proceedings which, in the present case, would have no utility whatsoever.

Additionally, it should be noted that the preliminary ruling determined by another Arbitral Tribunal does not bind this Arbitral Tribunal to determine the suspension of proceedings since that is a discretionary power of the adjudicator.

iii. Entering now into the substantive question, namely whether the regime provided for in No. 2 of Article 43 of the Personal Income Tax Code with the wording at the date of the facts at issue in these proceedings, in providing that non-resident taxpayers in Portugal are taxed on the entirety of real property capital gains realized in Portugal unlike the regime provided for resident taxpayers who are taxed at 50%, is violative of European Union Law and as such illegal.

In other words, whether the differentiation provided for by the national legislator is or is not in conformity with community law, particularly 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).

The legal question posed here has been subject to decision by the Arbitral Tribunals functioning at CAAD, and even to case law emanating from the Court of Administrative Supremacy, with uniform case law going in the direction of considering the taxation of capital gains obtained by non-residents illegal for incompatibility of No. 2 of Article 43 of the CIRS with Article 63 TFEU, given that it restricts taxation of 50% of capital gains to residents in fiscal Portugal (in this sense - Cases Nos. 600/2018-T; 613/2018-T; 627/2018-T, 55/2019-T; 63/2019-T and 67/2019-T. and Judgment of the STA rendered in case No. 0901/11.0BEALM) a framework which, it should be said from the outset, this Tribunal follows.

Article 63 of the Treaty on the Functioning of the European Union provides as follows:

Article 63
(ex-Article 56 TEC)

  1. Within the scope of the provisions of this Chapter, all restrictions on the movement of capital between Member States and between Member States and third countries are prohibited.

  2. Within the scope of the provisions of this Chapter, all restrictions on payments between Member States and between Member States and third countries are prohibited.

The CJEU considered incompatible with European Union Law, because it constitutes different treatment incompatible with the free movement of capital guaranteed by Article 63 of the Treaty on the Functioning of the European Union (former Article 56), the regime of Article 72, No. 1, of the CIRS, in the wording prior to Law No. 67-A/2007, of 31 December, in case C-443/06, judgment of 11-10-2007, Hollmann vs Public Treasury, for taxing the capital gains of non-resident taxpayers at a fixed rate (in 2017, of 28%), while residents are subject to progressive tax on income.

In that judgment it was understood that it is incompatible with the norm that assures that freedom of movement of capital ( ) a regime that "subjects capital gains resulting from the alienation of real property situated in a Member State, in the present case Portugal, when such alienation is effected by a resident of another Member State, to a tax burden higher than that which would apply, in relation to this same type of operation, to capital gains realized by a resident of the State where such real property is situated."

This case law was reaffirmed in the Order of the CJEU (Seventh Chamber) of 06-09-2018, case C 184/18, in which it was understood that "legislation of a Member State, such as that at issue in the main proceedings, which subjects capital gains resulting from the alienation of real property situated in that Member State, effected by a resident in a third country, to a tax burden higher than that which would apply, in that same type of operations, to capital gains realized by a resident in that Member State constitutes a restriction on the free movement of capital which, subject to verification by the referring court, is not covered by the exception provided for in Article 64, No. 1, TFEU and cannot be justified by the reasons mentioned in Article 65, No. 1, Treaty on the Functioning of the European Union."

However, this latter decision was also rendered on the assumption of the wording of Article 72 introduced by Law No. 109 B/2001, of 27 December, prior to Law No. 67-A/2007.

The Respondent observes that following the pronouncement of Judgment Hollmann, an option for equalization was introduced in the Portuguese tax system with which it was intended to remove the judgment of discrimination from the CJEU on the restrictive provision of No. 2 of Article 43 of the Personal Income Tax Code applicable to resident taxpayers.

Thus, Law No. 67-A/2007, of 31 December (State Budget Law for 2008), introduced Nos. 7 and 8 of Article 72 of the Personal Income Tax Code establishing an optional regime of equalization of non-residents (these being required to be residents of another Member State of the European Union or the European Economic Area) to residents.

Subsequently, in light of the remuneration effected by Law No. 66-B/2012, of 31 December, these provisions became Nos. 9 and 10, providing at the date, year 2017, as follows:

"9 - Residents of another Member State of the European Union or the European Economic Area, provided that, in the latter case, there is an exchange of information on tax matters, may opt, with respect to income referred to in paragraphs a) and b) of No. 1 and in No. 2, for the taxation of such income at the rate which, in accordance with the table provided for in No. 1 of Article 68, would be applicable in the event they were derived by residents in Portuguese territory.

10 - For purposes of determining the rate referred to in the preceding number, all income is taken into consideration, including that obtained outside this territory, under the same conditions as are applicable to residents."

However, in the understanding of this Tribunal, these amendments to the law do not eliminate the invalidity of the discriminatory regime still in force and that was applied to the Personal Income Tax assessment at issue.

In fact, currently, in the matter of taxation of income resulting from capital gains arising from the alienation of real rights over real property situated in Portugal, by non-residents in this territory, but residents of another Member State of the European Union or European Economic Area, it results from the provisions of Nos. 1 and 8 of Article 72 of the Personal Income Tax Code that there coexist two tax regimes:

i. The regime that subjects income to a special rate of 28% and

ii. The regime equated to that in force for taxpayers resident in Portuguese territory, according to which such income is subject to the rate that, in accordance with the table provided for in No. 1 of Article 68, would be applicable in the event they were derived by residents in Portuguese territory, taking into account, in this regime, all income, including that derived outside Portugal, maintaining in force the provision contained in No. 2 of the cited Article 43 of the Personal Income Tax Code.

However, the provision of this optional regime imposes an additional burden on non-residents, as compared to residents, and the option for equalization is not capable of excluding the discrimination at issue, in the understanding of this Tribunal.

In this sense, the CJEU considered, in the Gielen Judgment, of 18/03/2010 (Case C-440/08), in a case of evident parallelism (although in that judgment the violation of Article 49 was at issue), the following:

a. "the option for equalization allows a non-resident taxpayer, (...) to choose between a discriminatory tax regime and another supposedly non-discriminatory regime," stressing that such choice is not capable of excluding the discriminatory effects of the first of these two tax regimes."

b. "the recognition of such an effect on such choice would have the consequence (...) of validating a tax regime that would continue, in itself, to violate Article 49 TFEU because of its discriminatory character."

c. The Treaty "is opposed to national regulation that discriminates against non-resident taxpayers in the granting of a tax benefit (...) even if such taxpayers may opt, as regards such benefit, for the regime applicable to resident taxpayers."

Thus, what is essentially relevant for this purpose is to determine whether or not there is negative discrimination in the application to the Claimant of the regime that was applied to him.

The regime provided for by default (in the absence of an option) in No. 1 of Article 72 is more burdensome for non-residents than for residents, because while the maximum rate applicable to capital gains realized by residents is 24% of its value (maximum rate of 48% provided for in Article 68, applicable to 50% of the balance of capital gains), the rate provided for in No. 1 of Article 72 of the CIRS is 28%, applicable to the entire balance.

In fact, to the Claimant's taxable matter in the amount of € 90,124.07 corresponded Personal Income Tax to be paid in the amount of € 25,234.74 at the 28% rate applicable to non-residents, whereas even applying the maximum rate of 48% (and the average rate is necessarily lower since each bracket corresponds to its respective rate) to half of that taxable matter the tax to be paid by the Claimant would be € 21,629.78 (45,062.04 x 48%) even considering the theoretical exercise of applying the maximum marginal rate of Personal Income Tax which would not even be applicable tout court to the value of global income at issue in these proceedings.

On the other hand, even considering the solidarity additional rate provided for in Article 68-A, No. 1, of the CIRS of 2.5% applicable to the portion exceeding 80,000 [(90,124.07 - 80,000) x 2.5% = 253.10] and the now-extinct extraordinary surtax of 3.21%, provided for in Article 194, No. 3, of Law No. 42/2016, of 28 December, applicable to the portion exceeding the annual value of guaranteed minimum compensation of 7,798.00 [(90,124.07 – 7,798) x 3.21% = 2,642.66), it is concluded that applying the regime of residents the Claimant would pay Personal Income Tax, in the theoretical exercise we are conducting, the amount of € 24,525.54, less, therefore, than the amount of € 25,234.74 that was assessed against him.

Consequently, the existence of this regime, even if optional, in addition to creating an additional burden on non-resident taxpayers as compared to residents - which consists in the need to exercise such option - does not eliminate the invalidity of the discriminatory regime still in force and that was applied to the Personal Income Tax assessment now impugned.

Thus, it is certain to conclude that the regime of taxation at a liberatory rate provided for in Article 72 of the CIRS, in the wording in force in 2017, is incompatible with the aforesaid Article 63 of the Treaty on the Functioning of the European Union, because it constitutes a restriction on the movement of capital prohibited by the Treaty.

It was this negatively discriminatory regime for non-residents that was applied in the impugned assessment.

Which, and correctly so, was confirmed by the Court of Administrative Supremacy, as has already been identified in the present judgment, in the judgment dated 20-02-2019, rendered in case No. 0901/11.0BEALM 0692/17, in which it was concluded as to the illegality of the regime that results from the combination of Article 43, No. 2, with Article 72 of the CIRS, with respect to a situation in which the capital gains were realized in 2010, therefore already in full force under Law No. 67-A/2007.

For the foregoing, it is to be concluded that the taxation in the terms in which it was effected in the impugned assessment is illegal, which justifies its partial annulment, in accordance with the provisions of Article 163, No. 1, of the Administrative Procedure Code, subsidiarily applicable in accordance with Article 2, paragraph c), of the General Tax Law.

The Claimant also formulates a request for restitution of the amount in excess assessed by the Tax and Customs Authority, as well as the payment of compensatory interest.

Pursuant to No. 1 of Article 43 of the General Tax Law, compensatory interest is owed when it is determined, in friendly protest or judicial challenge, that there was error attributable to the services resulting in payment of the tax debt in an amount higher than legally due.

Since the present arbitral request is to be judged meritorious, it is concluded that there exists unduly paid amount and, consequently, the restitution of the amount paid in excess by the Claimant in these proceedings is justified and the payment of compensatory interest, in accordance with the provisions of No. 1 of Article 43 of the General Tax Law.

In light of the foregoing, pursuant to the provisions of Article 43 of the General Tax Law and Article 61 of the Tax Procedure and Process Code (CPPT), the Claimant is entitled to compensatory interest, such interest to be calculated from the date of payment of the unduly paid tax until the date of issuance of the respective credit note, the term for payment of which is counted from the date of the beginning of the term for voluntary execution of the present decision (Nos. 4 and 5 of Article 61 of the CPPT), at the rate referred to in No. 4 of Article 43 of the General Tax Law.

7. DECISION

In light of the foregoing, this Singular Arbitral Tribunal hereby decides:

  • To judge as meritorious the request for arbitral pronouncement of declaration of partial illegality of the Personal Income Tax assessment No. 2018..., in the amount of € 25,234.74, and to condemn the TA to refund to the Claimant the amount of tax paid in excess, in the amount of € 12,617.32, plus compensatory interest.

The value of the case is fixed at Euro 12,617.32, in accordance with the provisions of Articles 3, No. 2 of the Regulation of Costs in Arbitration Proceedings of the CAAD (RCPAT), 97-A, No. 1, paragraph a) of the CPPT and 306 of the Code of Civil Procedure.

The Respondent is condemned in costs in the amount of Euro 918.00 pursuant to Article 22, No. 4 of the RJAT and Table I attached to the RCPAT, in accordance with the provisions of Articles 12, No. 2 of the RJAT and 4, No. 4 of the RCPAT.

Notify accordingly.

Lisbon, 30 September 2019.

The Arbitrator,

(Henrique Nogueira Nunes)

Text prepared by computer, in accordance with Article 131, No. 5 of the Code of Civil Procedure, applicable by reference from Article 29, No. 1, paragraph e) of the RJAT.

The wording of the present arbitral decision is governed by the spelling prior to the Orthographic Agreement of 1990.

Frequently Asked Questions

Automatically Created

How are capital gains from property sales taxed differently for non-residents versus residents under Article 43(2) of the Portuguese IRS Code (CIRS)?
Under Article 43(2) CIRS, resident taxpayers benefit from a 50% reduction when calculating taxable capital gains from property sales—only half the gain is taxed. Non-residents, however, are taxed on 100% of their capital gains without this reduction, creating a significantly higher tax burden for the same transaction. This differential treatment applies to the taxable base determination, meaning non-residents face double the taxable amount compared to residents for identical property sale gains.
Does the 50% capital gains reduction exclusion for non-residents in Portugal violate the free movement of capital under Article 63 TFUE?
Yes, according to the claimant's arguments supported by CJEU precedent and Portuguese Supreme Administrative Court rulings, the exclusion of non-residents from the 50% capital gains reduction constitutes discrimination that restricts free movement of capital under Article 63 TFUE. The differential treatment lacks justification accepted by EU courts and creates a higher tax burden solely based on residence status, discouraging cross-border investment in Portuguese property. However, the Tax Authority contends that 2007 legislative amendments allowing non-residents to opt for income aggregation remedied this violation.
What did the CJEU rule in the Hollmann case regarding discriminatory taxation of non-resident capital gains in Portugal?
In the Hollmann case (CJEU Judgment C-443/06, October 11, 2007), the Court ruled that Article 56 EC (now Article 63 TFEU) precludes national legislation that subjects capital gains from property sales by non-residents to a higher tax burden than that applicable to residents for the same operations. The Court found Portugal's pre-2007 framework violated EU law by denying non-residents benefits available to residents without justification, establishing that such discriminatory treatment restricts free movement of capital.
Can non-residents challenge IRS capital gains tax assessments through CAAD tax arbitration proceedings in Portugal?
Yes, non-residents can challenge IRS capital gains assessments through the Administrative Arbitration Center (CAAD), as demonstrated in this case. The claimant filed under Articles 2(1)(a) and 10 of Decree-Law 10/2011 (RJAT), seeking partial annulment of the assessment. CAAD provides an alternative dispute resolution mechanism for tax matters, allowing non-residents to contest assessments they consider discriminatory under EU law, seek refunds of taxes unduly paid, and claim compensatory interest.
Are non-resident taxpayers entitled to a refund and compensatory interest when IRS capital gains tax is found discriminatory under EU law?
Yes, when IRS capital gains taxation is determined to violate EU non-discrimination principles, non-resident taxpayers are entitled to refunds of taxes unduly paid plus compensatory interest. The claimant specifically requested restitution of the challenged €12,617.32 assessment with compensatory interest. Portuguese law recognizes the right to compensation when tax authorities collect amounts contrary to EU law, ensuring taxpayers are made whole for both the principal amount and the time value of money improperly retained by the state.