CAAD 595/2018-T: IRS Category F Property Income for Non-Residents - Loss Carryforward and AIMI Tax Credit Deduction

ARBITRAL DECISION

I. Report

1. A..., with tax identification number ..., tax resident in ..., with residence in..., Florida ..., represented by Ms. Dr. B..., with Tax Identification Number..., with professional domicile at..., Rua ..., no. ... - ...-... ..., in the capacity of Tax Representative, (hereinafter "Claimant"), having been notified of the 2017 Personal Income Tax (IRS) assessment (Doc. 1), hereby, pursuant to the provisions of article 10 of Decree-Law no. 10/2011, of 20/01 (Legal Framework for Arbitration in Tax Matters, hereinafter referred to as "RJAT") and of articles 1 and 2 of Ordinance no. 112-A/2011, of 22/03, requests the constitution of an Arbitral Tribunal, in which the Tax and Customs Authority (AT) appears as the Respondent.

2. The request for arbitral decision, submitted on 28-11-2018, seeks the declaration of illegality and consequent annulment of the IRS assessment relating to real estate income earned in 2017, on the grounds that losses to be carried forward from previous years were not taken into account, as well as on the grounds that the portion of the Additional Municipal Property Tax (AIMI) relating to the properties to which the declared income pertains was not deducted from the collection of said tax.

3. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority (AT).

4. The Claimant did not proceed to the appointment of an arbitrator.

5. Pursuant to the provisions of paragraph a) of item 2 of article 6 and of paragraph b) of item 1 of article 11 of Decree-Law no. 10/2011, of 20/01, in the wording introduced by article 228 of Law no. 66-B/2012, of 31/12, the Deontological Council appointed the undersigned as arbitrator of the singular arbitral tribunal, who communicated acceptance of the assignment within the applicable deadline, having duly notified the parties.

6. Duly notified of this appointment, the parties did not manifest any intention to refuse the appointment of the arbitrator, pursuant to the combined provisions of article 11, item 1, paragraphs a) and b) of the RJAT and of articles 6 and 7 of the Deontological Code.

7. In accordance with the provision of paragraph c) of item 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31/12, the collective arbitral tribunal was constituted on 11-02-2019.

8. In response to what was requested, the Tax and Customs Authority (AT) expressed itself in the sense of the non-merits of the present request for arbitral decision, expressing the understanding that the impugned act should be maintained in the legal order and, in accordance therewith, that the tribunal should pronounce itself on the acquittal of the respondent entity.

9. In view of the knowledge arising from the procedural documents submitted by the parties, which is deemed sufficient for the decision, the tribunal decided to dispense with the meeting referred to in article 18 of the RJAT.

10. Thus, by order of 30-03-2019, subject to timely notification, it was decided, absent objection by the parties, to dispense with the aforementioned meeting, granting a 20-day deadline for submission of written arguments and setting 20-05-2019 as the deadline for issuance and notification of the final decision.

11. Only the Respondent submitted written arguments, reaffirming the position previously expressed in the Reply duly submitted.

II. Preliminary Examination

1. The Arbitral Tribunal is regularly constituted and is materially competent, pursuant to the provisions of paragraph a) of item 1 of article 2 of Decree-Law no. 10/2011, of 20/01.

2. The parties enjoy legal personality and legal capacity, are legitimate and are legally represented (see art. 4 and item 2 of art. 10 of Decree-Law no. 10/2011 and art. 1 of Ordinance no. 112/2011, of 22/03).

3. The proceedings are not affected by defects that would invalidate them, and no issues have been raised that preclude examination of the merits of the case.

III. Factual Matters

1. Based on the documentary evidence included in the present proceedings, in particular copies of gracious complaints and hierarchical appeals submitted by the Claimant, as well as arbitral decisions identified in the initial petition relating to the matter addressed in the present proceedings, although relating to earlier taxation periods, the following factual elements are highlighted which, not being contested by the parties, are considered fully proven:

15.1. In the year 2010, the now Claimant had her tax domicile in Portuguese territory.

15.2. In that year she earned real estate income, declared for IRS purposes, and in the respective assessment, losses to be carried forward to the following taxation periods were determined in the amount of € 61,002.63, relating to expenses incurred in obtaining said income.

15.3. In 2011, she declared the change of her tax domicile to the United States of America, a situation that was maintained in the year 2017, to which the subject matter of the present proceedings pertains. According to what appears in the passport issued by the North American authorities, the Claimant has the United States of America as her nationality (Doc. 2).

15.4. During the years 2011 to 2017, the Claimant earned real estate income, taxable in Portugal, which, in the capacity of non-resident, she declared for IRS purposes.

15.5. In the assessments made with reference to the aforementioned years, losses to be carried forward from previous years were not taken into account.

15.6. Regarding the assessments relating to the years 2011 and 2013, 2015 and 2016, the now Claimant lodged administrative impugnations on which express denial was made, and which were accordingly subject to requests for arbitral decision.

15.7. These requests gave rise to proceedings nos. 96/2015-T, 399/2017-T and 206/2018-T, relating to assessments of 2011 and 2013, 2015 and 2016, respectively, and in all cases, the illegality of the IRS assessments was declared due to the non-consideration of expenses carried forward from previous years, with the consequent annulment being determined, with the corresponding reimbursement of amounts wrongfully collected, plus corresponding indemnification interest.

15.8. Regarding the year 2017, the Claimant submitted Model Form 3, of IRS, comprising Annex F, in which, indicating her status as non-resident, she declares having earned in the said year the following income and expenses inherent to its production:

Total income ................................................................ € 55,121.46

Withholding at source ................................................................. € 1,466.22

Expenses incurred and paid .................................................€ 12,403.38

15.9. It is further mentioned in the said declaration, as a value to be deducted from the IRS collection, the amount of € 3,367.90, of AIMI, calculated in proportion to the tax value of the property generating the declared income.

15.10. On 09-07-2018, based on the submitted declaration, assessment no. 2018... was made, considering the following amounts (Doc. 1):

Total income ................................................................... € 55,121.46

Specific deductions ................................................................ € 12,403.38

Taxable income .............................................................. € 42,718.08

Total tax collected .............................................................................. € 11,961.06

Withholding at source ......................................................................€ 1,466.22

Tax determined ........................................................................€ 10,496.04

15.11. In the aforementioned assessment, no values of losses to be carried forward from previous years were taken into account, nor was the AIMI deduction indicated in the income declaration considered.

15.16. In the assessment notice, 31-08-2018 is recorded as the payment deadline, with payment made on the 28th of that month (Docs. 1 and 14).

1. The proven facts are based on the documents submitted to the proceedings and referenced above, with no facts relevant to the decision that should be considered as unproven.

IV. Legal Matters

1. In essence, there are two questions requiring examination and decision by this arbitral tribunal, the first being whether it is admissible to deduct losses carried forward from previous years relating to real estate income in cases where such income is subject to autonomous taxation at a special rate, and the second concerning deduction from IRS collection of AIMI relating to rented urban properties, whether such deduction can be claimed by taxpayers not resident in Portuguese territory.

Common to both cases is the question of whether the refusal to allow deduction of losses carried forward from previous years as well as the non-deduction from IRS collection of AIMI supported by the non-resident taxpayer violates the principle of non-discrimination on grounds of nationality provided for in article 26 of the Convention between the Portuguese Republic and the United States of America for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Income Taxes (CDT).

1. Faced with the questions thus briefly raised, it is noted that the Claimant bases the request for arbitral decision on the illegality of the assessment she impugns on the grounds that said assessment did not take into account losses to be carried forward from previous years, in violation of the rule of article 55 of the IRS Code and the principle of non-discrimination on grounds of nationality contained in article 26 of the Convention between the Portuguese Republic and the United States of America for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Income Taxes, directly applicable in the domestic legal order.

Being different the understanding of the Respondent, it is important to analyze in more detail the positions of both parties on the controversial matters.

Position of the Claimant

1. According to the Claimant, the illegality of the tax act she impugns derives from the fact that it is affected by the following defects:

• Direct violation of the principles of tax legality and taxation of actual income, enshrined in articles 103 and 104 of the Constitution of the Republic;

• Violation of the principle of non-discrimination inherent in article 8, item 2, of the CRP, by violation and non-compliance with article 26 of the Convention between the Portuguese Republic and the United States of America for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Income Taxes.

• Violation of the norms contained in articles 55, item 1, 72, both of the IRS Code and 135-I, item 1, paragraph b) of the IMI Code, and article 8 of the LGT.

1. Substantiating the position expressed above, the Claimant argues that "Pursuant to art. 55, item 1, paragraph b) of the IRS Code, the legal regime is that of deduction of negative net results determined in category F from income of that same category in the six years following that to which they pertain.

The law neither excepts nor restricts the application of this norm to the nature of taxpayers such as non-residents, or other.

Therefore, the mechanism of loss deduction is identical, whether it is a taxpayer resident or non-resident in the national territory."

1. The Claimant thus concludes that "...without dispensing with the argument put forward as to the absence of a norm in domestic legislation that limits the carryforward of category F losses to net positive income of the same category for non-residents, we understand that, should such a norm exist, it would constitute a clear and evident violation of the CDT ratified by the Portuguese State, regarding discrimination and inequality of treatment of nationals of the USA."

2. Regarding the AIMI supported by the Claimant, not considered in the impugned assessment as deductible from IRS collection in the portion corresponding to the tax value (VPT) of the rented properties, she understands that "...the exclusion of deduction of AIMI supported for non-residents, contained in item 5 of art. 78 of the IRS Code translates, in practice, into a material disadvantage and an inequality of treatment between nationals of the USA and those of Portugal in the same situation of taxation, by income of category F, expressly prohibited by art. 26 of the CDT, which binds (including internationally) the Portuguese State."

3. Therefore, "Starting from the principle inherent in art. 8, item 2 of the CRP, relating to the primacy of International Law and the binding of the Portuguese State and the principle of the imposition of equality of treatment, established in art. 26, item 1 of the Portugal/USA Convention, it is concluded that the application of art. 78, item 5, of the IRS Code, insofar as it involves the prohibition of deduction of AIMI to nationals of the USA, in the same terms in which it allows such deduction for residents, is unconstitutional, by violation of art. 8, item 2, of the CRP."

4. Based on the substantiation briefly referred to above, the Claimant concludes by formulating the request for partial annulment of the assessment in the overall amount of € 3,063.38, this amount being comprised of a portion of € 855.53 of tax corresponding to the deduction of losses carried forward from previous years, by consideration of the 28% rate applied to € 3,055.45, plus € 2,207.86 amount relating to the deduction from IRS collection of AIMI paid with reference to the tax value of the properties generating the income.

Position of the Respondent

1. For its part, the Respondent, in the reply it submitted, alleges, in summary, that, according to the provision of article 22 of the IRS Code, the possibility of aggregation of income earned by taxpayers not resident in Portuguese territory is excluded.

2. Thus, as the real estate income earned by the Claimant is not subject to aggregation, the Respondent considers that "the operation of deductions, notably the deduction of losses for what interests us now (which is not a specific deduction of Cat. F), and abatements is a previous operation, prior to and conditioned by the possibility of aggregation."

3. Hence, "... concluding from the lack of normative provision that prevents non-residents from aggregating the income they obtain in national territory - in this case, income of Cat. F (real estate) -, by greater reason, that prior operation (loss deduction) is not capable of being performed, inasmuch as the same would always be conditioned by the prior aggregation of income (only possible for residents)."

4. From the foregoing, the Respondent concludes that it is "... coherent to conclude that the legislator did not intend, in this specific case, to apply the loss carryforward regime provided for in art. 55 of the IRS Code, inasmuch as it opted for an isolated and analytical taxation of income of Cat. F earned by non-resident taxpayers."

5. Regarding the alleged violation of the rule of article 26 of the Convention between the Portuguese Republic and the United States of America for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Income Taxes, the Respondent, after considering that it is not clear why the norm of the IRS Code would be unconstitutional, alleges, in essence, that "It is not the criterion of residence that underlies art. 26 of the CDT entered into between Portugal and the United States, but rather the criterion of nationality."

6. Based on the argumentation briefly exposed above, the Respondent concludes by expressing the understanding that the request for arbitral decision should be judged unfounded, with the impugned tax act remaining in the legal order.

On the Merits of the Request

1. Considering the factual matters set out above, as well as the positions of the parties, it is important, before anything else, to conduct an analysis, albeit succinct, of the prerequisites for the incidence and assessment of IRS relating to real estate income earned by resident and non-resident taxpayers.

2. As provided for in articles 1 and 8 of the IRS Code, real estate income is subject to taxation under this tax, being considered as such the rents from rural, urban and mixed properties paid or made available to their respective owners. This income falls within Category F, without prejudice to, by choice of their owners, falling within Category B, business income (IRS Code, arts. 8, item 1, 4, items 1, paragraph n) and 5).

3. Arising from the principle of taxation of net income addition, which informs the IRS, the income actually subject to taxation is that obtained after deducting from gross income the expenses and charges that are strictly connected to the source producing the income or, in other words, that such expenses are essential to the formation of the income (IRS Code, art. 41).

4. It can, however, occur, as in the case under analysis, that the deductible expenses incurred in a given taxation period – calendar year – exceed the income earned therein. In this case, the rule of article 55, item 1, paragraph b) applies, which establishes, for each income earner, that the negative net result determined in a given year in category F may be carried forward to the six years following that to which it pertains.

5. From the cited article 55, it only appears, as shown in its item 8, added by Law no. 82-E/2014, of 31/12, that the right to carryforward is subject to the condition that the properties to which the expenses pertain do not cease to generate category F income for at least 36 months, consecutive or interpolated, of the five years following that in which the expenses were incurred.

6. Except by choice of taxpayers resident in Portuguese territory, these income are not aggregated for purposes of joint taxation with income from other categories earned in the same year, being subject to an autonomous rate of 28% (IRS Code, arts. 22, items 1, 3 and 5 and 72, items 1, paragraph e) and 12).

7. However, if such income is earned by persons who are considered as non-resident in Portuguese territory, they are excluded from the possibility of aggregation – unless it concerns residents of another Member State of the European Union or the European Economic Area, under the conditions provided for in article 72, items 12 and 13 – and are equally taxed at an autonomous rate of 28%.

8. Regardless of whether they are earned by residents or non-residents, such income is subject to withholding at source, when due by entities that have or should have organized accounting, at the rate of 25% (IRS Code, art. 101, item 1, paragraph e), this withholding being in the nature of payment on account.

9. Regardless of the residence of the taxpayer and whether or not the aggregation option is exercised, when legally permitted, taxpayers are not exempted from filing the periodic income declaration.

10. In the territorial scope of tax incidence, article 18, item 1, paragraph h), establishes that income relating to immovable property situated therein is considered to be obtained in Portuguese territory. IRS is thus levied on such income earned by non-resident owners, as results from article 15, item 2, of the same Code.

11. This provision of domestic law is not contradicted by conventional norms. Closely following article 6 of the OECD Model Convention, the Convention for the Avoidance of Double Taxation signed by Portugal and the United States of America, establishes, in its article 6, the competence of the source state – that is, the state of the location of the immovable property – to jointly with the state of residence of its owner, tax immovable property income.

12. According to the said norm of the Convention, the scope of the competence conferred on the Contracting States over this type of income is significantly broad:

Article 6 - Income from immovable property

1 - Income that a resident of a Contracting State derives from immovable property, including income from agricultural or forestry undertakings, situated in the other Contracting State may be taxed in that other State.

2 - The expression "immovable property" shall have the meaning which it has under the law of the Contracting State in which the property in question is situated. The expression includes in any case property accessory to immovable property, livestock and equipment used in agricultural and forestry undertakings, rights to which the provisions of the general law of the country relative to landed property apply, usufruct of immovable property and rights to variable or fixed payments as consideration for the working or the concession to work mineral deposits, springs and other natural resources; ships and aircraft are not considered immovable property.

3 - The provision of paragraph 1 applies to income derived from the direct use, letting or any other use of immovable property.

4 - The provisions of paragraphs 1 and 3 apply also to income from immovable property of an enterprise and to income from immovable property used for the performance of independent personal services.

1. Item 5 of the Protocol which forms part of the Convention establishes that "the provisions of this article shall also apply to income of tangible (personal) property associated with immovable property and of services rendered for the maintenance or functioning of such property."

2. Reverting to the situation under analysis, it is thus established that the Claimant has United States nationality, a fact she proves by presenting her respective passport and driver's license, earned in 2017 income from properties located in Portuguese territory, which she duly declared for IRS taxation purposes.

3. Given the status of a taxpayer not resident in Portuguese territory, the AT, in proceeding to assess the tax based on the declared income and expenses, did not consider losses to be carried forward from previous years in the amount of € 3,055.45 nor, as a deduction from collection, the amount of € 2,207.86, of AIMI proportional to the tax value of the properties generating the taxed income.

On Loss Carryforward

1. As already mentioned above, real estate income is taxed autonomously at a special rate, without the nature of a liberatory rate, of 28%, and is not subject to aggregation when earned by non-residents, except if the latter are considered residents of another Member State of the EU or the EEA, under the conditions provided for in article 72, items 13 and 14, of the IRS Code.

2. There is no indication, in the text of the law, of any conditioning of the loss carryforward in Category F of IRS income to the option, when permitted, of aggregating such income and the consequent waiver of their autonomous taxation. Nor is it understood that this autonomous taxation could be applied to gross income, in prejudice of the principle of taxation of net income addition which is a structuring principle of said tax.

3. Similarly, there is no extract from the text of the law of any exception regime applicable to non-residents who are subject to autonomous taxation, regardless of whether they can or cannot exercise the aggregation option, when permitted.

4. It is further noted that this matter has already been the subject of arbitral decision, referring to the same situation addressed in the present proceedings but to another taxation period, from which, by its exemplary clarity and solid reasoning, the following excerpt is transcribed:

"Now, taking into account that losses to be carried forward are nothing more than the accumulation of specific deductions which, in each year, can only be deducted from the taxable matter of that same year, up to the amount thereof, and can be deducted from positive taxable matter of subsequent years, within the temporal limit legally established, it is not clear how the said principle of taxation of net income can be satisfied without taking into account the losses to be carried forward from previous years.

On the other hand, there is no norm that excludes the possibility of deduction of losses by non-resident taxpayers.

If it is true that aggregation operates at a stage subsequent to the subtraction of "deductions and abatements provided for in the following sections," as provided in item 1 of article 22 of the IRS Code (the term "deductions" refers to both the specific deductions of each income category and loss deduction, while there ceased to be "abatements" since the repeal of article 56 by Law no. 64-A/2008, of 31 December), it does not necessarily follow from this that, if aggregation is not possible, it becomes impossible to benefit from the "deductions" provided for in the following sections.

Naturally, the taxation of net income is what best accords with the principle of contributory capacity, but this, when referring to taxpayers resident in national territory, is not satisfied merely by the taxation of net income, being deepened by their global taxation, through application of a table of progressive rates and deductions from collection, of a personalizing character.

The AT states that "that prior operation (loss deduction) is not capable of being performed, inasmuch as it would always be conditioned by the prior aggregation of income".

The difficulty in understanding that a reality prior to another be conditioned by that which comes after it, as in general causes precede their consequences, does not mean that, in the IRS Code, this is not possible, constituting an exception to the possibility of deduction of losses from previous years.

However, curiously, the only exception of this type is that which refers to the deduction of losses of category G (relating to certain capital gains on movables), for residents in national territory, under item 6 of article 55 of the IRS Code, in the wording in force in the years under analysis, according to which "6 - The negative balance determined in a given year, relating to the operations provided for in paragraphs b), e), f) and g) of item 1 of article 10, may be carried forward to the two following years, to income of the same nature, when the taxpayer opts for aggregation." (our emphasis).

Contrary to the position transmitted by the AT on the possibility of loss deduction without prior aggregation, legal doctrine has already pronounced itself on the taxation of category F income earned by residents, by proportional rates (although these may opt for aggregation), established by Law no. 66-B/2012, of 31 December (article 72, item 7, of the IRS Code). We permit ourselves to quote Rui Duarte Morais, who states "Note that, being a special rate (and not a liberatory rate), this applies to income determined according to general rules, that is to say, to net income, the same being that the taxpayer continues to be permitted to make the specific deductions that the law provides. As he will also maintain, the right to loss carryforward that he may have had in this category in previous years."

1. In the sense that the deduction of losses to the positive net income of category F, provided for in article 55 of the IRS Code (IRS Code) does not depend on income aggregation, it is reiterated and uniformly pronounced by both arbitral jurisprudence and that of the Supreme Administrative Court.

2. Adhering without reservation to the position transcribed above, the arbitral tribunal thus understands that the carryforward of losses in the category F scope is not dependent on aggregation, being the same permitted in the event that such option is not expressed – or because it is not permitted when it concerns non-residents – as there is no legal provision that precludes such possibility, on one hand, and, on the other, in obedience to the structuring principle of taxation of the net income earned by the respective taxpayers.

On AIMI Deduction

1. The Claimant seeks that in the IRS assessment relating to the real estate income earned in 2017, the portion of AIMI which, proportionally, corresponds to the tax value of the properties generating this income, be considered.

2. Falling upon the sum of the tax values of urban properties located in Portuguese territory, of which the respective owner is the holder, this additional, in the case of taxpayers who are natural persons, is determined by applying a rate of 0.7% to that value, after deduction of € 600,000, with this rate increasing to 1% or 1.5% falling on the portion of that value exceeding € 1,000,000.00 or € 2,000,000.00, respectively (IMI Code, arts. 135-A, 135-B, 135-C and 135-F).

3. In the case under analysis, the sum of the tax values of the urban properties registered in the property matrices in the name of the Claimant reaches the amount of € 1,056,790, with the competent AIMI assessment being made as follows (Doc. 9):

• Tax value of property (IMI Code, art.135-C, item 1) ...................... € 1,056,790.00

• Deduction (IMI Code, art. 135-C, item 2) .................................................. € 600,000.00

Assessment:

€ 400,000.00 x 0.70% = € 2,800.00

€ 56,790.00 x 1.00% = € 567.90

                                               € 3,367.90

1. As results from article 135-I of the IMI Code "The additional municipal property tax is deductible from the IRS collection due by taxpayers who hold income attributable to urban properties on which it falls, up to the amount of:

a) The portion of IRS collection proportional to net income of category F, in the case of aggregation; or

b) The collection obtained by applying the rate provided for in paragraph e) of item 1 of article 72 of the IRS Code, in other cases."

1. This deduction is also provided for in article 78, item 1, paragraph l), of the IRS Code, added by Law no. 42/2016, of 28/12, in the following terms: "1 - From collection, the following deductions are made, under the terms of the subsequent articles, relating to: ... l) The additional municipal property tax, under the terms of article 135-I of the Municipal Property Tax Code."

2. However, item 5 of the same article provides that "The deductions provided for in item 1 apply only to taxpayers resident in Portuguese territory."

3. On the other hand, the additional IMI is not capable of being considered within the scope of the specific deduction of category F – real estate income – as provided for in the final part of article 41, item 1, of the IRS Code, in the wording given by Law no. 42/2016, of 28/12.

4. From the cited norms, it thus results that the additional in question, when relating to properties that produce income subject to taxation, is not deductible from income nor, furthermore, from IRS collection of non-resident taxpayers.

5. According to the Claimant's allegations, as the basis for the request she formulates, such circumstance constitutes a violation of the principle of non-discrimination enshrined in article 26 of the Convention between the Portuguese Republic and the United States of America for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Income Taxes (CDT), approved for ratification by Resolution of the Assembly of the Republic no. 39/95 and ratified by Decree of the President of the Republic no. 73/95, of 12/10.

6. In accordance with this rule, "Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or connected requirement of a different or more burdensome nature than that to which nationals of that other State are or may be subject who are in the same circumstances. This provision shall also apply to persons who are not residents of one or both Contracting States. However, for purposes of United States taxation, and without prejudice to the provisions of article 25, 'Elimination of double taxation', a national of the United States who is not a resident of the United States and a national of Portugal who is not a resident of the United States are not in the same circumstances."

7. The transcribed norm, directly applicable in domestic law pursuant to article 8 of the Constitution of the Portuguese Republic (CRP), thus enshrines the principle of non-discrimination based on the nationality of taxpayers, while not ruling out the legitimacy of differentiated treatment of taxpayers based on their tax residence.

8. On the meaning and scope of the norm invoked by the Claimant, Professor Alberto Xavier emphasizes: "The principle of non-discrimination or equality of treatment has its source in article 24 of the OECD Model, which has been reproduced in all conventions signed by Portugal.

In the principle of non-discrimination, we can distinguish an objective element – which is its content – and a subjective element – concerning the circle of persons subject to its scope of application.

The content or objective element of the principle of non-discrimination translates into the fact that "foreigners" (including stateless persons) do not become subject, in a given State, to any taxation or corresponding obligation different or more burdensome than that to which they are or may be subject the nationals of that State who are in the same circumstances. The identity of the situation – of law and of fact – is thus the necessary prerequisite for the application of the principle and must, in each case, be examined with the utmost care.

The principle of non-discrimination is a corollary of the general principle of equality as regards the criterion of nationality. Just as this consists in the obligation to treat equals equally and unequals unequally, so also the principle of non-discrimination, thus also the principle of non-discrimination proclaims the irrelevance of nationality to found unequal treatment between subjects who present themselves objectively in identical situations, any tax discrimination being prohibited, whether this translates into a "more burdensome" taxation, or merely a "different" taxation.

On the other hand, the prohibited discrimination is only that which is based on nationality, but not that which is based on residence, considered a legitimate criterion for differentiated tax treatment. This very fact results from the new version of article 24, given in 1992, having added to the previous expression "in the same circumstances" the phrase "in particular with respect to residence." Thus, for example, a German tax on capital (Kapitalverkehrsteuer, abolished since 1990) did not violate the principle of non-discrimination, falling on branches of non-resident undertakings but not on branches of German undertakings. But a French law that exempted from tax the capital gain from the sale of residential immovable property by French citizens, resident or non-resident, while not recognizing the exemption for foreign non-residents, did violate the said principle.

We also understand that it does not violate the principle of non-discrimination the possible application to income paid to non-resident nationals of States that have entered into double taxation conventions with Portugal of a rate superior to that applicable to residents, since the discrimination is not based on the nationality of the taxpayer but only on his residence. Now, the truth is that a non-resident – whatever his nationality – is not in the "same circumstances".

The reason for formulating the principle by a negative route (non-discrimination), instead of by a positive route (equality of treatment), lies only in not closing the doors to a given State, for reasons of diverse nature, political, economic or social, namely of attraction of foreign investment, from granting a more favorable treatment to persons of foreign nationality.

Subjective element. With regard to the subjective element, it is important to note that the aforementioned principle applies to both natural persons and legal entities."

1. From the applicable norms to situations identical to that which stands out in the present case, the differentiation of treatment between taxpayers resident in Portuguese territory and non-residents is based exclusively on tax residence, with no discrimination being verified on the grounds of nationality.

2. In other words, the tax treatment dispensed with regard to income and values such as those at issue in this proceeding is strictly identical when these are earned, or assets held, by non-residents in Portuguese territory. No relevance is attached, for this purpose, to the fact that non-resident taxpayers hold Portuguese nationality or any other.

3. From the foregoing, it is concluded that, in this aspect, the impugned assessment does not violate the principle of non-discrimination enshrined in article 26 of the CDT entered into between Portugal and the USA, and thus does not suffer from unconstitutionality by violation of article 8 of the CRP.

On the Right to Indemnification Interest

1. Together with the annulment of the assessment and consequent reimbursement of the amount wrongfully paid, the Claimant further requests that she be recognized the right to indemnification interest, under article 43 of the LGT.

2. In fact, pursuant to the provision of item 1 of the said article, indemnification interest is due "when it is determined, in gracious complaint or judicial impugnation, that there was error attributable to the services from which results payment of the tax debt in an amount greater than that legally due." Beyond the means referred to in the norm that is transcribed, we understand that, as results from item 5 of article 24 of the RJAT, the right to the aforementioned interest can be recognized in the arbitral process and thus the request is addressed.

3. The right to indemnification interest referred to in the norm of the LGT above cited presupposes that tax has been paid in an amount greater than that due and that such derives from error, of fact or of law, attributable to the services of the AT. In the present case, both conditions are satisfied, thus creating the obligation of indemnification interest in favor of the taxpayer with respect to the portion of the assessment whose annulment is determined.

VI. Decision

Based on the terms and reasoning set forth above, the arbitral tribunal decides:

• To adjudge the request for arbitral decision as founded, with the consequent partial annulment of the impugned assessment, in the terms petitioned, in the part in which the deduction of losses of category F carried forward from previous years was not accepted, in the amount of € 3,055.45, with the consequent reimbursement of the amount paid in excess in the value of € 855.52, plus corresponding indemnification interest calculated in accordance with legal terms.

• To adjudge the request unfounded in the part relating to the non-deduction from collection of the amount of € 2,207.86, relating to the portion of AIMI relating to the properties to which the income subject to IRS pertains.

Value of the proceeding - In accordance with the provision of article 315, item 2, of the CPC and article 97-A, item 1, paragraph a) of the CPPT and article 3, item 2, of the Regulation of Costs in Tax Arbitration Proceedings, the proceeding is assigned the value of € 3,063.88.

Costs - Pursuant to article 22, item 4, of the RJAT, the amount of costs is set at € 612.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Respondent (AT) and the Claimant, in the proportion of the respective success, with € 171.00 to be borne by the former (AT) and € 441.00 by the latter.

Lisbon, 15 May 2019,

The Arbitrator,

Álvaro Caneira