Summary
Full Decision
ARBITRAL DECISION
I. Report
1. On 29 November 2018, A..., married, resident in ..., ..., ..., holder of citizen card no. ... and tax identification number ..., submitted a request for the constitution of a single arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter referred to only as RJAT), with a view to declaring the illegality of the tax act demonstrating the assessment of Personal Income Tax ("IRS") no. 2018... and of the tax act assessing compensatory interest no. 2018... relating to the year 2017.
2. Pursuant to article 6, paragraph 1 of the RJAT, the Deontological Council of the Arbitration Centre appointed the undersigned arbitrator, notifying the parties.
3. The tribunal is regularly constituted to hear and decide the subject matter of the proceedings.
4. The allegations supporting the Claimant's request for arbitral decision are, in summary, as follows:
4.1. On 4 January 2016, the Claimant and his spouse, B..., holder of tax identification number ..., acquired the autonomous fraction, individualized by the letter "A", which constitutes the ground floor, with the right to exclusive use of the rear yard area, of the urban property under a horizontal property regime, located on Rua ..., no. ..., municipality of Lisbon, described in the Land Registry Office of Lisbon under number ... of the parish of ... and registered in the urban property matrix under article ... .
4.2. The fraction was acquired for the value of €122,500.00 and was intended for the Claimant's and his spouse's own permanent residence, with the latter assuming its tax representation, since the former resides in Switzerland.
4.3. Thus, following the aforementioned acquisition, the Claimant and his spouse began to reside in the said fraction permanently, although in the case of the Claimant only during his trips to Portugal, always staying there and receiving his guests, friends and family members.
4.4. In March 2017, the Claimant and his spouse disposed of the aforementioned fraction for the value of €340,000.00.
4.5. When completing their respective IRS income tax returns for the period of 2017, both the Claimant and his spouse declared the respective capital gain, each in the proportion of 50%.
4.6. Similarly, the Claimant and his spouse expressed the intention to reinvest the capital gain, entering in section 5 "Reinvestment of the proceeds from the disposal of property intended for own permanent residence" of Annex G of the IRS Form 3 Declaration, in field "5005 – Amount of debt of the loan at the date of disposal of the asset referred to in field 5002, 5003 or 5004" the value of €69,013.00 and in field "5006 – Amount of proceeds that you intend to reinvest (without recourse to credit)" the value of €100,987.00.
4.7. Nevertheless, the Claimant was notified of the demonstration of IRS assessment, better identified in the preamble, pursuant to which results a value to be paid of €18,728.25.
4.8. This amount was paid by the Claimant within the voluntary payment period.
4.9. By contrast, the income tax return of his spouse generated no amount to be paid to the State.
4.10. Now, from the comparative analysis of both IRS income tax returns it is possible to extract that the Claimant completed Annex G in the exact same manner as his spouse, and that the latter additionally submitted Annex H in which he declared in section 6 "Health, training and education expenses, property and care home charges" an expense in the amount of €665.95.
4.11. However, the submission of two materially identical declarations resulted, in the case of the Claimant, in the apportionment of the amount of tax to be paid to the State of €18,689.34, plus the amount of €38.91 of compensatory interest, and in the case of his spouse, generated no amount to be paid or reimbursed.
4.12. Thus, from the demonstration of IRS assessment of the Claimant it is possible to extract that he was taxed on the share of the capital gain value he declared.
4.13. Whereby it can be concluded that the Tax and Customs Authority disregarded the reinvestment intention declared by the present Claimant.
4.14. Additionally, it is also perceived that in the calculation of the capital gain, the Tax and Customs Authority likewise does not grant him the possibility of being taxed only on 50% of the respective value in light of article 43, paragraph 2 of the IRS Code.
4.15. Article 10, paragraph 5 of the IRS Code excludes from taxation under IRS capital gains resulting from the disposal of properties "intended for the own permanent residence of the taxpayer or of his family unit" provided that the proceeds are "reinvested in the acquisition of the ownership of another property (...) exclusively with the same purpose situated in Portuguese territory.
4.16. Now, in the present case it is verified that indeed the fraction that the Claimant and his spouse disposed of constituted their own permanent residence.
4.17. Indeed, notwithstanding the Claimant's residence in Switzerland, his own permanent residence is located in Portugal, with his family unit which is constituted by the Claimant, his spouse and a dependent.
4.18. The Tax and Customs Authority itself admits that emigrants may have permanent residence in Portugal pursuant to Circular Notice no. 10782, of 26.05.1998, from the Directorate of Municipal Tax Services.
4.19. On the other hand, even if the Tax and Customs Authority does not recognize, which is not conceded and is only admitted out of an obligation of prudent advocacy, that the said fraction constituted the Claimant's own permanent residence, this did not permit it to proceed with the taxation of the capital gain.
4.20. This is because, the law provides that the exclusion of taxation of capital gains benefits the disposal of properties "intended for the own permanent residence of the taxpayer or of his family unit", whereby, given that the Claimant's spouse and the dependent resided in this fraction, it was incumbent upon the Tax and Customs Authority to refrain from proceeding with the respective taxation.
4.21. Furthermore, this is not prejudiced by the fact that the taxpayers have, by oversight, registered in field 4 "Marital status of the taxpayer", on the cover page of the IRS income tax return, the option "De facto separated", as this does not correspond to the truth since the Claimant and Her Excellency B... are married.
4.22. It is evident that taxpayer B... constitutes part of the Claimant's family unit, and that she resided, at the time, in the disposed fraction, together with the respective dependent.
4.23. Thus, taking into account that the said fraction constituted the couple's own permanent residence and that in compliance with the provisions of subparagraph c) of paragraph 5 of article 10 of the IRS Code, the Claimant – as well as his spouse – expressed "intention to proceed with reinvestment, even if partial, mentioning the respective amount in the income tax return relating to the year of disposal, it is not understood on what grounds the Tax and Customs Authority proceeded with the taxation of the said capital gain.
4.24. All the more so because reinvestment must be effected "between the 24 months prior and the 36 months following, counted from the date of disposal", under subparagraph b) of paragraph 5 of article 10 of the IRS Code, a period which is still ongoing since the disposal occurred only in March 2017.
4.25. Furthermore, there is also no verification in the present case of any of the situations provided for in paragraph 6 of article 10 of the IRS Code that determine the departure from the exclusion of taxation embodied in paragraph 5 of the same article.
4.26. In accordance with the general rules of interpretation, in particular paragraph 2 of article 9 of the Civil Code, the interpreter cannot consider the legislative intent that does not have in the letter of the law a minimum of verbal correspondence, even if imperfectly expressed.
4.27. The legislator's intention is, as it emerges from the letter of the norm, to exclude the taxation of capital gains obtained from the disposal of the taxpayers' own permanent residence when they are reinvested in the acquisition of another residence with the same purpose.
4.28. Pursuant to paragraph 1 of article 43 of the IRS Code "The value of income qualified as capital gains is the corresponding amount to the balance determined between capital gains and losses realized in the same year, determined pursuant to the following articles."
4.29. Additionally, in light of paragraph 2 of the same provision "The balance referred to in the preceding paragraph, relating to disposals made by residents provided for in subparagraphs a), c) and d) of paragraph 1 of article 10, positive or negative, is only considered at 50% of its value."
4.30. Now, in the present case, the proceeds value is the value stated in the purchase and sale agreement, i.e., the amount of €340,000.00.
4.31. In the case sub judice the acquisition value amounts to €122,500.00.
4.32. The Claimant and his spouse bore charges in relation to the disposed fraction in the amount of €84,004.68.
4.33. The above-referred amounts were declared by the Claimant and by his spouse in the proportion of 50%.
4.34. Therefore, from the Claimant's Form 3 IRS income tax return results as proceeds value the sum of €170,000.00, as acquisition value the amount of €61,250.00 and as the value of charges and expenses the sum of €42,002.34.
4.33. Having regard to the referred provisions, the calculation of the capital gain is effected in accordance with the formula: capital gain = proceeds value – (acquisition value + value of expenses and charges).
4.34. Whereby in the present case the Claimant's capital gain would correspond to €66,747.66 = €170,000.00 – (€61,250.00 + €42,002.34).
4.35. It happens that, pursuant to paragraph 2 of article 43 of the IRS Code, the determined amount of €66,747.66 would only be "considered at 50% of its value" being reduced to the amount of €33,737.83.
4.36. To this amount, of €33,737.83, would finally be applied the autonomous rate provided for in subparagraph a) of paragraph 1 of article 72 of the IRS Code.
4.37. From which would result an amount of tax to be paid by the Claimant, by virtue of the obtaining of the said capital gain, of €9,344.67.
4.38. However, it results from the demonstration of IRS assessment of the Claimant that the amount of tax to be paid is €18,689.34, which corresponds to twice that which would be determined in accordance with the provisions of the IRS Code.
4.39. In this manner, the demonstration of IRS assessment of the Claimant still suffers from manifest illegality by proceeding incorrectly to the calculation of the tax, disregarding the 50% reduction provided for in paragraph 2 of article 43 of the IRS Code.
4.40. And it should not be said that the Tax and Customs Authority did not proceed with the reduction of the capital gain value pursuant to paragraph 2 of article 43 of the IRS Code because the provision only applies to "disposals made by residents."
4.41. Having regard to the above, the Tax and Customs Authority should in the present case have excluded from taxation 50% of the determined capital gain, in light of article 43, paragraph 2 of the IRS Code, interpreted in light of the understanding of the CJEU.
4.42. It results from the demonstration of IRS assessment of the Claimant the amount of €38.91 as compensatory interest to which corresponds the assessment no. 2018.... .
4.43. The Claimant, notwithstanding his disagreement with the demonstration of assessment issued by the Tax and Customs Authority, proceeded to pay the amount identified in the said demonstration of assessment – on 03.08.2018 – still during the course of the voluntary payment period which ended on 31.08.2018.
4.44. Now, article 35, paragraph 1 of the General Tax Law regulates in general terms the regime of compensatory interest, specifying that "Compensatory interest is due when, by a fact attributable to the taxpayer, the assessment of part or all of the tax due or the payment of tax to be paid in advance, or withheld or to be withheld in the context of tax substitution, is delayed".
4.45. In implementation of paragraph 3 of article 268 of the Constitution, paragraph 1 of article 77 of the General Tax Law requires that the procedural decision be always reasoned by means of a succinct exposition of the reasons of fact and of law that motivated it.
4.46. And, even when in paragraph 2 of the same article 77 of the General Tax Law it is admitted that the reasoning may be effected in summary form, it is defined as minimum requirements that it contains the applicable legal provisions, the qualification and quantification of tax facts and the operations for determining the taxable matter and the tax.
5. In turn, the Defendant Tax and Customs Authority submitted a reply, in which it defended itself, in summary, in the following terms:
5.1. As to the possible suspension of taxation of the disputed real estate capital gain, more concretely, through the regime instituted for the reinvestment of the proceeds of capital gains, the core of the dispute lies in assessing the nature of the use of the disposed property.
5.2. From the outset, the Claimant submitted the income tax return individually and autonomously, not including in the family unit B... .
5.3. Of no lesser importance, and still in the domain of the income tax return, the Claimant indicates his marital status as "de facto separated".
5.4. If that were not enough, it must be emphasized that, relating to the tax period of 2017, the Claimant submitted three income tax returns (nos. ...; ...; ...).
5.5. Being that in all of them the Claimant presents himself as de facto separated.
5.6. It is not, therefore, a "mere oversight" since it was corroborated and reiterated several times.
5.7. It is also imperative to emphasize that, notwithstanding the fact that the author's condition of non-resident dates from 15-05-2015, according to the AT database, it is no less true that, in the tax period of 2015, the income tax return submitted by the Claimant, as a resident in Portuguese territory, already discriminated the same condition of de facto separated.
5.8. A situation contrasting with the declarations of 2012, 2013 and 2014, where the Claimant indicates his marital status as married.
5.9. Finally, but no less importantly, it should be noted that the Claimant's tax domicile is not consistent with that of B..., in March 2017.
5.10. Which precludes the application of the norm of article 13, paragraph 11 of the IRS Code.
5.11. Without prejudice, the Claimant contests the amounts that appeared in the capital gain, arguing that the part relating to him would amount, as proceeds value, to €170,000.00, whereas the acquisition value would be €61,250.00, and expenses and charges €42,002.34.
5.12. Now, these amounts are not refuted by the AT.
5.13. The Claimant refutes the understanding that precludes the application of the rule of article 43, paragraph 2 of the IRS Code to non-residents in Portuguese territory.
5.14. From the outset, a literal interpretation of the provision postulates that only residents may be included in its respective provision.
5.15. This matter relates to the exclusion of the incidence of capital gains tax at 50% (as happens with residents), obtained by a non-resident in Portugal but resident in a Member State of the European Union, violating Community Law.
5.16. Having regard to the tenor of the Judgment of the Court of Justice of the European Communities of 2007 October 11, and in order to adapt the national legislation to the decision endorsed therein, paragraph 7 (current paragraph 9) was added to article 72 of the IRS Code, by Law no. 67-A/2007, of 31/12, the content of which at the date of the facts was as follows:
"9 - Residents in another Member State of the European Union or of the European Economic Area, provided that, in the latter case, there is an exchange of information in tax matters, may opt, in relation to the income referred to in subparagraphs a) and b) of paragraph 1 and in paragraph 2, for the taxation of such income at the rate that, in accordance with the table provided for in paragraph 1 of article 68, would be applicable in the case of being earned by residents in Portuguese territory."
5.17. For its part, paragraph 8 (current paragraph 10) of the same article and legal instrument, also added by Law no. 67-A/2007, of 31/12, prescribed, at the date of the facts, that:
"10 - For the purposes of determining the rate referred to in the preceding paragraph, all income is taken into account, including that obtained outside this territory, in the same conditions as are applicable to residents."
5.18. And, as a result of this legislative amendment, the income tax returns relating to the fiscal years of 2008 (in force from January 2009) and onwards, more concretely Form 3, have a field for exercising the option for the rate of article 68 of the IRS Code.
5.19. Consulting the Mod. 3 IRS declaration submitted in the name of the Claimant (relating to the fiscal year of 2017), it appears that in section 8 B of Form 3, field 4 (non-resident) was marked, field 6 (residence in an EU country) and field 7 (requests taxation under the general regime applicable to non-residents).
5.20. Thus, the Claimant's allegations cannot be upheld in view of the amendment to article 72, made by Law no. 67-A/2007, of 31/12, in particular the addition of paragraphs 7 (current paragraph 9) and 8 (current paragraph 10).
5.21. Paragraph 8 (current paragraph 10) of article 72 of the IRS Code is categorical, in the sense that all income obtained in that year (whether in Portugal or abroad) must be included.
5.22. The same is stated in paragraph 1 of article 15 of the IRS Code: being persons resident in Portuguese territory, IRS is charged on the totality of their income, including that obtained outside that territory.
5.23. As such, for the purposes of taxation at the rate of article 68, that is, as a resident, it was necessary to have filled in fields 9 (option for the rates of article 68 of the IRS Code) and 11 (total income obtained abroad).
5.24. Thus, the provision of paragraph 2 of article 43 of the IRS Code cannot be applied to the case being analyzed here.
5.25. The legal framework (as well as the obligation to declare) is no longer that which existed at the date of the Judgment of the Court of Justice of the European Communities, taking into account that the amendment to the law was made as a result of the addition of paragraphs 7 and 8 (current 9 and 10) to article 72 of the IRS Code by Law no. 67-A/2007, of 31/12.
5.26. The decision handed down in the Hollmann Judgment refers to situations occurring during the period of validity of the wording prior to Law no. 67-A/2007, of 31/12, of article 72 of the IRS Code.
5.27. The question being analyzed in the present proceedings does not correspond to the so-called "clear act", by the decision handed down in the above-mentioned Judgment.
5.28. This is because the legislative amendment introduced to article 72 of the IRS Code by Law no. 67-A/2007, of 31/12, has not yet been subject to examination 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.
5.29. A normative framework that now provides for two situations/possibilities/alternatives for the taxation of the balance determined between capital gains and losses realized in the same year, resulting from the difference between the proceeds value and the acquisition value by onerous disposal of real rights over real property.
5.30. Thus, on the one hand, the Claimant could have opted for the taxation of such income (capital gains) at the rate that, in accordance with the table provided for in paragraph 1 of article 68 of the IRS Code, would be applicable in the case of being earned by residents in Portuguese territory, the determination of the rate taking into account all income including that obtained outside this territory, in the same conditions as are applicable to residents, which it did not.
5.31. On the other hand, the Claimant could have opted, as it did, for the autonomous rate of 28%, as provided for in article 72, paragraph 1, subparagraph a) of the IRS Code.
5.32. The amendment introduced to article 72 of the IRS Code by Law no. 67-A/2007, of 31/12, came, in our opinion, to fully adapt the national legislation to Community law, this is because paragraphs 9 and 10 of article 72 of the IRS Code, in accordance with point 40 of the operative part, now provide for a limitation of taxation to 50% of capital gains realized, no longer just for residents in Portugal, but also for non-residents, provided they are residents in another Member State of the European Union or of the European Economic Area.
5.33. The amendment made through the introduction of current paragraphs 9 and 10 of article 72 of the IRS Code came to allow that both residents and non-residents benefit from the regime provided for in article 43, paragraph 2 (consideration of the capital gain balance at only 50% of its value) of the same Code, provided they opt for the inclusion of income obtained both in Portugal and outside this territory.
5.34. A situation that did not occur in the present case.
5.35. Whereby the AT defends that the Arbitral Tribunal should consider that the above-referred jurisprudence is not binding, in view of the current national legal framework, as well as, to rule that the hypothesis of a clear act or of a clarified act is not verified, whereby it must necessarily consider that sufficient doubts are raised, in view of the jurisprudence which we have just invoked, that preclude the acceptance of the Claimant's understanding without prior consultation with the CJEU, so that it may exercise its own competences, pursuant to the Treaties.
5.34. Whereby the present arbitral proceedings should be suspended and the question should be referred to the Court of Justice, pursuant to the provisions of the preliminary ruling procedure (article 267 of the TFEU), to which the Portuguese State is bound pursuant to the TFEU.
5.35. Whereby the aforementioned assessments should be maintained, relating to the IRS of the fiscal year of 2017, and it should be concluded that the application is without merit.
6. Notified, the Claimant pronounced on the request for preliminary ruling to the CJEU, invoking the same, in summary, that it does not appear necessary that the pronouncement, since the Arbitral Tribunal has sufficient Community jurisprudence for the decision of the case.
7. On 2 April 2019, an arbitral order was issued, dispensing with the meeting provided for in article 18, unless the parties requested it.
8. The parties did not request the holding of the meeting provided for in article 18 of the RJAT.
II – Proved Facts
9. Based on the documents attached to the case file, the following are the proved facts with relevance to the decision of the case:
9.1. On 4 January 2016, the Claimant and B..., holder of tax identification number ..., acquired the autonomous fraction, individualized by the letter "A", which constitutes the ground floor, with the right to exclusive use of the rear yard area, of the urban property under a horizontal property regime, located on Rua ..., no. ..., municipality of Lisbon, described in the Land Registry Office of Lisbon under number ... of the parish of ... and registered in the urban property matrix under article ... .
9.2. The Claimant and B... are married under community of property acquired.
9.3. The fraction was acquired for the value of €122,500.00.
9.4. The Claimant resides in Switzerland.
9.5. In March 2017, the Claimant and B... disposed of the aforementioned fraction for the value of €340,000.00.
9.6. When completing their respective IRS income tax returns for the period of 2017, both the Claimant and B... declared the respective capital gain, each in the proportion of 50%.
9.7. The Claimant and B... expressed the intention to reinvest the capital gain, entering in section 5 "Reinvestment of the proceeds from the disposal of property intended for own permanent residence" of Annex G of the Form 3 IRS Declaration, in field "5005 – Amount of debt of the loan at the date of disposal of the asset referred to in field 5002, 5003 or 5004" the value of €69,013.00 and in field "5006 – Amount of proceeds that you intend to reinvest (without recourse to credit)" the amount of €100,987.00.
9.8. Following the submission of the Form 3 IRS income tax return for the fiscal year of 2017, the Claimant was notified of the demonstration of assessment of an amount of tax to be paid by the Claimant of €18,689.34.
9.9. The Claimant submitted the income tax return individually and autonomously, not including in the family unit B... .
9.10. Relating to the tax period of 2017, the Claimant submitted three income tax returns (nos. ...; ...; ...).
9.11. In the income tax returns referred to in 9.9, the Claimant indicated his marital status as "de facto separated".
9.12. In the tax period of 2015, the income tax return submitted by the Claimant, as a resident in Portuguese territory, already discriminated the same condition of "de facto separated".
9.13. The acquired fraction was intended for the permanent residence of B... .
9.14. Following the aforementioned acquisition, B... began to reside in the said fraction permanently.
9.15. The Claimant paid the amount of €18,728.25, within the voluntary payment period.
III – Unproved Facts
10. The Tribunal did not consider the following facts proved:
10.1. The acquired fraction was intended for the own permanent residence of the Claimant and B... .
10.2. Following the aforementioned acquisition, the Claimant and B... began to reside in the said fraction permanently.
IV - On the Law
11. The following questions of law are to be examined:
- On the illegality of the act demonstrating the assessment of IRS and the necessity of preliminary ruling to the CJEU
- On the right to indemnity interest.
These questions shall be examined as follows:
ON THE ILLEGALITY OF THE ACT DEMONSTRATING THE ASSESSMENT OF IRS AND THE NECESSITY OF PRELIMINARY RULING TO THE CJEU
The Claimant invokes having declared, as well as B..., the respective capital gain, in the proportion of 50% each.
He further invokes that both expressed the intention to reinvest the capital gain, entering in section 5 "Reinvestment of the proceeds from the disposal of property intended for own permanent residence" of Annex G of the Form 3 IRS Declaration, in field "5005 – Amount of debt of the loan at the date of disposal of the asset referred to in field 5002, 5003 or 5004" the value of €69,013.00 and in field "5006 – Amount of proceeds that you intend to reinvest (without recourse to credit)" the amount of €100,987.00.
I do not, however, find that this intention of reinvestment of the proceeds from the disposal of the property has been considered by the Tax Authority in relation to the Claimant.
As stated in article 9, paragraph 1 of the IRS Code:
"The following constitute patrimonial increments, provided that they are not considered income of other categories:
a) Capital gains, as defined in the following article;"
Providing article 10, paragraph 1 of the same instrument:
"Capital gains are the gains obtained which, not being considered business and professional income, capital income or real property income, result from:
a) Onerous disposal of real rights over real property and allocation of any property of a person's private assets to business or professional activity exercised in his own name by its owner;"
It further states in paragraph 5 of the same article:
"Excluded from taxation are gains from the onerous transfer of property intended for the own permanent residence of the taxpayer or of his family unit, provided that the following conditions are cumulatively met:
a) The proceeds value, net of the amortization of any loan contracted for the acquisition of the property, shall be reinvested in the acquisition of the ownership of another property, land for construction of property and/or its construction, or in the enlargement or improvement of another property exclusively with the same purpose situated in Portuguese territory or in the territory of another Member State of the European Union or of the European Economic Area, provided that, in the latter case, there is an exchange of information in tax matters;
b) The reinvestment provided for in the preceding subparagraph shall be effected between the 24 months prior and the 36 months following, counted from the date of disposal;
c) The taxpayer expresses the intention to proceed with reinvestment, even if partial, mentioning the respective amount in the income tax return relating to the year of disposal;"
However, it happens that the Claimant, as the Tax Authority emphasizes, declared being de facto separated and currently resides in Switzerland.
It is therefore manifest that one cannot consider that the taxpayer resided in the property sold, nor that he would carry out a reinvestment in the acquisition of the ownership of another property, for his residence.
However, article 10, paragraph 5 of the IRS Code refers to "properties intended for the own permanent residence of the taxpayer or of his family unit".
Now, may we therefore consider that B... is part of the Claimant's family unit, notwithstanding the fact that he has declared that they are de facto separated?
As provided by article 13, paragraph 4 of the IRS Code:
"4 – The family unit is constituted by:
a) Spouses not judicially separated as to persons and property, or persons united in de facto union, and their respective dependents;
b) Each of the spouses or former spouses, respectively, in cases of judicial separation as to persons and property or of declaration of nullity, annulment or dissolution of marriage, and dependents in their charge;
c) The unmarried father or mother and dependents in their charge;
d) The unmarried adopter and dependents in their charge."
It is therefore verified that, for the purposes of the definition of family unit, under the IRS Code, it is not relevant that the spouses are de facto separated, but only that they are (or are not) judicially separated as to persons and property.
In those terms, we must consider that B..., regardless of whether she may be de facto separated from the Claimant, for the purposes of the IRS Code is part of his family unit.
As such, the property sold must be considered as intended for the own permanent residence of the Claimant's family unit, as well as the reinvestment in a property with the same purpose must be admitted.
In those terms, it is illegal the tax act demonstrating the assessment of Personal Income Tax, by having unduly taxed the value of the capital gains relating to the sale of the property listed in paragraph 1 of the Proved Facts.
The Claimant further invokes that the Tax Authority did not consider the 50% reduction provided for in article 43, paragraph 2, subparagraph b) of the IRS Code.
On the other hand, the Tax Authority invokes that article 43, paragraph 2 is not applicable, since the Claimant is a resident of another Member State of the European Union or of the European Economic Area and, as such, pursuant to article 72, paragraph 9 of the IRS Code, would have had to opt for the taxation of all its income in Portugal, including therefore income obtained abroad, and that the Judgment C-443/06 of the Court of Justice of the European Communities of 2007 October 11 (Hollmann) is not applicable, since it predates this legislative amendment.
The Tax Authority further invokes that, since the legal framework does not correspond to the legal framework in force when the Hollmann Judgment was handed down, it is verified the necessity of referring the question to the Court of Justice, pursuant to the preliminary ruling procedure.
Let us examine this.
Article 267 of the Treaty on the Functioning of the European Union states:
"The Court of Justice of the European Union shall have jurisdiction to give preliminary rulings concerning:
a) The interpretation of the Treaties;
b) The validity and interpretation of acts adopted by the institutions, bodies or offices of the Union.
Where such a question is raised before any court or tribunal of a Member State, that court or tribunal may, if it considers that a decision on the question is necessary to enable it to give judgment, request the Court to give a preliminary ruling thereon.
Where such a question is raised in a case pending before a court or tribunal of a Member State whose decisions are not subject to a right of appeal under the law of that Member State, that court or tribunal shall bring the matter before the Court.
If such a question is raised in a case pending before a court or tribunal of a Member State in relation to a person held in custody, the Court shall act with the utmost expedition."
Now, and as the Claimant rightly argues, the question has already been the subject of extensive jurisprudence, both European and national.
In those terms, a preliminary ruling to the CJEU does not appear necessary.
It will therefore be necessary to analyze whether the Tax Authority could have considered the total value of the capital gain.
Article 43, paragraph 2 of the IRS Code (at the date of the facts) states:
"2 - The balance referred to in the preceding paragraph, relating to disposals made by residents provided for in subparagraphs a), c) and d) of paragraph 1 of article 10, positive or negative, is only considered at 50% of its value".
Stating article 72, paragraph 9 of the same instrument (at the date of the facts):
"Residents in another Member State of the European Union or of the European Economic Area, provided that, in the latter case, there is an exchange of information in tax matters, may opt, in relation to the income referred to in subparagraphs a) and b) of paragraph 1 and in paragraph 2, for the taxation of such income at the rate that, in accordance with the table provided for in paragraph 1 of article 68, would be applicable in the case of being earned by residents in Portuguese territory."
However, as stated in the Judgment of the Court of Justice of 18 March 2010, handed down in case C-440/08, in an analogous situation:
"This conclusion is not contested by the argument that the option of assimilation is capable of excluding the discrimination in question. First of all, it should be recalled that the option of assimilation allows a non-resident taxpayer, such as F. Gielen, to choose between a discriminatory tax regime and another allegedly non-discriminatory regime. However, it must be emphasized in this regard that, in the present case, this choice is not capable of excluding the discriminatory effects of the first of these two tax regimes. Indeed, recognition of such an effect would have the consequence, as is essentially observed by the Advocate General at point 52 of his Opinion, of validating a tax regime which would continue, in itself, to violate article 49 TFEU by reason of its discriminatory nature. Moreover, as the Court of Justice has already had the opportunity to clarify, a national regime that limits the freedom of establishment is incompatible with Union law, even though its application is facultative (see in this regard the judgment of 12 December 2006, Test Claimants in the FII Group Litigation, C-446/04, Reports, p. I-11753, no. 162). It follows from the foregoing that the choice granted, in the context of the dispute in the main proceedings, to the non-resident taxpayer, through the option of assimilation, does not neutralize the discrimination found in paragraph 48 of this judgment."
Also stating the Judgment of the Court of Justice of 11 October 2007, handed down in Case C-443/06: "Thus, pursuant to article 43, paragraph 2 of the IRS Code, the amount of capital gains realized by residents when disposing of real property in Portugal is only considered at 50% of its value. In contrast, for non-residents, the IRS Code provides that the taxation of the amount of capital gains realized in the case of disposal of the said property is charged on the totality of this value. From this it follows that, pursuant to the relevant provisions of the IRS Code, the taxation of capital gains realized is not the same for residents and non-residents. Thus, with respect to the sale of the same real property located in Portugal, in the event of realization of capital gains, non-residents are subject to a higher tax burden than that applied to residents, being therefore in a less favorable situation than the latter. Indeed, while a 25% rate is applied to a non-resident on the taxable base corresponding to the totality of the capital gains realized, the consideration of only half of the taxable base corresponding to capital gains realized by a resident allows this person to systematically benefit, on this ground, from a lower tax burden, whatever the tax rate applied to the totality of his income, given that, according to the observations submitted by the Portuguese Government, the taxation of the income of residents is subject to a table of progressive rates whose highest bracket is 42%. Consequently, national legislation such as that in question in the main proceedings has the effect of making the transfer of capital less attractive for non-residents, discouraging them from making real estate investments in Portugal and, consequently, operations related to these investments, such as the sale of real property. In these circumstances, it must be concluded that the fact of providing for a limitation of taxation to 50% of capital gains realized only for residents in Portugal, and not for non-residents, constitutes a restriction on capital movements, prohibited by article 56 CE."
This jurisprudence is applicable even though the Claimant resides in Switzerland, as follows from article 25 of Annex I to the Agreement between the European Community and its Member States and the Swiss Confederation, pursuant to the Judgment of the CJEU of 11/2/2010, handed down in case C-541/08.
Having regard to the tenor of European jurisprudence, it does not appear relevant the legislative amendment contained in article 72, paragraph 9, now article 72, paragraph 13, of the IRS Code, maintaining the understanding that taxation of capital gains of 50% being applied only to residents in Portugal is contrary to European Union Law.
The same has been understood in arbitral jurisprudence.
See the Judgment of the CAAD no. 45/2012-T:
"It remains to be determined whether the option of assimilation, introduced in the Portuguese tax system following the pronouncement of the Hollmann Judgment, contained in paragraphs 8 and 9 of article 72 of the IRS Code, and in force at the date of the facts under review, makes it possible to dismiss the judgment of discrimination of the CJEU concerning the restrictive provision of paragraph 2 of article 43 of the IRS Code to taxpayers resident. In addition to the fact that, as the Claimants rightly point out, the provision of this optional regime imposes an additional burden on non-residents, compared to residents, the option of assimilation is not, in our view, capable of excluding the discrimination in question. In this sense, the CJEU pronounced, in the Judgment of 18 March 2010, handed down in case C-440/08 (Gielen Judgment), in a situation that presents manifest parallelism, with the sole difference that in this case the violation of article 49 was at issue and not that of article 63 of the Treaty on the Functioning of the European Union (…). It is not unknown that the consequences here drawn from the aforementioned Community jurisprudence, in particular from the Hollmann Judgment, provide for a more favorable taxation of real estate capital gains earned by non-residents in Portugal who reside in the European Union than by residents, because, in addition to benefiting equally from the reduction to 50% of the basis of incidence of IRS, they are subject to a single rate of 25%, which will, in most cases, be lower than the progressive rates of residents, in accordance with the table provided for in paragraph 1 of article 68 of the IRS Code, to which is added the fact that the latter must include all their income. However, at the current stage of Community Law, there is no principle or norm that prevents positive discrimination of non-residents vis-à-vis residents, with direct taxation being an area of competence of the Member States. In this way, having regard to the above, the vice of violation of law alleged by the Claimants proceeds, due to the incompatibility of paragraph 2 of article 43 with article 63 of the Treaty on the Functioning of the European Union, insofar as it restricts the reduction to 50% of capital gains subject to IRS to taxpayers resident in Portugal, with the consequent annulment of the tax acts subject to arbitral decision."
In the same manner, it was decided in the Judgment of the CAAD no. 127/2012-T, in which it is stated:
"Thus, the option given to a taxpayer resident in the European Union or European economic area between a regime that continues to be discriminatory, due to violation of the provisions of article 63 of the TFEU and another allegedly non-discriminatory, equating them with residents in Portuguese territory, in addition to having the obligation to opt and to declare income earned outside that territory, does not exclude or neutralize the discriminatory effects of the first of these two regimes. And, consequently, by recognizing that the referred effects are not eliminated, one is admitting that the referred option validates a tax regime that continues in itself to violate article 63 of the TFEU, for the reasons set out above, which is not in accordance with Community law."
An identical decision was handed down by the CAAD in case no. 520/2017-T, in which it is stated: "In view of this situation, we follow the legal reasoning of the aforementioned Judgment handed down by this Tribunal, as well as in the Hollman Judgment. Thus, the interpretation and application of paragraph 2 of article 43 of the IRS Code, in the sense of excluding from the limitation of tax incidence at 50% capital gains resulting from the onerous disposal of real rights over real property, realized by a resident of another Member State of the European Union, it being the same only applicable to residents in Portuguese territory, embodies a violation of the provisions of article 63 of the TFEU, as it translates into a discriminatory tax regime for residents of another Member State of the European Union".
Given the above, we must understand the illegality of the tax act demonstrating the assessment of Personal Income Tax, due to violation of Community law, in particular the provisions of article 63 of the TFEU.
ON THE RIGHT TO INDEMNITY INTEREST
As provided by article 43, paragraph 1 of the General Tax Law "Indemnity interest is due when it is determined, in a gracious reclamation or judicial challenge, that there was error attributable to the services from which results payment of the tax debt in an amount superior to that legally due."
Pursuant to article 24, paragraph 5 of Decree-Law no. 10/2011, of 20 January (RJAT): "Payment of interest is due, regardless of its nature, pursuant to the provisions of the general tax law and the Code of Tax Procedure and Process."
For the Tax Authority to be condemned to the payment of interest, it is necessary, first of all, to ascertain whether there was error on the part of the services, which would allow holding it responsible for the payment of the tax debt in an amount superior to that legally due.
In the present case, and notwithstanding the declarations of the Claimant and of B... in their respective IRS returns, the Tax Authority decided to ignore the intention of reinvestment of the capital gains by the Claimant, as well as to tax this value in its entirety and not at 50%.
In view of the Community and national jurisprudence existing, it is manifest that the Tax Authority should have had knowledge of the illegality of this taxation.
Having the Tax Authority persisted in the same wrongful grounds, it must be understood that there was negligence, which constitutes an "error attributable to the services", for the purposes of the application of article 43 of the General Tax Law.
In those terms, it is understood that the Claimant is entitled to indemnity interest at the legal rate, calculated on the amount of €18,728.25, which shall be counted from 29-11-2018 until full reimbursement of this same amount.
V – Decision
The claim for declaration of the tax act demonstrating the assessment of Personal Income Tax and the tax act assessing compensatory interest relating to fiscal year 2017, in the amount of €18,728.25 is granted.
The claim for condemning the Defendant to the payment of indemnity interest at the legal rate, calculated on the amount of €18,728.25, which shall be counted from 29-11-2018 until full reimbursement of this same amount is equally granted.
The case is fixed at the value of €18,728.25 (value stated and not contested) and the corresponding arbitration fee is fixed at €1,224.00, pursuant to Table I of the Regulation of Costs for Arbitration Proceedings in Tax Matters.
Costs to be borne by the defendant entity.
Lisbon, 11 June 2019
The Arbitrator
(Luís Menezes Leitão)
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