Non-Habitual Resident IRS Exemption on Foreign Dividends: Burden of Proof in Tax Arbitration (CAAD 609/2016-T)

ARBITRAL DECISION

I. Report

1. A… (hereinafter only "Claimant"), taxpayer no.…, with tax domicile at Rua…, no. … – …, …-… Cascais, came, under the provisions of articles 2nd, no. 1, subsection a) and 10th, no. 1, subsection a), of Decree-Law no. 10/2011, of 20 January, a diploma that approved the Legal Regime of Tax Arbitration (hereinafter only "LRTA"), to submit a request for establishment of an arbitral tribunal, in which the Tax and Customs Authority is made a respondent (hereinafter only "Respondent" or "TCA").

2. The said request for arbitral pronouncement was submitted on 12/10/2016;

3. In the respective request, the Claimant requested the Deontological Council of CAAD to designate the Arbitrator, in accordance with the provisions of articles 6th, no. 1 and 11th of the LRTA.

4. The request for establishment of the arbitral tribunal was accepted by the Illustrious President of CAAD and automatically notified to the TCA on 17/10/2016, with the Parties being notified, on 30/11/2016, of the arbitrator designated by the Deontological Council of CAAD.

5. Following acceptance by the designated arbitrator, the present Arbitral Tribunal was deemed constituted on 18/12/2016, in accordance with the provisions of articles 2nd, no. 1, subsection a), 5th, 6th, no. 1, and 11th, no. 1, all of the LRTA (as amended by article 228th of Law no. 66-B/2012, of 31 December).

6. Within the scope of the request for arbitral pronouncement presented by him, the Claimant requested the declaration of illegality of the act of assessment of Personal Income Tax (hereinafter only "IRS"), relating to the year 2014, embodied in Assessment Note no. 2015…, from which resulted the determination of an amount to be paid of € 49,314.00.

7. He also requested, and as a consequence, the annulment of the decision to reject the Voluntary Complaint lodged against the above-identified assessment act, relating to the year 2014, as well as the full reimbursement of the tax paid, plus the respective compensatory interest.

8. In his request, the Claimant invoked, in summary, the following:

i) In accordance with the provisions of article 81st, no. 5, subsection a), of the IRS Code "(…) to non-habitual residents in Portuguese territory who obtain income abroad (…) the exemption method shall be applied, it being sufficient that any one of the conditions set out in the following subsections is met: a) they may be taxed in the other Contracting State, in accordance with a convention to eliminate double taxation concluded by Portugal with that State (…)";

ii) In accordance with article 10th, no. 1, of the Double Taxation Convention (DTC) concluded between Portugal and Brazil, dividends paid by a company resident in one Contracting State – in this case Brazil – to a resident of another State – in this case Portugal – may be taxed in Portugal;

iii) But article no. 2 of the same article determines that "2 — These dividends may, however, also be taxed in the Contracting State of which the company paying the dividends is a resident and in accordance with the legislation of that State (…)", that is, they may also be taxed in Brazil;

iv) This possibility of double taxation in the State of Residence – in this case in Portugal – and in the State of Source or Origin of the dividends – Brazil – requires a limitation of taxation at source of the income according to subsections a) and b) of the cited article 10th of the DTC and which cannot exceed 10% for significant shareholdings in the capital of the Brazilian company paying the dividends or 15% in other cases;

v) But the fact is that it allows taxation in the State of Source payer or Origin of the dividends, in the present case, in Brazil, the Country of the head office of the companies that distributed the dividends to the now Claimant, resident in Portugal;

vi) Thus and in harmony with the provisions of the above-mentioned article 81st, no. 5, subsection a) of the IRS Code, such dividends may be taxed in Brazil in accordance with the DTC, whereby they could never have been subject to IRS in Portugal, given the status of non-habitual resident in Portugal attributed to the now Claimant;

vii) The same conclusion is valid for the income earned by the now Claimant from the "Debentures", which were also paid and actually borne by a company resident in Brazil, B…S/A;

viii) Article 81st, no. 5, subsection a), of the IRS Code, in referring to double taxation conventions and in using clearly and unequivocally the expression "income that may be taxed abroad", in accordance with these conventions, does not require that such income is even actually subject to taxation;

ix) In truth, the DTCs merely stipulate an allocation of taxing power between the two Contracting States and establish maximum taxation rates for that taxation attributed to one or the other Contracting State;

x) In accordance with articles 10th and 11th of the DTC in question, the following situation is verified: the dividends and interest earned by the now Claimant may be taxed in Brazil at certain maximum rates;

xi) In order to avoid double taxation, the now Claimant would theoretically have two options: claim a tax credit for taxes paid in Brazil or choose the exemption method of IRS in Portugal;

xii) What article 81st, no. 5, subsection a) of the IRS Code comes to establish is that the rule is the exemption method of IRS in Portugal as to all types of income from the application of capital – income category E of IRS – that may be taxed in Brazil, even if actually they are not;

xiii) In his IRS declaration for the year 2014, the Claimant did not choose the tax credit method, having instead chosen the exemption method;

xiv) It may be accepted that, faced with the error in the completion of said declaration, the computer system of the TCA was not able to process the declaration containing the incongruence between the choice of the exemption method and the declaration of income in Fields 420 and 411 of Annex J of the declaration, which would have generated automatically the assessment in crisis;

xv) This despite the now Claimant, working in manifest excessive diligence, having intended only to declare exempt income for merely informational purposes and in no way to choose the tax credit method;

xvi) But, for this, he should have made it clearer in his income declaration for the year 2014 that the mention of income from capital application earned in Brazil was only on the basis of a communication obligation for merely calculating the tax expenditure by the Finance authority for the grant of the IRS exemption that benefits the Claimant regarding these exempt income;

xvii) Or alternatively, such exempt income should not even have been declared, given that they are exempt from IRS and the now Claimant chose the exemption method for such income;

xviii) Accordingly and as a precaution, the now Claimant submitted a substitute declaration for the year 2014, in which the choice of the IRS exemption method was maintained, regarding the income from the application of capital – dividends and interest – from Brazil, given that both were paid and actually borne by companies resident in Brazil according to the definitions and provisions of the DTC, and such income may also be taxed in Brazil;

xix) Thus, the condition set out in subsection a), of no. 5 of article 81st of the IRS Code being demonstrated, it remains only to conclude that the assessment in question is invalid for being affected by the defect of violation of law, error of fact and of law in the assumptions of the tax fact and non-existence of the tax fact;

xx) Although the Claimant may have in some way contributed to the present situation with the contradiction detected in the completion of his IRS income declaration for 2014 that he timely corrected, the fact is that even his first declaration clearly reveals the nature of the unnecessarily declared income;

xxi) They are capital income obtained outside Portugal, hence clearly exempt, given the status of non-habitual resident in Portugal that benefits the now Claimant;

xxii) As is evident from the first income declaration submitted, the Claimant made express mention of the exemption method regarding capital income – Category E of IRS;

xxiii) The TCA should not have issued the assessment in question, under the validity of an IRS exemption, without first verifying the Claimant's tax situation;

xxiv) In doing so, the TCA violated the principles of legality, tax legality, collaboration and impartiality, provided for in particular in articles 3rd, 7th, 9th and 11th of the Administrative Code of Procedure and in articles 56th and 59th of the General Tax Law;

xxv) Faced with a manifest error, of fact and of law, in the assessment note, a defect of violation of law due to error in the assumptions of the tax act and non-existence of the tax fact, the TCA committed a grave and notorious injustice in carrying out the assessment;

xxvi) The TCA, through the decision to reject the voluntary complaint, continues to fail to take into account that the alleged "other capital income", erroneously declared by the Claimant in the aforementioned field 411 of his original annual IRS income declaration, correspond to two and only two very precise types of income: a) dividends distributed by Brazilian companies; and b) interest paid by debt instruments also issued by Brazilian companies called precisely "Debentures";

xxvii) The Claimant, when submitting the voluntary complaint, provided proof by means of documents of collection of receipts of Brazilian tax that the income mentioned by error in field 411 has the nature of dividends and interest under Brazilian tax legislation, a fact not accepted by the TCA because it is merely a copy;

xxviii) The Claimant understands that the copy of said document embodies a means of proof with sufficient force to sustain what he alleges, since it is an official document issued by the Ministry of Finance, Federal Revenue Service of Brazil;

xxix) Within the scope of the principle of material truth, a guiding principle of the tax procedure, an official document or its copy should be considered as an appropriate and valid means of proof;

xxx) In accordance with article 75th of the General Tax Law, the declarations of taxpayers submitted in the manner provided for by law are presumed to be true and made in good faith;

xxxi) Moreover, at no moment from the IRS assessment procedure in question to the rejection of the complaint lodged against such assessment act has the TCA ever impugned the accuracy of the documents, allegedly only copies, with which the Claimant clearly and unequivocally demonstrated that the income obtained constitutes dividends and interest from a Brazilian source;

xxxii) The TCA merely alleged that such documents, being copies, would constitute private documents, according to the legal definition contained in article 363rd, no. 2, of the Civil Code;

xxxiii) Such private documents constitute "mechanical reproductions" of facts, within the meaning of article 368th of the Civil Code, making, as such, full proof, except if the TCA had impugned their inaccuracy, which it did not do at any moment;

xxxiv) These documents are valid under the legislation of Brazil, the country where they were issued, and are therefore in accordance with the provisions of article 365th, no. 1, of the Civil Code, and therefore could never have been ignored by the TCA merely on the ground that they were mechanical reproductions;

xxxv) For which reason the copy of the document should be taken into account to prove the nature of said income as dividends and interest, and as such, to exclude their classification under article 22nd of the DTC (Other income) which provides for exclusive taxation of the country of residence;

xxxvi) Now, if such income falls within the category of dividends and interest, it is not understood how, merely by lapse in completion of an annual IRS income declaration corrected by a substitute declaration accompanied by a timely complaint, an appeal can be made to an exclusive right of Portugal to tax such dividends and interest under the DTC;

xxxvii) Moreover, the current no. 5 of article 81st of the IRS Code contains a general IRS exemption for "income of categories E, F and G" of non-habitual residents in Portugal not necessarily associated with a high value-added activity, a requirement that this rule does not contemplate since it also applies, for example, to pensioners;

xxxviii) Therefore the Claimant does not understand the reference contrary to this assertion in the text of the decision to reject the voluntary complaint, although without reflection in the decision itself;

xxxix) Nor does he understand, in any case, the doubts expressed by the TCA as to whether the Claimant exercises an activity of high value-added, a fact proven and confirmed by the TCA itself in granting him the status of non-habitual resident in Portugal;

xl) In accordance with the provisions of article 43rd of the General Tax Law, the Claimant has the right to be indemnified by the TCA, through the payment of compensatory interest, for overpayment of the tax debt, counted from the day following payment until the date of effective reimbursement thereof.

1. For its part, the Respondent invoked, in the reply presented by it and in summary, the following:

i) Forthwith we challenge documents nos. 6, 7 and 8, presented by the Claimant, for all legal purposes, it being further stated that the same do not have the virtue of contradicting the position expounded by the Respondent, either in this forum or in the scope of the administrative procedure;

ii) As referred to in the information that supports the decision to reject the Voluntary Complaint procedure "Regarding the proof of the nature of the income allegedly mentioned, by error, in field 411 – "Other capital income", the taxpayer comes to allege that they are dividends distributed by Brazilian companies and interest paid by debt instruments also issued by Brazilian companies, called "Debentures", as can be verified through document 4. Analyzing said document (fls. 41) it appears that it is merely a copy, not allowing to prove the nature of the income as dividends and interest, and as such, to exclude their classification under art. 22nd of the DTC (Other income) which provides for exclusive taxation of the country of residence.";

iii) Now, first of all, it appears that the issues that arise at this stage, to which it is believed to be imperative to answer categorically, are two:

· Do the documents submitted by the Claimant, either in the administrative procedure phase or in the present request for arbitral pronouncement, allow identification of the income from interest and dividends?

· Of the documents submitted by the Claimant does any prove the payment, in Brazil, of the tax due for having earned the alleged income from interest and dividends?

iv) It is emphasized that the income from dependent work is not being examined here, as specified in the facts given as proven in the information prepared in the Voluntary Complaint procedure;

v) Thus, focusing on the content of the documents submitted with the request for arbitral pronouncement, it appears that document no. 6 is composed of several pages all entitled "Certificate of Income Paid and Tax on Income Withheld at Source", in which the "1. Paying Source Legal Entity", the "2. Beneficial Natural Person of the Income" and the "Nature of Income Salaried Work Income" are identified;

vi) Note that, in the declarations whose paying entities are C… LTD. and D… LTDA are declared, in the table "4. Exempt and Non-Taxable Income", the values 214,929.89 and 272,175.02, respectively, which correspond, apparently, to "4. Profits and dividends, calculated as of 1966, paid by a legal entity (actual, presumed or estimated profit).";

vii) Now, from document no. 6 it is only drawn that income was declared paid by the paying entities to the Claimant here, as a dependent worker, with the exception of the income referred to in the previous article, which correspond to profits and dividends but, apparently, exempt and non-taxable;

viii) Which means that the joining of this document to the file proves useless, for failing to prove the nature of the capital income earned by the Claimant;

ix) Document no. 6, in addition to being also a simple copy, does not even correspond to a document issued by the Brazilian tax authorities, to prove taxation in that State;

x) Regarding document no. 7, entitled "Report of Financial Income", one can read "1. Identification of Paying Source E… AS", the identification of the Claimant here, in table 5. the so-called "Income subject to exclusive taxation (Values in Reals) are recorded, in which were declared, in subfield 02 "Fixed Income Applications";

xi) Well, once again, it will be necessary to conclude that it is not discerned what the income called "fixed income applications" corresponds to, and the Claimant does not mention, nor does he prove, the nature of the same, and there is no mention of the "debentures", as alleged by the Claimant;

xii) On the other hand, apparently this document no. 7 corresponds to a declarative exercise by the Claimant or by the custodian "E…", so much so that it is called "Report of Financial Income", not proving, as already stated, the nature of the income to which it refers, whether interest whether dividends whether other capital income;

xiii) In addition to being also a simple copy, it is not a document issued by the Brazilian tax authorities to prove taxation in that State, whereby it does not prove that such income was subject to actual taxation there, that is, the document does not demonstrate the value of the assessed tax and whether it was paid, being irrelevant;

xiv) As for document no. 8, no matter how great the deductive and even intuitive capacity of the Respondent, it fears to hazard what it may be or what it intends to prove, for, on the one hand, it does not identify what income, possibly, could be being referred to, and, on the other, it does not materialize proof of any type of payment;

xv) It does, in fact, have the reference "DARF valid for payment until 29/05/2015" affixed, but what is intended to be paid or if it was paid is unknown, or, at least, this information cannot be extracted from the document in question;

xvi) Considering, once again, that document no. 8, like the previous ones, does not have the capacity to prove either the nature of the income in question, or whether the assessment carried out resulted in tax payable and if the same was paid;

xvii) And since it is also here a simple copy and not a document issued by the Brazilian tax authorities to prove taxation in that State, whereby it again does not prove that such income was subject to actual taxation there, that is, the document does not demonstrate the value of the assessed tax and whether it was paid;

xviii) In view of the above, regarding documents nos. 6, 7 and 8, it will be inevitable to invoke no. 1, article 74th of the General Tax Law (GTL) "The burden of proof of the facts constitutive of the rights of the tax administration or of the taxpayers falls upon whoever invokes them";

xix) In the situation in question in the present proceedings, it is easily verified that the Claimant failed to make the proof that was incumbent upon him, for, first, the documents submitted with the present request for arbitral pronouncement do not demonstrate the nature of the income in question;

xx) More specifically, it is not determined what type the capital income earned falls within so that, by this route, the requirements legally provided in the DTC Portugal – Brazil, invoked by the Claimant, are verified;

xxi) It will be necessary to conclude that the Respondent acted well within the scope of the Voluntary Complaint procedure, faced with the undefined classification of the income in question, in making the legal classification under article 22nd of the DTC;

xxii) Even if it is considered that the Claimant managed to prove that the income earned corresponds to interest and dividend income, by force of the application of the Convention (articles no. 10 and 11), which is only by mere academic hypothesis conceived, although without conceding, it is always emphasized that he did not submit the documents issued by the tax authorities proving the payment of the tax in Brazil;

xxiii) Thus, the Claimant failed to prove that the "other income" declared in annex J of Model 3 can "… be taxed in the other Contracting State, in accordance with a convention to eliminate double taxation concluded by Portugal with that State", in accordance with article 81st, no. 4, subsection a), of the IRS Code;

xxiv) For which reason the exception of no. 3, of article 22nd of the DTC Portugal - Brazil does not apply to said "other income", but rather the general rule provided in no. 1 of the same article, according to which "The elements of income of a resident of one Contracting State, and wherever they come from, not dealt with in the preceding articles of this Convention, can only be taxed in that State", as the Respondent decided, and correctly, in the scope of voluntary complaint;

xxv) Therefore, it is important, in view of all the above, to conclude that the arbitral request should be dismissed in its entirety.

1. By arbitral order of 31/03/2017, the Claimant was notified to, within 10 days, inform the Tribunal whether it was in a position to exhibit, before the Tribunal, the originals of the documents issued by the Brazilian authorities, to which the Respondent referred to in its reply;

2. Having the Respondent answered affirmatively, the day 18/05/2017 was designated for the holding of the meeting referred to in article 18th of the LRTA, in which the Respondent would proceed to submit said originals, which were annexed to the respective Minutes;

3. The parties were also notified to submit written pleadings, which they would do, having, in essence, reproduced the grounds previously invoked.

II. Sanation

The tribunal is competent and is regularly constituted.

The parties possess legal personality and legal capacity, being duly represented.

The procedural means is appropriate.

There are no nullities, exceptions or preliminary issues that may prevent the examination of the merits of the case.

III. Facts Deemed Established

With regard to the factuality brought to the proceedings by both Parties, the Tribunal considers the following facts as proven, with relevance for the final decision:

A) The Claimant requested, on 31 December 2014, from the Service Department of Taxpayer Registration of the TCA, the status of non-habitual resident in Portugal, in accordance with the provisions of nos. 7 and following of article 16th of the IRS Code, having submitted the respective supporting documentation for this request (cf. Doc. no. 4 of the Arbitral Request);

B) By order of the Director of the Service Department of Taxpayer Registration, dated 28/11/2014 and notified to the representative of the Claimant through letter no.…, the request to grant the status of non-habitual resident for the year 2014 was granted (cf. Doc. no. 5 of the Arbitral Request);

C) On 30/06/2016, the Claimant submitted the IRS income declaration, relating to the year 2014, in accordance with which he entered, in Field 420 of Annex J, the amount of € 156,068.35 ("Dividends or Profits – without withholding in Portugal) and, in Field 411 of the same Annex, the amount of € 151,938.67 ("Other Capital Income Not Referred to in no. 5 and no. 12 of Article 72nd of the IRS Code – without withholding in Portugal"), as well as the tax that will have been paid abroad;

D) In the declaration referred to in C), income from dependent work was also declared, obtained abroad, in the amount of € 7,017.14, pensions, in the amount of € 2,910.93 and real estate income, in the amount of € 7,075.77, as well as the amounts of tax that will have been paid, in this scope, abroad;

E) On 19/10/2015, the IRS assessment act with no. 2015… was issued, according to which a "Global Income" and a "Taxable Income" was determined in the amount of € 151,938.67, which in turn resulted in the determination of an amount of tax to be paid, with reference to the year 2014, of € 49,314.00 (Cf. Doc. no. 2 attached to the arbitral request);

F) The Claimant voluntarily proceeded, on 01/12/2015, to pay the assessed tax, in the aforementioned amount of € 49,314.00, as is evident from the receipt attached to the arbitral request as Doc. no. 9;

G) On 28/03/2016, the Claimant would submit, with regard to the same year 2014, a substitute declaration, in which Annex J no longer contained the amounts of € 156,068.35 and € 151,938.67, and the reference to tax paid abroad had also been removed, all referred to in subsection C) of the evidentiary segment;

H) The Claimant submitted, on 29/03/2016 (Cf. receipt stamp affixed on Doc. no. 11 attached to the petition), a voluntary complaint against the IRS assessment act identified in subsection E) of the evidentiary segment, in which he sought, in summary, the following: i) that the substitute IRS declaration submitted by him, with reference to the year 2014, be accepted and processed; ii) that the assessment complained of be annulled, in particular, the tax collected; iii) that any execution or counter-violation procedure possibly instituted or pending, related to the assessment complained of, be filed; and iv) that all execution or counter-violation proceedings and or tax penalties be suspended, pending consideration of the complaint;

I) By Letter no.…, of the Administrative Justice Division of the Finance Directorate of Lisbon, dated 14/06/2016, the Claimant, represented by his representative, was notified to exercise the right to be heard regarding the draft decision to reject the voluntary complaint submitted on 29/03/2016;

J) On 01/07/2016, the Claimant would exercise his prior right to be heard with reference to the draft decision referred to in I);

K) By Letter no.…, of the Administrative Justice Division of the Finance Directorate of Lisbon, dated 04/08/2016, the Claimant, represented by his representative, was notified of the final decision to reject the voluntary complaint submitted on 29/03/2016;

L) In the year 2014, the Claimant earned income designated as "Salaried Work Income", paid by the following entities: "F… LTDA" (in the amount of 2,190.00 Reals), "G… LTDA" (in the amount of 2,190.00 Reals), "C… LTDA" (in the amount of 2,190.00 Reals), H… LTDA" (in the amount of 2,190.00 Reals), "I… LTDA" (in the amount of 2,190.00 Reals), " J…LTDA" (in the amount of 2,190.00 Reals), " K…S/A" (in the amount of 2,190.00 Reals), "D…LTDA" (in the amount of 2,190.00 Reals), " L… S/A" (in the amount of 2,190.00 Reals) and "M… S/A" (in the amount of 2,191.20 Reals) (cf. Doc. no. 6 of the Arbitral Request);

M) In the year 2014, income designated as "Fixed Income Applications" was paid to the Claimant by "E… SA", in the amount of 935,139.76 Reals.

IV. Unproven Facts

After analyzing all the proof produced by the Parties, the Tribunal considers that the following facts were not proven:

N) Those that respect, specifically, the income referred to in Document no. 7 submitted with the arbitral request;

O) If the amount of € 151,938.67, contained in Field 411 of Table 4 of Annex J of the IRS Income Declaration Model 3 relating to 2014, submitted on 30/06/2015, corresponds to, or is encompassed within, the amount of income indicated in that Document no. 7 (935,139.76 Reals);

No other facts with relevance for the final decision were identified.

V. Motivation of the Decision

Prior to examining the merits of the request, it is important to emphasize that Courts, here including Arbitral Courts, do not have to examine all the arguments presented by the parties, as is evident by way of example from the Judgment of the Plenary of the 2nd Section of STA, of 07/06/1995, handed down in appeal no. 5239.

In fact, the issues raised by the parties are not to be confused with the arguments, reasons or motivations produced. Issues, in particular for the purposes of article 608th, no. 2 of the Civil Procedure Code, are only those of substance and which integrate the decision matter, that is, those that relate to the claim, the cause of action and the exceptions (see in this sense the Judgment of the Supreme Court of Justice, of 29/11/2005, handed down in appeal no. 05S2137 or the Judgment of the Central Administrative Court South, of 25/09/2012, handed down in appeal no. 05073/11).

Thus and taking into account what was set out above, it is important to note that at the genesis of the present arbitral request is the Claimant's claim to obtain the annulment of the voluntary complaint lodged against the IRS assessment act issued following the first IRS income declaration submitted by him, relating to 2014, as well as the annulment of this act itself.

Furthermore, the Claimant also claims that the substitute declaration subsequently delivered by him, relating to that year 2014, be accepted, being in particular recognized the exemption in Portugal of the amount of € 151,938.67, declared in Field 411 of Table 4 of Annex J of the original IRS Model 3 income declaration of that year, under the provisions of article 81st, no. 5, of the IRS Code and article 10th of the DTC Portugal-Brazil.

For its part, the TCA, here Respondent, considers that the Claimant failed to prove the nature and quantification of the income recorded in Field 411 of the original income declaration relating to capital income exempt, nor ruled out its classification under the rule provided in article 22nd of the DTC Portugal-Brazil – Other Income.

In view of the above, the question of law to be decided in the present proceedings is, in essence, whether the proof presented by the Claimant, either in the petition of the arbitral request, or in the context of the reply to the TCA's defense, or in the context of the meeting of article 18th of the LRTA, allowed to prove the effective nature and quantification of such income and to exclude its classification under the said rule.

VI. On the Law

As appears from all the above, the Claimant points to the illegality of the decision to reject the voluntary complaint lodged against the IRS assessment act in issue, and of this latter act itself, due to error of fact and of law and non-existence of the tax fact, based on the fact that the income declared by him in the said Field 411 of his original annual IRS income declaration, correspond to two types of income: a) dividends distributed by Brazilian companies; and b) interest paid by debt instruments also issued by Brazilian companies called "Debentures".

The Claimant further considers that he has proved, in particular, by means of documents of collection of receipts of Brazilian tax, that such income has the nature of dividends and interest under Brazilian tax legislation.

The Claimant also contests the allegation made by the TCA, that such documents would not be suitable, for purposes of proof, because they are mere copies.

On the other hand and with regard to the grounds invoked by the now Respondent, it is important to make clear that the Tribunal will have to rely, not only on the content of the decision to reject the voluntary complaint issued with reference to the complaint lodged by the Claimant, but also on the very arguments contained in the defense presented in the scope of the present arbitral request.

And the Respondent would summarize such grounds in its defense, considering that the issues to be answered at this stage would be the following: i) do the documents submitted by the Claimant, either in the administrative procedure phase or in the present request for arbitral pronouncement, allow identification of the income from interest and dividends? and ii) of the documents submitted by the Claimant does any prove the payment, in Brazil, of the tax due for having earned the alleged interest and dividend income?

As stated above, the Tribunal considers that the issue to be decided is slightly different and more concrete, it being important to determine whether the proof presented by the Claimant throughout the process allowed to prove the effective nature and quantification of the income recorded in Field 411 of the original income declaration and, thus, to exclude its classification under article 22nd of the DTC Portugal-Brazil – Other Income.

Let us examine this.

First, it is important to emphasize that no. 5, article 81st, of the IRS Code, establishes that the exemption method shall apply, with reference to income of Categories B, E, F and G, obtained abroad by non-habitual residents in Portuguese territory, it being sufficient that any one of the following conditions is met:

"(…)

a) They may be taxed in the other Contracting State, in accordance with a convention to eliminate double taxation concluded by Portugal with that State; or

b) They may be taxed in the other country, territory or region, in accordance with the OECD model convention on income and property taxation, interpreted in accordance with the observations and reservations made by Portugal, in cases where there is no convention to eliminate double taxation concluded by Portugal, provided that they are not on a list approved by ordinance of the member of the Government responsible for the finance area, relating to privileged taxation regimes, clearly more favorable and, as well, provided that the income, by the criteria set out in article 18th, is not to be considered obtained in Portuguese territory".

That is and in the first place, it is evident that such rule does not impose, contrary to the position of the TCA on this matter, reproduced in the present proceedings, actual taxation abroad. It is sufficient that the income may be taxed in the country of origin.

And the truth is that the DTC Portugal-Brazil provides, in its articles 10th and 11th, this possibility of taxation in Brazil.

Otherwise, indeed, the distinction made by the legislator, in an express and unequivocal manner, regarding the legal regime of elimination of double taxation provided in no. 4 of that article 81st for income of Category A would not be understood.

Effectively, in accordance with this no. 4, for the exemption to occur, it will be necessary to comply with an aggravated burden of proof, requiring proof of actual taxation abroad, namely that the income in question:

" (…)

a) Be taxed in the other Contracting State, in accordance with a convention to eliminate double taxation concluded by Portugal with that State; or

b) Be taxed in the other country, territory or region, in cases where there is no convention to eliminate double taxation concluded by Portugal, provided that the income, by the criteria set out in no. 1 of article 18th, is not to be considered obtained in Portuguese territory".

Hence it has been considered that the issue of actual payment of tax is not the one that truly matters to be clarified in these proceedings, being in this respect fruitless the submission by the Claimant of any possible receipts of tax payment in Brazil.

In reality, it matters, solely and exclusively, to understand whether the income recorded in Field 411 of the original income declaration submitted by the Claimant falls within the scope of the exemption that results from the application of articles 81st, no. 5, of the IRS Code and 10th and 11th of the DTC Portugal-Brazil, proving its nature, quantification and potential taxation in the country of origin.

And having arrived here, it is necessary then to determine who had such burden of proof.

Now, the submission of the present arbitral request was triggered, in the first place, by the alleged errors committed by the Claimant in the first income declaration submitted with reference to the year 2014. In fact, the issuance of the assessment act sub judice embodies, in accordance with the normal assessment procedure provided in article 76th of the IRS Code, the application of the information provided by the Claimant when completing that declaration.

It is the Claimant himself, moreover, who admits this in the arbitral request.

As the South Central Administrative Court clearly explained, in the judgment handed down in case no. 01076/03, dated 03/05/2005: "In our tax system, the principle of the taxpayer's declaration prevails in determining the taxable matter, which implies an increase in the obligations of collaboration of the taxpayer with the TCA, among which is that of maintaining accounting organized in accordance with commercial and tax law and which allows the determination and inspection of IRS (arts. 78th of the Tax Code and 38th, no. 1, subsection e) of the IRS Code) and that of submission of the periodic declaration. In nos. 1 and 2 of art. 76th of the Tax Code was established: «1. The assessment process is instituted with the declarations of the taxpayers or, in the absence or defect of these, based on all the elements available to the competent entity. 2. The determination of the taxable matter shall be made on the basis of the declarations of the taxpayers, provided they are submitted in the manner provided for by law and the indispensable elements are provided to the tax administration to verify its tax situation». For this purpose, ALFREDO JOSÉ DE SOUSA and JOSÉ DA SILVA PAIXÃO consider that the declaration is an act by which the taxpayer brings to the knowledge of the Tax Administration the existence of the taxable matter that integrates the tax fact, indicating its amount and all the elements necessary for the calculation of tax (charges, deductions, etc.). The declaration is required by law and translates an act of collaboration of the taxpayer given the public nature of tax justified by the idea that the tax obligation is not a voluntary obligation, contractual, but the fulfillment of a legal duty. It is a mandatory act and if the taxpayer, being in the conditions provided for by law, fails to comply with it, is subject to sanctions (arts. 31st and 32nd of RJIFNA). The Portuguese tax system thus enshrines the method of the taxpayer's declaration in determining the taxable matter (arts. 57th to 61st of the IRS Code, 16th of the Corporate Income Tax Code and 28th to 40th of the VAT Code). (…) Therefore, when the taxpayer's declaration is in accordance with the elements contained in his accounting or records, this is shown to be organized in accordance with law and no errors, inaccuracies or other well-founded indications are found that it does not correspond to reality, it is presumed that the declared taxable matter is the real one. And, as a result of the provisions of art. 38th of the IRS Code, the TCA can only rectify the declarations of taxpayers and proceed to the corresponding additional assessment when it reasonably considers that they show tax lower than due".

In this respect, it can be stated that the TCA assessed the tax based on the elements available to it and which were provided by the taxpayer, it not being required of it at that moment to act differently, for the declaration submitted on 30/06/2015 did not raise doubts.

In fact, despite declaring the choice of the exemption method, the Claimant also declared income which he recorded in Field 411 of the declaration and which in reality correspond to the category of "Other capital income", provided for in article 22nd of the DTC Portugal-Brazil, a rule that provides for exclusive taxation of the country of residence, that is, Portugal. Whereby regarding this income the exemption method provided for in no. 4, article 81st, of the IRS Code does not apply, since taxing authority over such income belongs exclusively to Portugal.

That is, what resulted from such declaration was the Claimant's choice of the application of the exemption method, regarding income that could benefit from this exemption, in particular, those provided for in articles 10th and 11th of the DTC. The other income, having been recorded in Field 411, could never benefit from this exemption.

In the case sub judice, the TCA was obliged to comply with the principle inherent in no. 1 of article 75th of the General Tax Law (GTL), according to which "The declarations of taxpayers submitted in the manner provided for by law are presumed to be true and made in good faith, as well as the data and determinations recorded in their accounting or records, when these are organized in accordance with commercial and tax legislation, without prejudice to the other requirements on which deductibility of expenses depends". And there are, for the above reasons, no reasons for the non-application of this presumption, in particular, by application of no. 2 of this rule.

Therefore, it is reiterated, the TCA acted correctly in assessing based on the elements presented by the taxpayer, the now Claimant.

It was incumbent on the Claimant, for not agreeing with such assessment, to contest it, either through submission of a voluntary complaint, judicial challenge or arbitral request, or through submission of a substitute declaration. Which, in truth, the Claimant would do.

But, in this context, it was incumbent on him to demonstrate, conclusively, the error that he points to in the original income declaration, proving that the amount he declared in Field 411 referred in fact to exempt income, depending on its nature. For which reason it was on him that the burden of proof referred to in article 74th of the GTL fell.

Let us examine then, specifically, whether the Claimant managed to fulfill such burden, which he attempted to do through the documentation submitted to these proceedings.

Now, in the first place, the Claimant submitted, as Document no. 6 of the arbitral request, copies of declarations issued with the stamp of the Ministry of Finance – Federal Revenue Service of Brazil, which attest the payment to the Claimant, in the year 2014, of income designated as "Salaried Work Income", by the following entities: "F… LTDA" (in the amount of 2,190.00 Reals), " G… LTDA" (in the amount of 2,190.00 Reals), "C… LTDA" (in the amount of 2,190.00 Reals), H… LTDA" (in the amount of 2,190.00 Reals), "I… LTDA" (in the amount of 2,190.00 Reals), "J… LTDA" (in the amount of 2,190.00 Reals), "K… S/A" (in the amount of 2,190.00 Reals), "D… LTDA" (in the amount of 2,190.00 Reals), "L… S/A" (in the amount of 2,190.00 Reals) and " M… S/A" (in the amount of 2,191.20 Reals).

Such declarations, in cases where the entities paying the income were "C… LTDA" and "D… LTDA", contained the indication of having been paid "profits and dividends", in the amounts, respectively, of 214,929.89 Reals and 271,175.02 Reals. Having, in the context of the documentation submitted at the arbitral meeting held on 17/05/2017, been replaced by others that no longer contained this mention but which were found to have an earlier date.

Regarding these documents, the Claimant would come to say, in the context of final pleadings and insofar as it is relevant here, that "These documents reflect the values received by the Claimant as salaried work declared in field 401 of the annual income declaration relating to the fiscal year 2014".

However and as stated, regardless of the incongruence pointed out above regarding the dates, the fact is that what is under discussion in the present proceedings is the payment of capital income and, specifically, the validation of the amount recorded in Field 411 of Model 3, not salaried work income (Category A) paid in Brazil.

Whereby such documents would never be able to prove the merit of the Claimant's claim.

The Claimant also submitted, as Document no. 7 of the Arbitral Request, a document likewise issued with the stamp of the Ministry of Finance – Federal Revenue Service of Brazil, which is signed and stamped by "E… SA". In this document it appears that he was paid, in the year 2014, income designated as "Fixed Income Applications", in the amount of 935,139.76 Reals.

Regarding this document, the Claimant would come to state, in the context of final pleadings, the following:

"It is a document issued by the Ministry of Finance of Brazil that proves income of a financial nature entitled «Report of Financial Income" and which identifies as the paying source the company «E… SA»."

(…)

"Regarding the nature of these financial income we refer to the clarifications of the Claimant presented in the aforementioned response to the defense of the Authority Respondent, in particular in its points 3 to 8, which leave no doubt that the term "Fixed Income Applications/Debentures", referred to in line 02 of field 05 of the document in question, is included in the definition of interest.

Income that was subject to exclusive taxation as referred to in field 5 and which was erroneously declared in field 411 of the annual IRS declaration.

This document is signed by the said paying source: «E… SA»".

Let us examine this document.

First, no mention is discerned in the document of "Debentures", as the Claimant alleges, in particular, in line 02 of field 05 of the declaration.

In fact, such declaration merely refers to the payment of income designated as "Fixed Income Applications". Which by itself does not allow attestation of the effective nature of such income.

It does not allow, in particular and if we are talking about dividends, to confirm, in accordance with and for the purposes of the provisions of no. 3 of article 10th of the DTC Portugal-Brazil, whether the Claimant was paid income from "shares, shares or bonus shares, mining shares, founder shares or other rights, with the exception of credits, which allow participation in profits, as well as income derived from other equity shares subject to the same tax treatment as dividend income by the legislation of the State of which the company distributing them is resident" or else "income derived from an account or partnership in participation".

Nor does it allow, in the case of interest and according to no. 5 of article 11th of the DTC, to ascertain whether we are faced with "income from public debt, bonds with or without mortgage guarantee and with or without the right to participate in profits and other credits of any nature, as well as any income assimilated to interest income under the tax legislation of the State from which the income comes".

That is, the proof submitted by the Claimant does not allow the Tribunal to assess the concrete nature and origin of the income declared in Field 411 of the original Model 3 of Corporate Income Tax. It only allows to suppose that capital income will have been paid and that, taking into account only the designation contained in that Document no. 7, may be related to financial applications. Nor does such document even make reference to the payment of dividends, which contradicts what the Claimant alleges, that the amount recorded in that Field 411 would also refer to dividends paid.

Furthermore, the documentation submitted by the Claimant, in the context of the reply to the defense presented by the TCA, brought only some generic concepts in this matter to the proceedings and which, although they may help the judge in the theoretical delimitation of the concept of "Fixed Income Applications", do nothing to advance the specific case.

Moreover and as the Claimant himself states, such documents will have been submitted to the proceedings to clarify the concept of "Debentures", a term which, as mentioned, does not appear in Document no. 7.

In fact, the Claimant failed to prove that the income that – erroneously, according to him – was recorded in Field 411 of his income declaration, falls within no. 3 of article 10th or no. 5 of article 11th of the DTC Portugal-Brazil.

That is, he failed to rebut the presumption, resulting from the declaration itself submitted by him, that the same should be classified, as they were by the TCA, as "Other Income", under article 22nd of that DTC.

Even if it is admitted that they are capital income, the proof presented by the Claimant is insufficient to demonstrate that they correspond to the categories of exempt capital income. For this, the Claimant could have submitted, throughout the entire process, other documentation that would allow understanding the effective nature of the income in question, possibly the contracts that originated these payments or, in the case of dividends, the corporate acts that resulted in this payment and that would have justified it.

Not having done so and considering the proof presented by the Claimant, it is not possible to conclude, or to state with complete certainty, that such income should have been exempt from taxation under the provisions of articles 81st, no. 5 of the IRS Code and 10th and 11th of the DTC.

And the fact is that the TCA, throughout the entire process, either in the scope of voluntary complaint, or in the context of the present arbitral process, always argued for the unsuitability of the proof presented by the Claimant, thereby instructing him to effectively demonstrate the nature of the income in question, in order to rebut the presumption resulting from his income declaration.

Either by alleging that the documentation presented was mere copies, not certified by the Brazilian tax authorities, or by the allegations made in points 25th, 37th, 38th, 39th and 40th of the defense presented by the TCA and which are reproduced:

"

                                                  25th

On the other hand, apparently this document no. 7 corresponds to a declarative exercise by the Claimant or by the custodian "E…", so much so that it is called "Report of Financial Income", not proving, as already stated, the nature of the income to which it refers, whether interest whether dividends whether other capital income (…)

                                                  37th

In the situation in question in the present proceedings, it is easily verified that the Claimant failed to make the proof that was incumbent upon him.

                                                  38th

First, the documents submitted with the present request for arbitral pronouncement do not demonstrate the nature of the income in question.

                                                  39th

More specifically, it is not determined what type the capital income earned falls within so that, by this route, the requirements legally provided in the DTC Portugal – Brazil, invoked by the Claimant, are verified.

                                                  40th

It will be necessary to conclude that the Respondent acted well within the scope of the Voluntary Complaint procedure, faced with the undefined classification of the income in question, in making the legal classification under article 22nd of the Convention (…)"

But, even having the Tribunal attempted to abstract from the question of proof of the nature of the income, the fact is that, no matter how many attempts it made, and it did make them, it did not even manage to establish, in quantitative terms, the correspondence of the amount contained in that Document no. 7 (935,139.76 Reals) with the amount recorded in Field 411 of the income declaration submitted by the Claimant (€ 151,938.67).

In fact, even resorting to some of the many online currency conversion platforms, it is not possible to achieve such correspondence. Note for example the result obtained on the Bank of Portugal website (at www.bportugal.pt/conversor-moeda), by reference to 01/07/2017: 935,139.76 Reals = € 248,707.38

Those values, according to the same platform, if assessed on the date of 31/12/2014, would be as follows: 935,139.76 Reals = € 290,352.95.

And if, in yet another vain attempt, we resort to a similar platform, with the address at www.br.investing.com/currencies), the result obtained, by reference to 01/07/2017 is: 935,139.76 Reals = € 249,308.27

Those values, according to this latter platform, if assessed on the date of 31/12/2014, would be as follows: 935,139.76 Reals = € 290,828.45.

That is and even though among such results there is a minimal quantitative deviation, the fact is that it is not possible to make the connection between the values recorded in Document no. 7 and in Field 411 of Model 3 of 2014.

And it is certain that, in reality, the Claimant at no time managed to establish such correspondence, in particular, by resorting to the application of exchange rates, having merely alleged that the value contained in Document no. 7 corresponded to the value in Field 411.

To this is added the fact that Document no. 7 refers that the amounts declared are "Net Income", whereby it becomes even more impossible to quantify and understand the calculations in which the Claimant based himself to allege such correspondence.

Finally, regarding document no. 8 submitted with the arbitral request, it would always be receipts of tax payment in Brazil, which, as stated, is irrelevant for the case at hand, since it would always be sufficient the demonstration that the income could be subject to taxation in that country, which is done through article 81st, no. 5, of the IRS Code and the DTC itself (cf. arts. 10th and 11th).

But, even so, it will always be said that such receipts of payment do not allow confirmation of the nature of the income paid, in particular because the only reference they contain is to the code of the respective receipt (…), whose identification is unknown and which the Claimant did not demonstrate, even when requested to do so by the TCA in its defense.

Nor is it, once again in quantitative terms and resorting to the aforementioned currency conversion indices, possible to approach the amounts of tax declared in the original model 3 IRS declaration submitted by the Claimant.

Thus and in summary, the Tribunal considers that the Claimant did not bring to the proceedings the necessary elements for the proof of the facts alleged by him when submitting the voluntary complaint against the IRS assessment act issued with reference to the year 2014, as well as, the facts invoked in the arbitral process itself. Specifically, he did not provide the proceedings with the proof that would rebut the presumption of the truthfulness of the facts himself initially declared for the year 2014.

And, as stated, it was on him that such burden fell, in accordance with the provisions of article 74th of the GTL.

As taught by DIOGO LEITE DE CAMPOS, BENJAMIM SILVA RODRIGUES and JORGE LOPES DE SOUSA[1], "The production of proof susceptible of convincing of the truthfulness of a fact invoked, is sufficient, in principle, to consider the burden of proof fulfilled. However, if there are in the tax procedure evidentiary elements in the opposite sense (counter-proof), a situation of doubt may arise. In this case, if there is no case of full legal proof, the rule of burden of proof will again prevail, and doubt should be valued procedurally against whoever has such burden (art. 346th of the Civil Code)".

Attention is also drawn to what was considered in this regard by the North Central Administrative Court, in the Judgment of 15.02.2012, handed down in case no. 00881/08.0BEBRG, by stating peremptorily that the doubt that implies the annulment of the assessment act cannot be considered founded if it rests "on the absence or inertia of proof by the parties, especially the challenger. (…) The challenger should not limit himself to alleging facts that cast doubt on the existence and quantification of the tax fact. Only by means of conclusive proof of such facts is it possible to conclude that such doubt is founded".

In this case, it is not even a question of the Tribunal being in doubt as to the tax facts, but only of the proof that appeared necessary for the refutation of the presumption that formed with the first declaration delivered and, in this measure, the proof necessary to demonstrate that the assessment act was affected by illegality for having been issued on the basis of non-existent tax facts and error in its assumptions, not being realized on the one who bore that burden, the now Claimant.

As a consequence of what has just been considered, the Tribunal also considers that no grave and notorious injustice occurred attributable to the TCA, as invoked by the Claimant.

For which reason the request formulated by the Claimant will have to be dismissed in its entirety.

VII. Decision

In view of the above, it is decided to judge the arbitral request dismissed, not proven, and, as a consequence:

i) Judge the request to annul the decision to reject the voluntary complaint lodged against the IRS assessment act relating to the year 2014 as dismissed;

ii) Judge the request to annul said assessment act and for payment of compensatory interest as dismissed;

iii) Judge the other requests formulated by the Claimant in the petition, in particular, those contained in subsections c) and d) of the final request as dismissed.

VIII. Value of the Proceedings

The value of the proceedings is fixed at € 49,314.00, in accordance with the provisions of article 97th-A, no. 1, subsection a), of the Tax Procedure and Process Code, applicable by force of the provisions of subsections a) and b), of no. 1, article 29th, of the LRTA and of no. 2 of article 3rd of the Regulation of Costs in Tax Arbitration Proceedings.

XIX. Costs

The costs of the proceedings are fixed at € 2,142.00, in accordance with Table I of the Regulation of Costs of Tax Arbitration Proceedings, to be paid by the Claimant, due to full loss of the action.

Notify accordingly.

Lisbon, 20 July 2017

The Arbitrator

(Diogo Bonifácio)

[1] In "General Tax Law Annotated and Commented", 4th Edition, 2012, p. 655.