CAAD 613/2018-T: Capital Gains Tax (IRS) on Property Sale by EU Non-Resident – Article 43(2) CIRS Ruling

ARBITRAL DECISION

I. REPORT

1. On 5 December 2018, A..., Tax Identification Number..., resident in ..., ... ..., London, ..., United Kingdom (hereinafter, the Claimant), filed a request for constitution of an arbitral tribunal, under the combined provisions of articles 2, paragraph 1, subparagraph a), and 10, paragraphs 1, subparagraph a), and 2, of Decree-Law No. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as LRAT), with a view to this tribunal's pronouncement regarding:

• The declaration of illegality and partial annulment of the Personal Income Tax (IRS) assessment No. 2018..., relating to the year 2017, in the total amount of € 80,016.19;

• The recognition of the Claimant's right to indemnity interest, in accordance with applicable law.

The Claimant attached 3 (three) documents and did not request the production of any other evidence.

The Respondent is the AT – Tax and Customs Authority (hereinafter, Respondent or AT).

1. The request for constitution of an arbitral tribunal was accepted and automatically notified to the AT on 12 December 2018.

2. The Claimant did not appoint an arbitrator, therefore, under the provisions of paragraph 1 of article 6 and subparagraph a) of paragraph 1 of article 11 of the LRAT, the President of the Deontological Council of CAAD appointed the undersigned as arbitrator of the singular Arbitral Tribunal, who communicated acceptance of the assignment within the applicable period.

3.1. On 28 January 2019, the parties were duly notified of this appointment and did not express an intention to challenge the appointment of the arbitrator, in accordance with the combined provisions of article 11, paragraph 1, subparagraphs b) and c), of the LRAT and articles 6 and 7 of the Deontological Code of CAAD.

3.2. Thus, in accordance with the provision of subparagraph c) of paragraph 1 of article 11 of the LRAT, the singular Arbitral Tribunal was constituted on 18 February 2019.

1. On 25 March 2019, the Respondent, duly notified for this purpose, filed its Response in which it specifically challenged the arguments raised by the Claimant and concluded in favor of dismissal of the present action, with its consequent absolution from the claim; the Respondent further proposed the suspension of the present arbitral proceedings and the subjection of the legal-tax question at issue to the CJEU through a preliminary ruling procedure, in accordance with article 267 of the TFEU, which was reviewed and rejected by arbitral order issued on 29 April 2019.

4.1. The Respondent did not attach documents, nor the respective administrative file as it does not exist, nor did it request the production of any other evidence.

1. On 29 April 2019, an order was issued which, among other things, dispensed with the holding of the meeting referred to in article 18 of the LRAT, set a deadline for submission of arguments, and determined 26 July 2019 as the deadline for issuance of the arbitral decision.

2. The Parties submitted arguments, in which they reiterated the positions previously assumed in their respective pleadings.

II. CASE MANAGEMENT

1. The Arbitral Tribunal was regularly constituted and is competent ratione materiae, considering the nature of the subject matter of the proceedings (cf. articles 2, paragraph 1, subparagraph a) and 5 of the LRAT).

The request for arbitral pronouncement is timely, as it was filed within the period provided for in article 10, paragraph 1, subparagraph a), of the LRAT.

The parties have legal capacity and standing, possess legitimacy, and are regularly represented (cf. articles 4 and 10, paragraph 2 of the LRAT and article 1 of Order No. 112-A/2011, of 22 March).

The proceedings do not suffer from any procedural defects, and no exceptions or preliminary issues have been raised that would prevent adjudication on the merits.

III. REASONING

III.1. ON THE FACTS

§1. PROVEN FACTS

1. The following facts are considered proven:

a) The Claimant is resident in the United Kingdom.

b) In the year 2017, the Claimant was the owner of the autonomous fraction designated by the letter "V" which corresponds to the Building ... – Third Floor – third story, letter B, with two parking spaces designated by numbers 18 and 19 and a storage room, designated by number 19 on the basement floor (level minus one) of the urban property called "...", located at Street ..., number ..., place and parish of ..., municipality of Cascais, described in the Second Land Registry Office of Cascais under No. ... of said parish and registered in the respective land matrix under article .... [cf. document No. 3 attached to the application]

c) On 5 January 2017, by public deed executed in the Notary Office of B..., the Claimant sold the property identified in the previous proven fact for the price of € 600,000.00. [cf. document No. 3 attached to the application]

d) On 9 August 2018, the Claimant submitted the Personal Income Tax Return Form 3 for the year 2017, in which he declared, as to his tax residence [field 8], to be a non-resident, resident in an EU or EEA country (826) and to request taxation under the general regime. [cf. document No. 2 attached to the application]

e) The Claimant submitted, together with that same income tax return, the respective Annex G [Capital Gains and Other Patrimonial Increases], in which he declared [field 4] the aforementioned sale of the mentioned property, indicating the sale value of € 600,000.00, the acquisition value of € 157,121.34 and also expenses and charges in the amount of € 5,272.29. [cf. document No. 2 attached to the application]

f) Following this, the AT issued the Personal Income Tax assessment No. 2018..., relating to the year 2017, in the total amount of € 80,016.19 – comprising € 79,415.68 as tax and € 600.51 as compensatory interest – with a payment deadline of 08.10.2018. [cf. document No. 1 attached to the application]

g) On a date not specifically determined, the Claimant made full payment of the aforementioned total amount (€ 80,016.19) of Personal Income Tax and compensatory interest that was assessed by the AT.

h) On 5 December 2018, the Claimant filed the request for constitution of an arbitral tribunal that gave rise to the present proceedings. [cf. CAAD Case Management System]

§2. UNPROVEN FACTS

1. With relevance to the assessment and decision of the case, there are no facts that have not been proven.

§3. REASONING ON FACTS

1. The facts relevant to the adjudication of the case were selected and determined based on their legal relevance, in light of the plausible solutions to the legal issues, in accordance with the combined application of articles 123, paragraph 2, of the Tax Court Procedure Code, 596, paragraph 1 and 607, paragraph 3, of the Code of Civil Procedure, applicable pursuant to article 29, paragraph 1, subparagraphs a) and e), of the LRAT.

The Tribunal's conviction was based on the facts pleaded by the parties, whose correspondence to reality was not challenged, and on the critical analysis of the documentary evidence in the record.

III.2. ON LAW

§1. OF THE ISSUE TO BE DECIDED

1. The issue to be decided in the present proceedings has as its center the autonomous taxation of real property capital gains earned by residents of other Member States of the European Union, in accordance with the combined provisions of articles 10, paragraph 1, subparagraph a), 13, paragraph 1, 18, paragraph 1, subparagraph h), 43, paragraphs 1 and 2, and 72, paragraph 1, subparagraph a), all of the Personal Income Tax Code.

Specifically, it is necessary to determine whether, in light of the provision of article 43, paragraph 2, of the Personal Income Tax Code, the positive balance determined as capital gains in the year 2017 should or should not be considered at only 50% of its value, given that the Claimant is resident in the United Kingdom.

1. The Claimant contends that that positive balance should be considered at only 50% of its value, as it understands that the provision of article 43, paragraph 2, of the Personal Income Tax Code is also applicable to non-residents in Portugal who are residents of a Member State of the European Union; the Claimant bases this position on the judgment delivered by the CJEU in case C-443/06, on 11 October 2007 (Hollmann case) – which decided that "Article 56 EC [current article 63 of the TFEU] must be interpreted as precluding national legislation, such as that in issue in the main proceedings, which subjects capital gains resulting from the transfer of immovable property situated in a Member State, in the case in question Portugal, when that transfer is carried out by a resident of another Member State, to a tax burden higher than that which would be imposed, in relation to this same type of operation, on capital gains realized by a resident of the Member State where that immovable property is situated." – and in the subsequent case law of our superior courts on this matter.

It is therefore the Claimant's understanding that that provision of the Personal Income Tax Code is incompatible with European law, and that such incompatibility is not remedied by the addition to article 72 of the Personal Income Tax Code of paragraphs 7 and 8 (current paragraphs 9 and 10), by Law No. 67-A/2007, of 31 December (State Budget 2008).

The Respondent, in turn, contends that the legal framework, as well as the declarative obligation, is no longer that which existed at the time of the judgment by the CJEU, taking into account the legislative change embodied in the addition to article 72 of the Personal Income Tax Code of paragraphs 7 and 8 (current paragraphs 9 and 10), by Law No. 67-A/2007, of 31 December; thus, according to the Respondent, the Hollmann judgment refers to situations occurring under article 72 of the Personal Income Tax Code in the version prior to that introduced by Law No. 67-A/2007, of 31 December. For this reason, the Respondent contends that the Arbitral Tribunal should consider that the aforementioned case law is not binding, in light of the current national legal framework.

§2. ON THE MERITS

§2.1. ON THE TAXATION IN PERSONAL INCOME TAX OF CAPITAL GAINS EARNED BY THE CLAIMANT

1. The analysis of the legal-tax issue that is at the center of the disagreement between the Parties must begin with an examination of the applicable normative framework, obviously in the version in force at the time of the facts.

Article 10 of the Personal Income Tax Code determines, in paragraph 1, that capital gains consist of gains obtained which, not being considered business and professional income, capital income, or real property income, result from (subparagraph a)) the onerous transfer of real rights over immovable property.

In turn, article 13 of the Personal Income Tax Code establishes, in paragraph 1, that natural persons residing in Portuguese territory and those not residing therein who obtain income there are subject to Personal Income Tax, and, as follows from the provision of paragraph 1 of article 18 of the same Code, income is considered obtained in Portuguese territory (subparagraph h)) with respect to immovable property situated therein, including capital gains resulting from its transfer.

We can, from the outset, establish that, although the Claimant is resident in the United Kingdom, the capital gains resulting from the transfer of the aforementioned property are considered income obtained in Portuguese territory and, as such, are subject to Personal Income Tax; in the same sense, article 13, paragraph 1, of the Convention between the Portuguese Republic and the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, signed in Lisbon on 27 March 1968 (Decree-Law No. 48497, of 24 July 1968), provides that gains from the transfer of immovable property (…) may be taxed in the Contracting State in which such property is situated.

That established. Article 43 of the Personal Income Tax Code provides, in paragraph 1, that the value of income classified as capital gains is that corresponding to the balance determined between capital gains and capital losses realized in the same year, determined in accordance with the following articles; paragraph 2 of the same article provides that the balance referred to in the previous paragraph, with respect to transfers 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.

The crux of the dispute between the Parties lies precisely in this rule, and it is necessary to determine whether it should apply only to residents in Portuguese territory, in accordance with its literal element, or also to residents of other Member States of the European Union.

Finally, article 72 of the Personal Income Tax Code provides, in paragraph 1, that the following are taxed at the autonomous rate of 28% (subparagraph a)) capital gains provided for in subparagraphs a) and d) of paragraph 1 of article 10 earned by non-residents in Portuguese territory that are not attributable to a permanent establishment situated therein.

1. Paragraph 2 of article 43 of the Personal Income Tax Code was already subject to review by the Court of Justice of the European Union (CJEU) in the judgment of 11 October 2007, delivered in case C-443/06 (Hollmann judgment), which decided as follows:

"Article 56 EC [current article 63 of the TFEU] must be interpreted as precluding national legislation, such as that in issue in the main proceedings, which subjects capital gains resulting from the transfer of immovable property situated in a Member State, in the case in question Portugal, when that transfer is carried out by a resident of another Member State, to a tax burden higher than that which would be imposed, in relation to this same type of operation, on capital gains realized by a resident of the Member State where that immovable property is situated."

We are therefore dealing with a discriminatory regime incompatible with European Law, by virtue of a violation of article 63 of the Treaty on the Functioning of the European Union (TFEU).

This conclusion is based, fundamentally, on the following reasoning presented in the aforementioned judgment of the CJEU:

"29. Now, the Treaty provides, in particular in Article 56 EC, a specific rule of non-discrimination in the field of freedom of movement of capital (judgment of 10 January 2006, Cassa di Risparmio di Firenze, C-222/04, Reports, p. I-289, no. 99).

1. In light of the foregoing considerations, it is therefore necessary to determine whether a taxpayer such as E. Hollmann can rely on Article 56 EC.

2. In that regard, it follows from the case law that an operation consisting of the liquidation of an immovable property investment, such as that at issue in the main proceedings, constitutes a movement of capital (v., to that effect, judgment of 16 March 1999, Trummer and Mayer, C-222/97, Reports, p. I-1661, no. 24).

(…)

1. From this it follows that, under the relevant provisions of the PIRC, the taxation of capital gains realized is not the same for residents and non-residents. Thus, with regard to the sale of the same immovable property situated in Portugal, in the case of realization of capital gains, non-residents are subject to a tax burden higher than that which is applied to residents, and are therefore in a less favourable situation than the latter.

2. Indeed, whilst a non-resident is subject to a rate of 25% on the taxable base corresponding to the totality of capital gains realized, the consideration of only half of the taxable base corresponding to capital gains realized by a resident enables the latter systematically to benefit, in this respect, from a lower tax burden, regardless of the rate of taxation applicable to all his income, since, according to the information provided by the Portuguese Government, the taxation of the income of residents is subject to a scale of progressive rates whose highest rate is 42%.

(…)

1. In these circumstances, it must be concluded that the fact that the limitation of taxation to 50% of capital gains realized applies only to residents in Portugal, and not to non-residents, constitutes a restriction on the movement of capital, prohibited by Article 56 EC.

(…)

1. In this regard, the Portuguese Government maintains that the two categories of taxpayers are in different situations, which perfectly justifies this difference in treatment. The limitation of taxation to 50% can only apply to residents, as they are subject to a scale of progressive rates on their overall income. In contrast, non-residents are only taxed on income earned in Portuguese territory. In other words, the mechanism provided for by national legislation such as that at issue in the main proceedings is intended not to penalize residents who are subject to a progressive tax, as opposed to non-residents.

2. Moreover, the same government considers that the difference in tax treatment resulting from the application of different taxation to non-residents should be interpreted in conjunction with the general system of income tax applicable to residents and non-residents.

3. With this argument, the Portuguese Government considers that the fact that different taxation is provided for non-residents, in the case of realization of capital gains, is justified having regard to the system of taxation of income, in particular to the different taxation rate applicable to residents and non-residents. Indeed, for the former, the taxable income is that resulting from the aggregation of income from the various categories, including therefore capital gains earned in each year, subject to a scale of progressive rates, while for non-residents, the PIRC provides for the application of a special proportional rate.

4. It should be noted that, in the main proceedings, first, the taxation of capital gains resulting from the transfer of immovable property applies to a single category of income of taxpayers, whether residents or non-residents; second, it concerns the two categories of taxpayers; and, third, the Member State from which the taxable income derives is always the Portuguese Republic.

5. In this regard, it is particularly important to clarify that, as follows from no. 38 of this judgment, the fact that the taxable base corresponding to capital gains realized by a resident is reduced by half, combined with the fact that the taxation of his income is subject to a scale of progressive rates whose highest rate is 42%, leads, under the same conditions of taxation as a non-resident, to a more burdensome taxation of the latter.

6. In these circumstances, the allegation presented, in the case in question, by the Portuguese Government cannot be accepted.

7. It follows from the foregoing that there is objectively no difference in situation that would justify the inequality of tax treatment with respect to the taxation of capital gains between the two categories of taxpayers. Consequently, a situation such as that of E. Hollmann is comparable to that of a resident.

8. It is therefore concluded that national legislation such as that at issue in the main proceedings institutes unequal tax treatment for non-residents, in that it allows, in the case of realization of capital gains, more burdensome taxation and, therefore, a higher tax burden than that borne by residents in an objectively comparable situation."

It is important to recall here that the prevalence of the CJEU's interpretation regarding European law originates from paragraph 4 of article 8 of the Constitution of the Portuguese Republic and the principle of the primacy of European Law, whether primary or secondary.

Thus, following that judgment of the CJEU, national courts adopted a position consistent with what was decided therein, as exemplified by the case law of the Supreme Administrative Court cited by the Claimant in the request for arbitral pronouncement.

Arbitral tribunals constituted under the auspices of CAAD have also followed the same understanding, as results from, among others, the arbitral decisions also cited by the Claimant in the request for arbitral pronouncement.

1. That being said. The Respondent contends that the aforementioned case law of the CJEU is not binding, since the legal framework, as well as the declarative obligation, is no longer that which existed at the time of the judgment by the CJEU, given the legislative change embodied in the addition to article 72 of the Personal Income Tax Code of paragraphs 7 and 8 (current paragraphs 9 and 10), by Law No. 67-A/2007, of 31 December (State Budget 2008); thus, according to the Respondent, the Hollmann judgment refers to situations occurring under article 72 of the Personal Income Tax Code in the version prior to that introduced by Law No. 67-A/2007, of 31 December, so the present case is not covered by that temporal framework.

In this context, the Respondent argues as follows, which is pertinent here to extract:

"33. However, as mentioned above, the amended version of article 72 of the Personal Income Tax Code introduced by Law No. 67-A/2007, of 31/12, results in a new normative framework that has not yet been subject to analysis for the purpose of verifying its compatibility with European law.

1. That normative framework which now provides two situations/possibilities/alternatives for the taxation of the balance determined between capital gains and capital losses realized in the same year, resulting from the difference between the sale value and the acquisition value by onerous transfer of real rights over immovable property.

2. Thus, on the one hand, the Claimant could have opted for the taxation of those income items (capital gains) at the rate that, in accordance with the table provided for in paragraph 1 of article 68 of the Personal Income Tax Code, would be applicable in the case of being earned by residents in Portuguese territory, and that the determination of the rate would take into account all income including that obtained outside this territory, under the same conditions applicable to residents, which he did not do.

3. On the other hand, the Claimant could have opted, as he did, for the autonomous rate of 28%, as provided for in article 72, paragraph 1, subparagraph a) of the Personal Income Tax Code.

(…)

1. (…) the change introduced to article 72 of the Personal Income Tax Code by Law No. 67-A/2007, of 31/12, came, in our opinion, to fully adapt national legislation to European law,

2. because paragraphs 9 and 10 of article 72 of the Personal Income Tax Code, in accordance with point 40 of the ruling [of the Hollmann judgment], now provide for a limitation of taxation to 50% of capital gains realized, no longer ONLY for residents in Portugal, but ALSO for non-residents, provided they are residents of another Member State of the European Union or of the European Economic Area.

3. For which reason, the change introduced to article 72 of the Personal Income Tax Code by Law No. 67-A/2007, of 31/12, remedied the defect from which national legislation suffered, in accordance with what was ruled by the aforementioned judgment, as per article 61 of the ruling [of the Hollmann judgment] (…).

(…)

1. In summary, the change made through the introduction of current paragraphs 9 and 10 of article 72 of the Personal Income Tax Code made it possible for both residents and non-residents to 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 that they OPT for the aggregation of income obtained both in Portugal and outside this territory."

2. However, the Respondent is not correct in the position it maintains.

Paragraphs 9 and 10 of article 72 of the Personal Income Tax Code provide as follows:

"9. Residents of another Member State of the European Union or of the European Economic Area may opt, provided in the latter case that there is an exchange of information in tax matters, with respect to the income referred to in subparagraphs a), b), and e) of paragraph 1 and in paragraph 2, for the taxation of that 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.

1. For the purpose of determining the rate referred to in the previous paragraph, all income is taken into account, including that obtained outside this territory, on the same conditions as are applicable to residents."

With respect to a regime of optional choice similar to that which is enshrined in these rules, specifically in the aforementioned paragraph 9, the CJEU has already ruled in the judgment of 18 March 2010, delivered in case C-440/08 (Gielen judgment), which decided as follows:

"Article 49 TFEU precludes a national provision which discriminates against non-resident taxpayers in the granting of a tax benefit such as the deduction granted to self-employed workers, at issue in the main proceedings, despite the fact that those taxpayers may opt, with respect to that benefit, for the regime applicable to resident taxpayers."

This decision is based on the following lines of reasoning:

"50. First of all, it is important to recall that the option of equalization allows a non-resident taxpayer, such as F. Gielen, to choose between a discriminatory tax regime and another supposedly non-discriminatory regime.

1. Now, it should be stressed in this regard that, in the present case, that choice is not capable of eliminating the discriminatory effects of the first of those two tax regimes.

2. Indeed, the acknowledgment of such an effect with respect to the said choice would have as a consequence, as is essentially observed by the Advocate General in no. 52 of his conclusions, the validation of a tax regime which would continue, in itself, to violate Article 49 TFUE by reason of its discriminatory character.

3. On the other hand, as the Court of Justice has already had occasion to clarify, a national regime that restricts the freedom of establishment is incompatible with Union law, even if its application is optional (v., to that effect, judgment of 12 December 2006, Test Claimants in the FII Group Litigation, C-446/04, Reports, p. I-11753, no. 162).

4. It follows from the foregoing that the choice granted, in the context of the dispute at issue in the main proceedings, to the non-resident taxpayer, through the equalization option, does not neutralize the discrimination noted in no. 48 of this judgment."

In this manner, it is meridianly evident that the provision of the optional regime in question, in addition to imposing an additional burden on non-residents, compared to residents, the equalization option is not capable of eliminating the discrimination in question, which therefore continues to subsist.

As is well noted in the arbitral decision issued in case No. 45/2012-T, "[i]t is not overlooked that the consequences drawn here from the aforementioned European case law, in particular from the Hollmann judgment, provide for more favorable taxation of real property capital gains earned by non-residents in Portugal who reside in the European Union than by residents, as, in addition to benefiting in the same manner from the 50% reduction of the basis of Personal Income Tax, 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 Personal Income Tax Code, to which must be added the fact that the latter must aggregate all their income.

However, at the current stage of European Law, no principle or rule is apparent that would prevent positive discrimination of non-residents vis-à-vis residents, as direct taxation is a field within the competence of the Member States."

1. Therefore, in light of the foregoing, the defect of violation of law alleged by the Claimant is well-founded, by incompatibility of paragraph 2 of article 43 of the Personal Income Tax Code with article 63 of the TFEU, to the extent that it restricts the 50% reduction of capital gains subject to Personal Income Tax to taxpayers resident in Portugal, with the consequent partial annulment of the contested tax act, to the extent that it did not consider the limitation of the taxation of the aforementioned capital gains to 50% of their value.

As is extracted from the judgment of the Supreme Administrative Court, of 22 March 2011, delivered in case No. 01031/10, it was the Tax Authority that, "faced with the declaration by the taxpayers, assessed the tax it considered due (as always occurs in Personal Income Tax): at the rate provided for non-residents (25%, in accordance with article 72, paragraph 1 of the Personal Income Tax Code) and on the total amount of the capital gain realized and not only on 50% of this value (article 43, paragraph 2 of the Personal Income Tax Code), thus ignoring the European case law and that of this Supreme Court that adopted it (cf. the judgment of 16 January 2008, case No. 439/06) regarding the incompatibility of that legal provision, as thus applied, with Article 56 of the TFCE (current article 63 of the Treaty on the Functioning of the European Union), thereby subjecting, as was to occur, the contested assessment to be annulled in that respect, given the primacy of European law."

§2.2. ON THE REIMBURSEMENT OF AMOUNTS UNDULY PAID, PLUS INDEMNITY INTEREST

1. Article 24, paragraph 1, subparagraph b), of the LRAT provides that an arbitral decision on the merits of the claim from which no appeal or challenge is available binds the tax administration from the end of the period provided for appeal or challenge, such administration being required, in the exact terms of the success of the arbitral decision in favor of the taxpayer and until the end of the period provided for the voluntary execution of sentences of tax courts, to restore the situation that would have existed had the tax act subject to the arbitral decision not been made, adopting the acts and operations necessary for such purpose, which is in line with the provision of article 100 of the General Tax Code (applicable pursuant to article 29, paragraph 1, subparagraph a), of the LRAT) which establishes that the tax administration is obliged, in the case of full or partial success of a gracious claim, judicial challenge, or appeal in favor of the taxpayer, to immediately and fully restore the legality of the act or situation that is the subject of the dispute, including the payment of indemnity interest, if applicable, from the end of the period of execution of the decision.

Although article 2, paragraph 1, subparagraphs a) and b), of the LRAT uses the expression "declaration of illegality" to define the competence of arbitral tribunals operating under CAAD, making no reference to condemning decisions, it should be understood that the competence includes the powers that are attributed to tax courts in judicial challenge proceedings, and this is the interpretation that is consistent with the meaning of the legislative authorization on which the Government based itself to approve the LRAT, in which it proclaims, as the first directive, that "the arbitral tax process must constitute an alternative procedural means to the judicial challenge process and to the action for recognition of a right or legitimate interest in tax matters."

Judicial challenge proceedings, although essentially a process of annulment of tax acts, allow for the condemnation of the Tax Administration to payment of indemnity interest, as can be inferred from the provision of article 43, paragraph 1, of the General Tax Code and article 61, paragraph 4, of the Code of Tax Procedure and Process.

Thus, paragraph 5 of article 24 of the LRAT, by providing that payment of interest is due, regardless of its nature, in accordance with the terms provided for in the general tax law and in the Code of Tax Procedure and Process, should be understood as permitting the recognition of the right to indemnity interest in arbitral proceedings.

On the other hand, since the right to indemnity interest depends on the right to reimbursement of amounts paid unduly, which constitute its calculation base, it is inherent in the possibility of recognition of the right to indemnity interest the possibility of assessment of the right to reimbursement of those amounts.

1. Following the illegality and partial annulment of the contested Personal Income Tax assessment act, it must be concluded that the Claimant bore a tax liability superior to that legally due, and therefore, to the extent and proportion of success in the case, there is grounds for reimbursement of the amounts of tax and compensatory interest paid illegally, by virtue of the provision of articles 24, paragraph 1, subparagraph b), of the LRAT and 100 of the General Tax Code (applicable pursuant to article 29, paragraph 1, subparagraph a), of the LRAT), as this appears essential to restore the situation that would have existed had that tax act not been made.

2. Article 43, paragraph 1, of the General Tax Code provides that indemnity interest is due when it is determined, in a gracious claim or judicial challenge, that there was an error attributable to the services from which payment of the tax liability resulted in an amount higher than legally due, with paragraph 5 of article 61 of the Code of Tax Procedure and Process providing that interest is counted from the date of unduly payment of the tax until the date of processing of the respective credit note, in which it is included.

In the present case, as stated, the Claimant bore a tax liability superior to that legally due.

Furthermore, it is verified that the illegality and consequent partial annulment of the contested Personal Income Tax assessment is attributable to the AT for having assessed the tax it considered due, on the total amount of capital gains realized and not only on 50% of this value, in accordance with article 43, paragraph 2, of the Personal Income Tax Code, ignoring the incompatibility of that legal provision, as thus applied, with article 63 of the TFEU, and therefore the Claimant has the right to indemnity interest, in accordance with the provisions of articles 43, paragraph 1, of the General Tax Code and 61 of the Code of Tax Procedure and Process, to be assessed after the AT determines the amounts of tax and compensatory interest paid in excess, in the re-issuance of the assessment act purged of the defect imputed to it, in compliance with this decision.

1. Finally, it is important to note that the relevant issues submitted for the assessment of this Tribunal have been examined and considered, and those whose decision was superseded by the solution given to others have not.

IV. DECISION

Given the foregoing, this Arbitral Tribunal decides to uphold the request for arbitral pronouncement and, consequently:

a) The Personal Income Tax assessment No. 2018..., relating to the year 2017, is declared illegal and annulled to the extent that it did not consider the limitation of the taxation of the aforementioned capital gains to 50% of their value.

b) The Tax and Customs Authority is condemned:

(i) to reimburse to the Claimant the amounts of tax and compensatory interest which, in execution of this decision, are determined to have been assessed and paid in excess;

(ii) to pay indemnity interest to the Claimant, calculated on the amounts to be reimbursed, in accordance with applicable law;

(iii) to payment of the costs of the present proceedings.

VALUE OF THE CASE

In accordance with the provision of articles 306, paragraph 2, of the Code of Civil Procedure, applicable pursuant to article 29, paragraph 1, subparagraph e), of the LRAT, 97-A, paragraph 1, subparagraph a), of the Code of Tax Procedure and Process, applicable pursuant to article 29, paragraph 1, subparagraph a), of the LRAT, and 3, paragraph 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is set at € 40,009.58 (forty thousand and nine euros and fifty-eight cents).

COSTS

In accordance with the provision of articles 12, paragraph 2, and 22, paragraph 4, of the LRAT and article 4, paragraph 4, and Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is set at € 2,142.00 (two thousand one hundred and forty-two euros), to be charged to the Tax and Customs Authority.

Notify.

Lisbon, 29 May 2019.

The Arbitrator,

(Ricardo Rodrigues Pereira)