Process: 618/2017-T

Date: October 4, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 618/2017-T) addresses the IRS capital gains tax treatment of a non-resident taxpayer who sold property in Portugal that served as the permanent residence of their family unit (agregado familiar). The Applicant, a Portuguese national residing in Northern Ireland since 2015 for professional reasons, sold property and declared intention to reinvest proceeds under Article 10(5) of the IRS Code (CIRS), which excludes capital gains from taxation when reinvested in permanent housing within 36 months. The Tax Authority (AT) rejected this benefit, taxing the gain at 28% autonomous rate applicable to non-residents. The Applicant challenged the assessment on multiple grounds: (1) insufficient reasoning in the tax assessment; (2) entitlement to reinvestment exemption since the property remained the permanent residence of the family unit in Portugal despite the taxpayer's temporary foreign assignment; (3) errors in calculating deductible expenses; (4) failure to apply the 50% capital gains exclusion under Article 43(2) CIRS; and (5) violation of EU law principles regarding free movement of capital by discriminating against EU residents. The AT countered that non-residents cannot access the reinvestment regime, that only substantiated expenses totaling €64,190.49 were deductible, and that the assessment was properly reasoned through the divergence procedure. The case raises fundamental questions about whether the reinvestment exemption should apply based on family unit residence when the taxpayer is temporarily abroad, and whether limiting this benefit to Portuguese residents violates EU Treaty provisions on capital movement.

Full Decision

ARBITRAL DECISION

The arbitrator Pedro Miguel Bastos Rosado, appointed by the Deontological Council of the Centre for Administrative Arbitration to form the Singular Arbitral Tribunal, decides as follows:

Report

1. A..., with tax identification number ..., resident in ..., ..., Northern Ireland, hereinafter referred to as the Applicant, submitted on 27 November 2017, a request for arbitral determination, with a view to declaring unlawful and consequent annulment of the assessment of Personal Income Tax (IRS) for the year 2016, with number 2017..., in the amount of € 20,805.45 (twenty thousand eight hundred and five euros and forty-five cents), with the PORTUGUESE TAX AND CUSTOMS AUTHORITY being the Respondent, hereinafter referred to as the Respondent or AT.

2. The substance of the request for arbitral determination consists of declaring unlawful and consequent annulment of the tax assessment act for IRS referred to in 1., for defects of lack of reasoning and violation of law, due to errors in the assumptions of fact and law.

3. The Applicant further requests the restitution of all tax paid plus indemnification interest, at the legal rate, until full reimbursement of the amount due calculated on the tax.

4. The application for constitution of the arbitral tribunal was accepted by the President of the Centre for Administrative Arbitration (CAAD), on 27 November 2017, and subsequently notified to AT.

5. The Applicant did not proceed with the appointment of an arbitrator, whereby, under the provisions of article 6.º, no. 1, and article 11.º, no. 1, paragraph a) of the RJAT, the President of the Deontological Council of CAAD appointed, on 18 January 2018, the undersigned as arbitrator of the singular arbitral tribunal, who communicated acceptance of the appointment within the deadline.

6. On 18 January 2018, the parties were notified of the appointment of the arbitrator, and neither raised any objection.

7. In accordance with the provisions of article 11.º, no. 1, paragraph c) of the RJAT, the singular arbitral tribunal was constituted on 7 February 2018.

8. To support the request for arbitral determination, the Applicant alleged, in summary, the following:

8.1. That the assessment act does not comply with the legal requirements of reasoning that would allow the Applicant to reconstruct the cognitive and evaluative process followed by the authority that carried out the act, so as to be able to clearly know the reasons why it decided as it did and not differently, with the Applicant thus unaware of the grounds on which the amounts in question are being demanded;

8.2. That under article 10.º, no. 5 of the IRS Code, gains from the onerous transfer of real property intended for permanent personal housing of the taxpayer or of their family unit shall be excluded from taxation provided that the realization value – deducted from the amortization of any loan contracted for the acquisition of the property – is reinvested in the acquisition of new permanent personal housing of the taxpayer or of their family unit, within 36 months after the transfer;

8.3. That in order to benefit from this regime, the Applicant declared the intention of reinvestment in Annex G of form 3 of their IRS return;

8.4. That although it is true that the property sold by the Applicant was not their own permanent residence, since they changed their domicile to Northern Ireland as a result of a professional assignment for a period of less than 3 years, it was the permanent residence of their family unit, which remained and remains in Portugal for reasons of a family nature;

8.5. That the 36-month period for completion of such reinvestment is still running;

8.6. That AT also erred in setting the taxable base, namely, in setting the expenses and deductible charges for the purpose of calculating the taxable capital gain, the amount of which is greater than that considered in the assessment;

8.7. That AT also erred in not applying in the aforementioned assessment the regime for excluding taxation of 50% of the capital gain provided in article 43.º, no. 2 of the IRS Code;

8.8. That the limitation of the exclusion of taxation only to taxpayers resident in Portugal, excluding those resident in other European Union Member States, violates Community law, as it represents an inadmissible and unjustifiable restriction of the freedom of movement of capital enshrined in article 63.º of the Treaty on the Functioning of the European Union;

8.9. The Applicant concludes by alleging that the IRS assessment should be declared unlawful and annulled, formulating a request for restitution of the amount collected by AT, as well as payment of indemnification interest.

9. Notified in accordance with and for the purposes of article 17.º of the RJAT, the Respondent submitted a response and forwarded the "administrative file" (hereinafter referred to as PA).

10. In its response, AT invoked, in summary, the following:

10.1. That the formality of lack of reasoning of the tax assessment act is not omitted;

10.2. That the terms of the assessment act in question (divergence procedure contained in PA) permit complete understanding of the process followed by AT in the arithmetic operation of correction to the Applicant's taxable base;

10.3. That the Applicant had exact knowledge of the assumptions that were the basis of the corrections made, being fully aware of the reasoning offered in the divergence procedure;

10.4. That the Applicant could not enter the values indicated by them in Table 5 A, fields 5005 and 5006 of Annex G of their form 3 IRS return, as they are non-resident;

10.5. That only expenses totalling € 64,190.49 were substantiated, with the Applicant's share being € 32,095.25;

10.6. That capital gains provided in article 10.º, no. 1, paragraph a) of the IRS Code obtained by non-residents in Portuguese territory that are not attributable to a permanent establishment situated therein are taxed at the autonomous rate of 28% of the total capital gain, with the Applicant not having opted to be taxed as residents;

10.7. That AT merely applied the law, with no issue of interpretation arising from it regarding non-conformity or incompatibility with Community law;

10.8. That the application should be judged unfounded, with no basis for payment of any indemnification interest.

11. By order of 12 June 2018, the meeting provided for in article 18.º of the RJAT was dispensed with and it was determined that the proceedings would continue with optional written submissions.

12. In the same order of 12 June 2018, 3 August 2018 was set for pronouncement of the arbitral decision.

13. The parties submitted submissions, in which they reiterated the positions taken in the initial procedural documents.

14. By order of 3 August 2018, the Tribunal decided to extend the deadline for pronouncement of the arbitral decision by a period of two months, indicating that the arbitral decision would be issued and notified to the parties by 7 October 2018.

II. Preliminary Examination

The arbitral tribunal was regularly constituted, in accordance with the provisions of articles 2.º, no. 1, paragraph a), and 10.º, no. 1, of Decree-Law no. 10/2011, of 20 January, and is competent.

The parties are duly represented, possess legal personality and capacity and have standing (articles 4.º and 10.º, no. 2, of the same decree-law and article 1.º of Ordinance no. 112-A/2011, of 22 March).

The proceedings do not suffer from any nullities.

III. Matter of Fact

1. Proven Facts

The following facts are given as proven with potential relevance for the decision:

A) The Applicant has tax residence in Northern Ireland, being duly classified as non-resident in Portugal for tax purposes, since 8 July 2015;

B) On 30 January 2009, the Applicant married B...;

C) The Applicant is the father of the minor C..., born on 19 October 2015;

D) On 19 August 2011, the Applicant and their spouse acquired, for the price of Euro 401,000.00, the autonomous unit, intended for housing, designated by the letters CX, corresponding to FLOOR 5 – BLOCK ..., of the urban property located at ..., ..., numbers ... and ... and Street..., no. 1, turning towards Street ..., no number, parish of ..., municipality of Lisbon, described in the Property Registry Office of Lisbon, under number ... of the parish of ..., and registered in the registry of the parish of ..., under article ...;

E) On 19 August 2011, the Applicant and their spouse received from D..., by way of loan for the acquisition of the property identified in D), the sum of Euro 210,000.00;

F) The Property Transfer Tax (IMT) for the purchase of the property was assessed with the benefit: Exclusively for permanent personal housing;

G) In the deed of purchase and sale, loan and mortgage, it was declared that the acquired property was intended for permanent personal housing;

H) On 10 October 2016, the Applicant and their spouse sold the property identified in D) for the price of Euro 625,000.00;

I) In the deed of purchase and sale of the property identified in D), the Applicant and their spouse were identified as being resident in ..., ..., Northern Ireland;

J) On 10 October 2016, the outstanding balance of the loan Home Credit General Scheme was Euro 90,331.58, with the amount due for early repayment thereof being Euro 90,952.49;

L) The property identified in D) was sold with the mortgage value paid to the lending bank.

M) On 17 June 2017, the Applicant delivered via the internet to AT their form 3 IRS return for the year 2016, entering in the same their marital status as "married", not opting for joint taxation of income, indicating in field 6 – Family Unit the tax identification number ... of their spouse and in field 8 B – Tax Residence their status as "non-resident" (04) and resident in an EU country (6) with code 826;

N) On 17 June 2017, the Applicant delivered via the internet Annex G of their form 3 IRS return for the year 2016, entering in the same the acquisition of the property identified in D) for the value of Euro 200,500.00 in August 2011, the sale thereof for the value of Euro 312,500.00 in October 2016, their share of 50%, and the amount of Euro 52,376.00 in expenses and charges;

O) In the same Annex G of their form 3 IRS return for the year 2016, the Applicant, in Table 5 A relating to "Reinvestment of the Realization Value of Property Intended for Permanent Personal Housing", entered in field 5005 (Outstanding loan balance at the date of disposal of the property referred to in field 5002, 5003 or 5004) the amount of Euro 45,165.79 and in field 5006 (Realization value intended to be reinvested - without recourse to credit) the amount of Euro 267,334.21;

P) On 17 June 2017, the Applicant's spouse delivered via the internet to AT her form 3 IRS return for the year 2016, entering in the same her marital status as "married", not opting for joint taxation of income, indicating in field 6 – Family Unit the tax identification number ... of her husband, the Applicant herein, in field B D1 Dependents the tax identification number ... of the couple's minor son, and in field 8 A – Tax Residence her status as resident in the "mainland" (01);

Q) On 17 June 2017, the Applicant's spouse delivered via the internet Annex G of her form 3 IRS return for the year 2016, entering in the same the acquisition of the property identified in D) for the value of Euro 200,500.00 in August 2011, the sale thereof for the value of Euro 312,500.00 in October 2016, her share of 50%, and the amount of Euro 52,376.00 in expenses and charges;

R) In the same Annex G of her form 3 IRS return for the year 2016, the Applicant's spouse, in Table 5 A relating to "Reinvestment of the Realization Value of Property Intended for Permanent Personal Housing", entered in field 5005 (Outstanding loan balance at the date of disposal of the property referred to in field 5002, 5003 or 5004) the amount of Euro 45,165.79 and in field 5006 (Realization value intended to be reinvested - without recourse to credit) the amount of Euro 267,334.21;

S) In the IRS assessment statement of the Applicant's spouse with number 2017... of AT, a global income and a calculated value of 0 (zero) are indicated;

T) At the date of sale of the property identified in D), the Applicant's spouse and minor son had their permanent personal residence in the same;

U) The form 3 IRS return submitted by the Applicant gave rise to IRS assessment statement 2017... with the amount payable of Euro 15,010.52;

V) On 29 May 2017, the Divergence Management Application was created by AT in a process for analysis of the form 3 IRS return no. ... of the Applicant with analysis code D39-Disposal of Real Property;

X) On 29 May 2017, AT issued via official communication ... an automatic notification to the Applicant with a view to the need for substantiation of the values of expenses, disposal value, acquisition value and acquisition date of the disposed properties;

Z) As a result of personal attendance with the Applicant, exchange of e-mails and presentation of documents, AT deemed it necessary to remove the values indicated in Table 5 A, fields 5005 and 5006 of Annex G, as the taxpayer is "non-resident" and, with respect to the expenses in the same Annex, only substantiated expenses in the amount of Euro 64,190.49 were considered, corresponding to the Applicant's share, half of the value, that is, Euro 32,095.25;

AA) On 9 August 2017, the Applicant was notified via official communication ... of AT to exercise the right of prior hearing regarding the project of corrections to be made, with the same responding via e-mail on 16 October 2017, stating that he would not proceed with delivery of the amended return on the advice of his lawyer;

AB) AT proceeded with correction of the assessment through official return no...., as follows: Form 3 Annex G, table 4 - Expenses changed to Euro 32,095.25 and values in fields 5005 and 5006 removed;

AC) On 20 October 2017, AT issued assessment no. 2017... with the amount payable of Euro 20,805.45, which was notified to the Applicant;

AD) The Applicant attached to the case with their initial submission, the documents hereinafter indicated in order to be accepted as "expenses and charges" with the property:

- Stamp Duty (acquisition) € 3,208.00 - doc. 12

- Municipal Tax on Onerous Transfers of Real Property € 20,120.68 - doc 13

- E..., Lda. (works) € 4,434.30 - doc 14

- F..., S.A. (works) € 2,104.68 - doc 15

- G..., Lda. (works) € 17,084.30 - doc 16

- H..., S.A. (works) € 884.33 - doc 17

- I..., Lda. (works) € 3,766.33 - docs 18 and 19

- J..., S.A. (real estate brokerage) € 38,437.50 - doc 20

AE) On 9 December 2016, K... UK issued a written statement informing that the Applicant was an employee of L..., S.A., with the position of Director, who would be contracted to work in the United Kingdom, for a period of less than three years, commencing on 3 April 2015 and would reside in accommodation provided by the company in ..., Belfast;

AF) On 24 November 2017, the Applicant completed payment of the amount of Euro 20,805.45;

AG) On 27 November 2017, the Applicant submitted the request for arbitral determination that gave rise to the present proceedings.

2. Justification of the Matter of Fact Given as Proven

The proven facts are based on the documents attached by the Applicant with the request for arbitral determination and on the administrative file, the authenticity of which was not contested, and AT has likewise not questioned the Applicant's allegations regarding the fact that their spouse and minor son had their permanent personal residence in the disposed property.

3. Unproven Facts

There are no other facts with relevance for the arbitral decision that have not been given as proven.

IV. Matter of Law

1. Order of Consideration of Defects

In assessing the defects attributed to the act for which declaration of unlawfulness is requested, one should begin with the "defects whose sustainability would determine, according to the prudent discretion of the judge, more stable or effective protection of the prejudiced interests" [article 124.º, no. 2, of the CPPT, applicable by force of the provisions of article 29.º, no. 1, paragraph a) of the RJAT], since "tax arbitration aims to strengthen the effective and actual protection of the rights and legally protected interests of taxpayers" (article 124.º, no. 3, of Law no. 3-B/2010, of 28 April).

Therefore, the defect of lack of reasoning will not be assessed as a priority, which has a merely formal nature and whose sustainability does not preclude the possibility of renewal of the act with the same content, beginning with the assessment of the defect of violation of law, whose sustainability precludes renewal of the assessment act.

2. Assessment of the Merit of the Request for Arbitral Determination

The fundamental question is whether or not the requirements for exclusion of taxation of capital gains are met, given that the Applicant was non-resident in Portugal at the time of disposal of the property, their spouse and minor son had in the property, on that same date, their permanent personal residence, and the Applicant declared, in their IRS return, their intention to proceed with reinvestment of the capital gains.

AT takes the view that the requirements are not met since the Applicant was, at the date of disposal of the property, non-resident in Portugal, although it has accepted that the Applicant's spouse had in the same property their own permanent personal residence, since in the IRS assessment statement with number 2017..., following the submission of an Annex G in all respects identical to that of the Applicant, a global income and a calculated value of 0 (zero) are indicated.

The answer to this question hinges on the interpretation of article 10.º, no. 5 of the IRS Code, and it is necessary to examine this question in light of the law in force as of the date to which the income subject to taxation relates.

Article 10.º of the IRS Code provides that:

1 - Capital gains are constituted by gains obtained which, not being considered business and professional income, income from capital or real property income, result from:

a) Onerous disposal of real rights over real property (…);

5 - Gains from the onerous transfer of real property intended for permanent personal housing of the taxpayer or of their family unit are excluded from taxation, provided that the following conditions are met cumulatively:

a) The realization value, deducted from the amortization of any loan contracted for the acquisition of the property, is reinvested in the acquisition of ownership of another real property, land for construction of real property and/or respective construction, or in the expansion or improvement of another real property exclusively with the same purpose situated in Portuguese territory or in the territory of another European Union Member State or of the European Economic Area, provided that, in the latter case, there exists an exchange of information on tax matters;

b) The reinvestment provided for in the previous paragraph is effected between the 24 months prior to and the 36 months following the date of realization;

c) The taxpayer manifests the intention to proceed with reinvestment, even if partial, mentioning the respective amount in the tax return for the year of disposal;

(emphasized by us)

Article 10.º, no. 5, of the IRS Code enshrines the exclusion of taxable incidence relating to capital gains realized with the onerous disposal of real property intended for permanent personal housing of the taxpayer or of their family unit, promoting ownership of the property intended for permanent housing of the taxpayer or of their family unit provided that the realization value is reinvested in property intended for the same purpose, within certain periods and conditions.

Having been proven that the Applicant declared in Annex G of their form 3 IRS return for the year 2016 their intention to proceed with reinvestment of the capital gain, in full, mentioning the respective amount in the tax return for the year of disposal, that the Applicant's spouse and son had in the disposed property their permanent personal residence, and that the 36-month period from the date of realization has not yet elapsed, the essential question is whether all the requirements for exclusion of taxation are met, or whether the fact that on the date of realization the Applicant was living in Ireland and registered in the registry as non-resident in Portugal, means that it must be considered that the gains thus obtained cannot but be immediately subject to taxation under article 10.º, nos. 1, paragraph a) and 5 of the IRS Code.

As stated, the reason on which AT's refusal to recognize the Applicant's right to exclusion of taxation of capital gains income for the year 2016 is based, is the fact that, on the date of disposal, the Applicant was non-resident in Portugal, given that they had left the national territory in 2015, independently of the fact that the disposed property had previously been their own permanent personal residence and that it was, also on the date of disposal, the permanent personal residence of their spouse and minor son.

As is clear from the wording of the provisions contained in no. 5, paragraph a) of article 10.º of the IRS Code, applicable to the situation at issue, there shall be exclusion from taxation of capital gains obtained from the disposal of properties "intended for permanent personal housing of the taxpayer or of their family unit", reinvested in the acquisition of another property intended by the acquirer "for their own permanent personal housing or of their family unit", within the periods provided therein.

Although the IRS Code does not contain a definition of "family unit", the Applicant's situation cannot but be encompassed within the provision of article 13.º thereof, in the wording as of the date of the facts.

On the date of disposal of the property, nos. 2 and 4 of article 13.º of the IRS Code determine that:

2 - Where there is a family unit, the tax is determined individually in relation to each spouse or de facto partner, without prejudice to the provisions relating to dependents, unless the option for joint taxation is exercised.

4 - The family unit is constituted by:

a) Spouses not judicially separated as to persons and property, or de facto partners, and their respective dependents;

(emphasized by us)

Now, the Tribunal considers that the conjunction "or" allows that, although one of the taxpayers did not have, on the date of disposal, their permanent personal residence in the disposed property (although they previously did), this does not preclude the right to that benefit if it concerns "the onerous transfer of real property intended for permanent personal housing of the taxpayer or of their family unit".

The normative provision "onerous transfer of real property intended for permanent personal housing of the taxpayer or of their family unit" cannot allow, in the Tribunal's opinion, any other interpretation.

If the norm restricted the exclusion of taxation to "the onerous transfer of real property intended for permanent personal housing of the taxpayer", it could be argued that AT's position, in which case the capital gain obtained by the Applicant could not but be immediately subject to taxation, would be correct.

However, the text of the law is different, being satisfied with the fact that the disposed property was intended for permanent personal housing of the Applicant's family unit, as is the case.

It should be clarified that the fact that in the public deed of sale of the property the Applicant's spouse declared being resident in Ireland, in no way changes the Tribunal's position.

This is because, on the one hand, it is not uncommon for sellers of a property that served as their own permanent personal residence to declare, in the very act of disposal, a different address, given that, at that precise moment, they are selling their own permanent personal residence. Accordingly, such declaration does not constitute for the Tribunal a relevant fact for changing its position.

And, on the other hand, AT, in contrast to what occurred in the Applicant's case, accepted the fact that the Applicant's spouse was declaring the intention to reinvest the capital gain obtained from the disposal of their permanent personal residence, so much so that in the IRS assessment statement with number 2017..., following the submission of an Annex G in all respects identical to that of the Applicant, a global income and a calculated value of 0 (zero) are indicated. That is, as will be more clearly seen below, AT, in practice, proceeded appropriately to suspend taxation pending completion of the reinvestment itself.

Accordingly, no. 5 of article 10.º of the IRS Code is a provision for exclusion of taxable incidence relating to capital gains realized on real property, provided that certain conditions provided by law are met.

As Paula Rosado Pereira states, "Regarding the contours of the regime in question, one could say that, in reality, we are dealing with a suspension of taxation applicable by means of mere manifestation, in the tax return for the year of realization, of the intention to proceed with reinvestment (…)" [Paula Rosado Pereira, Studies on IRS: Income from Capital and Capital Gains, IDEFF Papers, no. 2, Almedina, Coimbra, 2005, p.101].

"The exclusion has the objective of promoting ownership of property intended for permanent housing." (cf. José Guilherme Xavier de Basto, IRS: Real Incidence and Determination of Net Income, Coimbra Editora, 2007, p. 413).

"The objective of the law is clear: to eliminate fiscal obstacles to the change of housing, in one's own home, by families." (cf. Rui Duarte Morais, On IRS, Almedina, Coimbra, 2006, p. 114).

"This is, naturally, to avoid imposing a fiscal burden on the realization of the fundamental right to housing" (cf. André Salgado de Matos, Code of Personal Income Tax (IRS), Annotated, ISG, Coimbra, 1999, p. 168).

Accordingly, the Tribunal considers that the Applicant should always be recognized as having the right to exclusion of taxation of capital gains income that gave rise to the assessment challenged, on the same terms as was proceeded with respect to the assessment of the Applicant's spouse, thereby constituting a suspension of taxation applicable by means of mere manifestation, in the tax return for the year of realization, of the intention to proceed with reinvestment.

And since the 36-month period from the date of realization has not yet elapsed, it will be determined later whether the Applicant fulfills the reinvestment of the total capital gain declared and whether taxation will or will not be excluded, in whole or in part, on a final basis.

In light of the foregoing, and without need for further consideration, it must be concluded that the IRS assessment for the year 2016 challenged herein, is unlawful as it constitutes a defect of violation of law due to error regarding the assumptions of law on which it was based, given the erroneous interpretation of the applicable legal provisions.

For the reasons pointed out, in the case of the present proceedings too, the IRS assessment for the year 2016, which is the object of the application for constitution of the arbitral tribunal, cannot but be entirely annulled.

3. Prejudiced Matters

Given that the request for arbitral determination is based on a defect of violation of law due to error regarding the assumptions of law, by violation of article 10.º, no. 5 of the IRS Code, which ensures effective and stable protection of the Applicant's rights, the consideration of the other defects attributed to it is prejudiced, whether the defect of lack of reasoning, or other defects of violation of law such as non-consideration of other deductible expenses (expenses and charges) or non-consideration of only 50% of the capital gain realized.

In fact, as is inherent in the establishment of an order of consideration of defects, in the aforementioned article 124.º of the CPPT, once a defect is judged to have merit which prevents renewal of the challenged act, there is no need to assess the others attributed to it.

Indeed, if it were always necessary to consider all the defects attributed to tax acts, the order in which such consideration was made would be immaterial.

Therefore, having judged the application to have merit on the basis of a defect of violation of law that prevents renewal of the challenged acts with the same meaning, the consideration of the other defects attributed to it is prejudiced, whether formal and procedural, or also of violation of law.

4. Request for Restitution of Amounts Paid and Indemnification Interest

The Applicant formulates a request for restitution of the amounts collected by AT, as well as payment of indemnification interest.

AT argues, in sum, that "the Applicant's allegations cannot, in any way, proceed, as they constitute a notoriously erroneous interpretation and application of the legal provisions subsumable to the case sub judice", whereby "there is no basis for payment of any indemnification interest".

In accordance with the provisions of article 24.º, paragraph b) of the RJAT, the arbitral decision on the merit of the pretension, 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 obliged, 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 voluntary execution of decisions of tax court judgments, to "restore the situation that would exist if the tax act which was the subject of the arbitral decision had not been carried out, adopting the acts and operations necessary for this purpose", which is in keeping with the provisions of article 100.º of the General Tax Law [applicable by force of the provisions of article 29.º, no. 1, paragraph a) of the RJAT] which establishes that "the tax administration is obliged, in case of total or partial success of a claim, court challenge or appeal in favor of the taxpayer, to immediately and fully restore the legality of the act or situation which is the subject of the dispute, including the payment of indemnification interest, if applicable, from the end of the period of execution of the decision".

Although article 2.º, no. 1, paragraphs a) and b), of the RJAT uses the expression "declaration of unlawfulness" to define the competence of the arbitral tribunals operating within CAAD, making no reference to condemnatory decisions, it should be understood that included in their competences are the powers which in judicial challenge proceedings are attributed to tax courts, this being the interpretation that is in keeping with the meaning of the legislative authorization on which the Government based itself to approve the RJAT, in which it proclaims, as a first directive, that "the tax arbitral 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".

The judicial challenge process, although it is essentially a process for annulment of tax acts, admits condemnation of the Tax Administration in the payment of indemnification interest, as is apparent from article 43.º, no. 1, of the General Tax Law, which establishes that "indemnification interest is due when it is determined, in a gracious claim or court challenge, that there was error attributable to the services resulting in payment of the tax debt in an amount greater than that legally due" and article 61.º, no. 4 of the CPPT (in the wording given by Law no. 55-A/2010, of 31 December, to which corresponds no. 2 in the original wording), which "if the decision recognizing the right to indemnification interest is judicial, the period for payment is counted from the beginning of the period of its voluntary execution".

Accordingly, no. 5 of article 24.º of the RJAT, by stating that "payment of interest, regardless of its nature, is due in accordance with the terms provided in the general tax law and in the Code of Tax Procedure and Process", should be understood as permitting recognition of the right to indemnification interest in the arbitral process.

On the other hand, the right to indemnification interest being dependent on the right to reimbursement of amounts paid unjustly, which form its basis of calculation, inherent in the possibility of recognition of the right to indemnification interest is the possibility of assessment of the right to reimbursement of such amounts.

Accordingly, assessment of the request for reimbursement of amounts unjustly paid and for payment of indemnification interest must be made.

For the reasons stated, the request for arbitral determination is entirely successful as regards IRS assessment no. 2017..., relating to the year 2016, in the amount of € 20,805.45.

Therefore, the Applicant has the right to be reimbursed this amount, by virtue of the aforementioned articles 24.º, no. 1, paragraph b) of the RJAT and 100.º of the General Tax Law, as this is essential to "restore the situation that would exist if the tax act which was the subject of the arbitral decision had not been carried out".

Therefore, the request for reimbursement of the amount of € 20,805.45 is successful.

The unlawfulness of this assessment is attributable to AT, as it issued it on its own initiative, with erroneous interpretation of the law.

Consequently, the Applicant is entitled to indemnification interest, under articles 43.º, no. 1, of the General Tax Law and 61.º of the CPPT, with respect to the amount to be reimbursed.

Indemnification interest shall be paid from the date on which the Applicant made payment until full payment of the amount that is to be reimbursed, at the legal subsidiary rate, in accordance with articles 43.º, no. 4, and 35.º, no. 10, of the General Tax Law, article 61.º of the CPPT, article 559.º of the Civil Code and Ordinance no. 291/2003, of 8 April.

Decision

In light of the foregoing, the Arbitral Tribunal decides:

To judge the present request for arbitral determination successful, and consequently, to annul IRS assessment no. 2017..., relating to the year 2016, in the amount of € 20,805.45, with consequent restitution of the tax paid;

To judge the request successful as regards recognition of the right to indemnification interest in favor of the Applicant, by virtue of the tax unjustly paid, from the date on which the Respondent made payment until full payment of the amount that is to be reimbursed, at the legal subsidiary rate.

V. Value of the Case

In accordance with the provisions of articles 306.º, no. 2, and 297.º, no. 2 of the Civil Procedure Code, article 97.º-A, no. 1, paragraph a) of the CPPT and article 3.º, no. 2, of the Regulations on Costs in Tax Arbitration Proceedings, the value of the case is fixed at € 20,805.45.

VI. Costs

In accordance with the provisions of articles 22.º, no. 4, and 12.º, no. 2, of the RJAT, article 2.º, no. 1 of article 3.º and nos. 1 to 4 of article 4.º of the Regulations on Costs in Tax Arbitration Proceedings, as well as Schedule I attached thereto, the total amount of costs is fixed at € 1,224.00, to be borne by the Portuguese Tax and Customs Authority.

Lisbon, 4 October 2018

The arbitrator,

Pedro Miguel Bastos Rosado

Frequently Asked Questions

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Can capital gains from property sales be excluded from IRS taxation through reinvestment by a household family member in Portugal?
According to this CAAD case, the critical question is whether capital gains from property sales can be excluded from IRS taxation when the reinvestment is tied to a family member's permanent residence rather than the taxpayer's own residence. Article 10(5) of the IRS Code provides that gains from onerous transfer of real property intended for permanent personal housing of the taxpayer or their family unit (agregado familiar) are excluded from taxation if the proceeds are reinvested in new permanent personal housing within 36 months. The Applicant argued that although they became non-resident due to a temporary professional assignment in Northern Ireland, the property remained the permanent residence of their family unit (spouse and child) in Portugal. The Tax Authority contested this interpretation for non-resident taxpayers, arguing the reinvestment benefit is only available to Portuguese tax residents. This raises the question whether the concept of 'agregado familiar' can bridge the residence gap when family members remain in Portugal.
What are the legal requirements for reinvestment of property sale proceeds to qualify for IRS capital gains tax exemption under Article 10(5) of the CIRS?
Article 10(5) of the CIRS establishes specific legal requirements for the reinvestment exemption: (1) the property sold must be intended for permanent personal housing of the taxpayer or their family unit; (2) the realization value, after deducting loan amortization contracted for property acquisition, must be reinvested; (3) reinvestment must occur within 36 months after the transfer; (4) the new property must serve as permanent personal housing of the taxpayer or family unit; and (5) the taxpayer must declare the intention to reinvest in Annex G of the IRS return (Form 3). In this case, the Applicant declared reinvestment intention in fields 5005 and 5006 of Annex G, but AT argued non-residents cannot use these fields. Additionally, for calculating the taxable gain, expenses and deductible charges must be properly substantiated—AT only accepted €64,190.49 in documented expenses (€32,095.25 for the Applicant's 50% share). The 36-month reinvestment period continues running, meaning the exemption determination may be premature if reinvestment has not yet occurred.
Does the Portuguese Tax Authority (AT) have to provide sufficient legal reasoning when issuing IRS tax assessments on capital gains?
Yes, Portuguese Tax Authority must provide sufficient legal reasoning when issuing IRS tax assessments, as required by administrative law principles. The Applicant challenged the assessment for lack of reasoning (falta de fundamentação), arguing it did not allow reconstruction of the cognitive and evaluative process followed by AT, preventing clear understanding of why the decision was made. However, AT defended that the assessment formality was not omitted, pointing to the divergence procedure (procedimento de divergência) contained in the administrative file, which detailed the arithmetic corrections to the Applicant's taxable base. AT argued this documentation provided complete understanding of the correction process and that the Applicant had exact knowledge of the assumptions underlying the corrections. The reasoning requirement ensures taxpayers can effectively exercise their right of defense and understand the legal and factual basis for tax obligations, which is fundamental to administrative legality and due process in Portuguese tax law.
Can a taxpayer claim reimbursement with compensatory interest after successfully challenging an IRS capital gains assessment at CAAD?
Yes, under Portuguese tax law, a taxpayer who successfully challenges an IRS assessment at CAAD can claim reimbursement with compensatory interest (juros indemnizatórios). The Applicant specifically requested 'restitution of all tax paid plus indemnification interest, at the legal rate, until full reimbursement of the amount due calculated on the tax.' Compensatory interest compensates taxpayers for the financial loss of having funds improperly retained by the Tax Authority. These are calculated at the legal rate from the date of payment until actual reimbursement. However, AT contested any basis for payment of indemnification interest, arguing the application should be judged unfounded. The entitlement to compensatory interest depends on: (1) successful annulment of the tax assessment; (2) actual payment of the contested tax; and (3) demonstration that the Tax Authority acted unlawfully in collecting the tax. The interest serves to restore the taxpayer's economic position and recognize the time-value of money improperly collected.
How does the concept of 'agregado familiar' (household) affect the reinvestment exemption for capital gains tax on permanent residence sales in Portugal?
The concept of 'agregado familiar' (household/family unit) is central to determining eligibility for the reinvestment exemption under Article 10(5) CIRS. Portuguese tax law recognizes that permanent residence may serve not only the individual taxpayer but their entire family unit, which typically includes spouses and dependent children. In this case, the Applicant's family unit consisted of their spouse (married 30 January 2009) and minor child (born 19 October 2015), who remained in Portugal while the Applicant relocated to Northern Ireland for a temporary professional assignment of less than 3 years. The Applicant argued that although they personally changed domicile for professional reasons, the property continued serving as the permanent residence of the family unit for family reasons. This interpretation would extend the reinvestment benefit based on family unit residence even when the taxpayer becomes non-resident. However, AT's position suggests the benefit requires the taxpayer themselves to be resident in Portugal, raising questions about whether family unit residence alone suffices, particularly when the taxpayer's non-residence is temporary and professionally motivated rather than a permanent relocation of the entire household.