Process: 619/2017-T

Date: April 30, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD Process 619/2017-T addresses the critical requirements for IRS capital gains reinvestment exemption under Article 10(5) and 10(6) of the Portuguese Personal Income Tax Code (CIRS). The taxpayer sold her permanent residence in June 2015 for €208,000 and reinvested €93,265.22 in a new property acquired six days later for €170,000. Despite declaring the reinvestment intention and completing the required fields in Annex G of her IRS return, the Tax Authority issued an assessment of €6,385.66, rejecting the capital gains exclusion. The central dispute concerns whether the new property qualified as the taxpayer's permanent residence (habitação própria e permanente) for reinvestment purposes. The taxpayer argued she allocated the property to permanent residence in February 2016 after necessary remodeling works, contracting utilities in December 2015 and updating her citizen card address in August 2016. The Tax Authority dismissed her administrative appeal, leading to tax enforcement proceedings. The taxpayer paid the contested amount (€6,569.99) and initiated CAAD arbitration to challenge both the assessment and the dismissal decision. This case illustrates the stringent requirements Portuguese tax law imposes on proving permanent residence status for capital gains reinvestment relief, particularly regarding timing of domicile registration and actual occupation. The arbitral tribunal must determine whether post-acquisition renovation works justify delayed residence establishment and if the taxpayer met the legal requirements for exclusion from capital gains taxation on real estate transactions involving own and permanent housing.

Full Decision

ARBITRAL DECISION

I. REPORT

  1. A..., single, of legal age, taxpayer number ..., resident at Rua ..., no. ..., ..., ... ...-... Carnaxide (hereinafter referred to as Applicant or Passive Subject), submitted on 2017-11-27 a request for constitution of a singular arbitral tribunal, in accordance with the provisions of subparagraph a) of no. 1 of article 2 and article 10, nos. 1 and 2, both of Decree-Law no. 10/2011, of 20 January (hereinafter referred to as RJAT), in which the Tax and Customs Authority (hereinafter referred to as Respondent or AT) is named as respondent, with a view to declaring the illegality and consequent annulment of the Personal Income Tax assessment act, no. 2017 ... of 2017-02-07, and respective interest, relating to the year 2015, as well as the declaration of illegality and consequent annulment of the decision to dismiss the administrative appeal to which the number ...2017... was assigned.

  2. The request for constitution of the Singular Arbitral Tribunal was accepted by the Honourable President of CAAD, and notification thereof was served on the Respondent on 2017-11-30.

  3. In accordance with the provisions of subparagraph a) of no. 2 of article 6 of RJAT, by decision of the Honourable President of the Deontological Council of CAAD, duly notified to the parties within the prescribed periods, the undersigned was designated as arbitrator, who communicated to that Council the acceptance of the appointment within the period provided in article 4 of the Code of Ethics of the Administrative Arbitration Centre.

  4. On 2018-01-18 the parties were notified of such designation and did not manifest the will to refuse the designation of the arbitrator, in accordance with the combined provisions of article 11, no. 1, subparagraphs a) and b) as amended by Law no. 66-B/2012, of 31 December.

  5. The Singular Arbitral Tribunal was constituted on 2018-02-07, in accordance with the prescription of subparagraph c) of no. 1 of article 11 of RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December.

  6. Having been duly notified to do so, the Respondent proceeded on 2018-03-08 to attach the administrative file, and on 2018-03-12 presented its response.

  7. By arbitral order issued on 2018-03-19, and for the reasons stated therein, it was, among other things: (i) dispensed with the holding of the meeting referred to in article 18 of RJAT, (ii) dispensed with the presentation of arguments, (iii) indicated as the deadline for rendering the decision the nineteenth of May, and the Applicant was further warned to proceed with the payment of the subsequent court fees up to ten days before that indicated date.

  8. To substantiate its request, the Applicant invokes, in summary, and with relevance to what matters here, the following (which is mentioned mostly by transcription):

8.1. The family unit of the Applicant consists of herself and her minor daughter, B..., NIF ... (cf. article 4 of the request for arbitral pronouncement),

8.2. Until 2015-06-22, the own and permanent housing of the Applicant's family unit corresponded to the autonomous fraction designated by the letter "G", of the matricial article ... of the Union of Civil Parishes of ... and ..., corresponding to Rua ..., no. ..., ..., and ... and Rua ..., no. ..., parish of ..., Municipality of Oeiras. (cf. article 5 of the request for arbitral pronouncement),

8.3. On 2015-06-23, the Applicant proceeded with the alienation of the aforementioned property for the amount of EUR 208,000.00 (….) [cf. article 6 of the request for arbitral pronouncement and document no. 4 attached thereto],

8.4. This property had been acquired through recourse to mortgage credit entered into with Bank C..., with an outstanding amount of EUR 97,930.35 (….) which amount was paid at the time of its alienation through part of the payment (cf. articles 7 and 8 of the request for arbitral pronouncement and documents nos. 5 and 6 attached thereto),

8.5. On 2015-06-29, the Applicant reinvested part of the proceeds from the realization of that property in the autonomous fraction designated by the letters "EC" of the urban matricial article ... of the Union of Civil Parishes of ... and ..., corresponding to the second left floor intended for housing of the urban building located at ...– Rua...–..., parish of..., Municipality of Oeiras, for the amount of EUR 170,000.00 (cf. article 9 of the request for arbitral pronouncement and document no. 7 attached thereto),

8.6. Following its acquisition, the Applicant subjected the property to remodelling works, which prevented her from transferring her residence to it immediately (cf. article 10 of the request for arbitral pronouncement),

8.7. The acquired property was allocated to the own and permanent housing of the family unit in February 2016 (cf. article 11 of the request for arbitral pronouncement),

8.8 (….) with the purpose of adapting the acquired property to her new housing, the Applicant entered into a contract for the supply of electricity and gas on 2015-12-29, with D... (cf. article 15 of the request for arbitral pronouncement and document no. 8 attached thereto),

8.9. On 2016-08-05 the Applicant proceeded with the change of address in her citizen card (cf. article 16 of the request for arbitral pronouncement and document no. 9 attached thereto),

8.10. On 2016-06-01, the Applicant proceeded with the submission of the Personal Income Tax Declaration Model 3 of IRS, which was identified with the number ... (cf. article 17 of the request for arbitral pronouncement and document no. 10 attached thereto),

8.11. (…) [in] the aforementioned declaration, the Applicant indicated in field 5005 of table 5 of Annex G that the amount owed of the loan at the date of alienation of the property was EUR 97,930.35 and expressed the intention to reinvest EUR 110,000 in field 5006 of table 5 of Annex G (cf. articles 18 and 19 of the request for arbitral pronouncement, and document no. 10 attached thereto),

8.12. (…) having declared that of this amount, EUR 93,265.22 were reinvested in the same year in the property better identified (cf. fields 5008 of table 5 of Annex G,

8.13. In the aforementioned income declaration, the Applicant also completed Table 4 of Annex G, where she itemized the value of alienation of the property for EUR 208,000.00, the indication that the same was acquired in December 2012 for EUR 160,000, and that she incurred expenses and charges of EUR 13,345.64 (cf. articles 20 and 21 of the request for arbitral pronouncement),

8.14. (…) The Applicant was notified of the existence of discrepancies in the completion of the IRS Declaration (cf. article 23 of the request for arbitral pronouncement and document no. 12 attached thereto),

8.15 (…) the IRS Assessment no. 2017 ... of 2017-02-07 was issued, in the amount of EUR 6,385.66, relating to the income of the year 2015 (cf. article 26 of the request for arbitral pronouncement and document no. 1, attached thereto),

8.16. On 2017-04-21 the Applicant submitted an Administrative Appeal against the aforementioned assessment (…) which was dismissed (cf. articles 27 and 30 of the request for arbitral pronouncement and attached administrative file),

8.17. For not having made the payment of the assessment and the corresponding demonstrations of interest calculation and account settlement, Tax Enforcement Proceedings no. ...2017... were initiated against the Applicant (cf. article 28 of the request for arbitral pronouncement and document no. 13 attached thereto),

8.18. On 2017-09-03 the Applicant proceeded with the payment of the debt in execution, in the amount of EUR 6,569.99 (cf. article 29 of the request for arbitral pronouncement and document 14, attached thereto),

8.19. The Applicant also makes several legal considerations in its request for arbitral pronouncement regarding the regime of exclusion of capital gains, provided in nos. 5 and 6 of article 10 of CIRS, expressing her disagreement with the interpretation made thereof by AT, arguing for the verification of the necessary requirements for its application, also invoking the interpretation to be carried out regarding the realities underlying the concepts of "own and permanent housing" and "tax domicile".

8.20. Concluding, as is extracted from its request, that the same should be judged to be well-founded as proven, declaring the illegality of the impugned acts and, condemning the Respondent to proceed with "the refund of the assessed tax, including compensatory and default interest and other increases imposed on the Applicant, and the payment of indemnificatory interest".

  1. The AT, having been duly notified to do so by the arbitral order of 2018-02-07, timely presented its response, arguing for the non-existence of any illegality relating to the assessment in question here, concluding, consequently, for the lack of merit of the request formulated by the Applicant in accordance, moreover, with the position already expressed by it in the context of the dismissal of the administrative appeal.

9.1. It thus alleges, in very brief summary, in defense of its position, and for what matters here, that the exclusion from taxation of the capital gains in question here is (…) "set aside if, in accordance with subparagraph a) of no. 6 of article 10 of CIRS, the passive subject does not allocate the property acquired "on arrival" to the housing of its family unit, until twelve months have elapsed after the reinvestment".

9.2. The AT thus continues its argument in response:

9.3. The A acquired the property "on arrival" on 2015-06-29, but only allocated it to the housing of its family unit on 2016-08-05 – more than twelve months having elapsed after the reinvestment (cf. articles 25 and 26 of the response),

9.4. The case file does not contain proof that it did so before (cf. article 27 of the response),

9.5. The A does not provide proof of habitual residence at the location of reinvestment (cf. article 28 of the response),

9.6. (…) This fact, that the property "on arrival" is not allocated to own and permanent housing, makes it impossible to apply the regime of exclusion from taxation of capital gains, in accordance with the legal terms (cf. article 30 of the response).

9.7. The AT concludes, as referred to above, that "the total lack of merit of the request should be declared, given its total lack of legal support".

  1. The parties have legal personality and capacity, are legitimate and are legally represented (articles 3, 6 and 15 of the Code of Tax Procedure and Process, ex vi article 29, no. 1, subparagraph a) of RJAT.

  2. The case does not suffer from any nullities, no exceptions have been raised, and there is no obstacle to the examination of the matter.

II. SUBSTANTIVE LAW

A. FACTS

A.1. Facts found to be proven

a. Until 2015-06-22 the own and permanent housing of the Applicant's family unit corresponded to the autonomous fraction designated by the letter "G", of the matricial article ... of the Union of Civil Parishes of ... and ... corresponding to Rua ..., no. ..., ..., and ..., and Rua ..., no. ..., parish of ..., municipality of Oeiras, recorded under number ... in the ... Property Registry Office of Oeiras,

b. On 2015-06-23 and for the price of 208,000.00 € the Applicant alienated the aforementioned property to E... and wife F... .

c. The property in question had been acquired by the Applicant through recourse to mortgage credit from C..., with an outstanding balance of 97,930.35 € paid to it on the date of alienation (2015-06-23)

d. Dated 2015-06-29 the Applicant acquired for the amount of 170,000.00 € "the autonomous fraction designated by the letters "EC" which corresponds to the second – left floor intended for housing, with a garage space 31 and storage number 34, both at ground level, of the urban building located at ...– Rua...– ... parish ..., municipality of Oeiras"

e. For the acquisition of the aforementioned fraction on the same date and simultaneously with the acquisition the Applicant contracted, with Bank G..., S.A. a loan of 94,400.00 €.

f. In the aforementioned deed of "Purchase and Sale, Loan with Mortgage and Power of Attorney" the Applicant's residence was indicated as Rua ..., no. ..., ..., Amadora,

g. The Applicant presented on 2016-05-31 the IRS Model 3 declaration, relating to the year 2015, to which came to be assigned the identification ..., accompanied by Annexes A and G,

h. The Applicant marked in the appropriate locations (tables 5 and 6 of annex G) the onerous alienation of real rights over property, as well as the reinvestment of the realization value of property intended for own and permanent housing,

i. The Applicant was notified of the existence of discrepancies in the Model 3 declaration of IRS relating to the year 2015 – detail of the irregular situation with the analysis code "D25 – reinvestment in property"

j. On 2017-02-07 an ex officio assessment relating to the IRS of 2015 was issued with the no. 2017 ... in the amount of 6,385.66 € which includes the taxation of capital gains realized with the alienation effected on 2015-06-23, and compensatory interest.

k. On 2017-04-21, the Applicant submitted an administrative appeal to the Finance Service of Oeiras, ..., to which was assigned the number ...2017... .

l. To instruct the administrative appeal the Applicant presented a contract entered into with "D..." on 2015-12-29, relating to the supply of electrical energy and gas, as well as various documents / invoices corresponding to the purchase of building materials, decoration and furniture and home appliances, dated 2015-07-25, 2015-08-08, 2015-10-08, 2015-09-10, 2015-09-14, 2015-09-26, 2015-09-22, 2015-10-03, 2015-10-08, 2015-10-11, 2015-10-17, 2015-10-21, 2015-10-24, 2015-10-06, 2015-11-10, 2015-12-27, 2015-12-07, and 2016-02-15, all showing as the customer's address, transport, unloading or destination address Rua..., no. ..., ..., ... in Carnaxide.

m. The Applicant proceeded with the change of its tax domicile to Rua..., ..., ..., ... in Carnaxide, municipality of Oeiras, on 2016-08-05.

n. On 2017-08-29, the Applicant was notified of the act dismissing the administrative appeal, in accordance with the PA whose contents are hereby reproduced.

o. The decision dismissing the administrative appeal, which became final, was preceded by the project for an order and opinion, whose contents are hereby fully reproduced, from which is extracted, among other things, and with relevance:

"(…) it was possible to ascertain that the claimant, on 2015-06-29, within the time limit established in subparagraph b) of no. 5 of article 10 of CIRS, acquired for the amount of € 170,000.00, the autonomous fraction designated by the letters "EC" corresponding to the 2nd Left, of the urban building located at Rua..., no. ..., recorded in the urban property matrix under article ... of the Union of civil parishes of ... and ..., municipality of Oeiras.

In accordance with no. 5 of article 10 of CIRS "excluded from taxation are gains arising from the onerous transfer of property intended for own and permanent housing of the passive subject or of its family unit…" if

  • within 36 months counted from the date of realization, the product of realization is reinvested in the acquisition of another property (…)

  • exclusively with the same destination.

This benefit incorporates three requirements: the period, the reinvestment and the allocation of the asset (both the one generating the capital gain and the one acquired).

Apparently and in so far as there was the acquisition of another property, the conditions would be met to benefit from the exclusion of taxation regarding the proportional part of gains corresponding to the reinvested value.

However, subparagraph a) of no. 6 of article 10 of CIRS provides that "the benefit referred to in the preceding number shall not apply when the acquirer does not allocate it to his own housing or that of his family unit until twelve months have elapsed after the reinvestment"

The relevant factor for tax domicile in natural persons is the habitual residence communicated by the taxpayer, understood not as an arbitrary choice but as the effective tax domicile, this being the mechanism through which the Tax Administration has the possibility of controlling tax obligations and in return enabling citizens to access fiscal advantages.

Tax domicile is a special domicile, since it refers to a determined place for the exercise of rights and the fulfillment of obligations provided for in tax norms.

In the present case, access to the advantages of a fiscal nature is embodied in the exclusion from taxation of gains with the alienation of property.

For tax purposes, proof of residence is made solely and exclusively after communication to the Tax Authority, being the same ineffective until such communication is made (nos. 2 and 3 of article 19 of LGT),

After consultation of the computer system, namely the SGRC – System for Management and Registration of Taxpayers, it was possible to ascertain that the claimant until 2015-06-15 resided at Rua ..., in Carnaxide, having changed her tax domicile to Rua..., in Amadora on 2015-06-15, residing at the current address only since 2016-08-24, thus verifying that the period provided in subparagraph a) of no. 6 of article 10 of CIRS has been exceeded.

In fact, because the Claimant, within the time limit of twelve months, did not allocate the property in question (acquired on 2015-06-29) to her housing, the tax exclusion provided for in subparagraphs a) and b) of article 10 of CIRS cannot be applied.

Given the reasons put forward by the claimant, which considers that the relevant date for assessing the allocation of the property in question to her housing should be the date of the last invoice she presented relating to the works carried out, we disagree with such understanding, in so far as, from the analysis of all the invoices presented we conclude that, although the claimant purchased a degraded property, the works carried out were repairs and improvements to it and that did not alter the content of her property right, as is evident from the consultation of the history of the property in question".

p. On 2017-08-08 the Applicant was served with enforcement proceedings no. ...2017..., which originated from the assessment in question and statutory increases,

q. Dated 2017-09-03 the Applicant proceeded with payment of the enforcement proceedings in the amount of 6,569.99 €,

r. On 2017-11-27 the Applicant submitted a request for constitution of an arbitral tribunal with CAAD which gave rise to the present case.

A.2. Facts found not to be proven

With regard to what matters for the decision there are no facts that should be considered as not proven.

A.3. Substantiation of the facts found to be proven and not proven

With regard to the facts, the Tribunal does not have to pronounce itself on everything that was alleged by the parties, but rather it is its duty to select the facts that matter for the decision, to discriminate proven from unproven facts [(cf. article 123, no. 2 of CPPT, and no. 3 of article 607 of the Code of Civil Procedure, applicable, ex vi, article 29, nos. 1, subparagraphs a) and e) of RJAT)].

Thus, the facts relevant for the determination of the case are chosen and defined according to their legal relevance, which is established with regard to the various solutions of the question(s) of law. (cf. article 596 of CPC, applicable ex vi article 29 no. 1 subparagraph e) of RJAT).

Thus, having regard to the positions taken by the parties, in light of the provisions of article 110, no. 7 of CPPT, the documentary evidence attached to the case file and the attached administrative file, the facts listed above are considered proven, with relevance for the decision.

B. THE LAW

The issue which is the object of the present case can be reduced to: (i) the issue of taxation of income of category G, specifically capital gains provided for in subparagraph a) of no. 1 of article 10 of CIRS, (ii) the regime of exclusion of such taxation in situations of reinvestment provided for in nos. 5 and 6 of article 10 of CIRS, and (iii) to ascertain to what extent the identity between tax domicile and own and permanent housing is relevant for purposes of the exclusion of taxation of capital gains.

The CIRS configures patrimonial increases as a residual category, taxing only gains that are not covered under the other categories.

In article 9 of CIRS, concerning income of category G, various categories of patrimonial increases are grouped together provided they are not considered income of another category, capital gains, indemnities that compensate for non-patrimonial damages, sums received by virtue of non-competition obligations, and also unexplained patrimonial increases established in accordance with articles 87, 88 and 89 A) of the General Tax Law.

Capital gains are enumerated on a case-by-case basis in article 10 of CIRS, and can be said to be characterized by their occasional and fortuitous nature and, for what matters here, regarding the source of the "gain obtained" real property gains, arising in accordance with subparagraph a) of no. 1 of article 10 of CIRS from the "onerous alienation of real rights over immovable property and allocation of any assets of the private patrimony to business and professional activity carried on in an individual name by its owner."

Given that the personal income tax code does not provide us with a concept of capital gains, we can assume here that constituting the same patrimonial increases "correspond, essentially to gains resulting from a valuation of assets due to external circumstances, therefore, independent of productive activity by its holder. They are 'gains blown by the wind' (windfall gains)".[1]

Regarding the effective gain for tax purposes, it can be said that "capital gain is a gain that materializes in the difference between the value at which the asset entered the individual patrimony and the value at which it left due to an act of disposition or another fact that, according to law, constitutes the realization of the capital gain".[2]

Such gains, and according to the traditional solution in our tax law system, will only be taxed at the moment of alienation of the asset, in accordance with the provision of no. 3 of article 10 of CIRS, establishing as a general principle of capital gains taxation, the principle of realization.

Gains, apart from the exceptions provided in subparagraphs a) and b) of no. 3 of article 10, are considered obtained at the moment of execution of the acts provided in its no. 1: "gains are considered obtained at the moment of execution of the acts provided in no. 1, without prejudice to the provisions of the following subparagraphs".

Underlying the gains occurring with capital gains resulting from the onerous alienation of real rights over immovable property (or equivalent act) is the difference between the realization or alienation value of the asset or right in question, and the acquisition value.

Thus,

Having traced, although in outline form, the regime of immovable property capital gains, and refocusing on the core issue of the present case, the following must be noted:

No. 5 of article 10 of CIRS – wording at the time of the underlying facts – excluded "from taxation gains arising from the onerous transfer of property intended for own and permanent housing of the passive subject or of its family unit, provided that the following conditions are cumulatively met:

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 property, of land for construction of property and or respective construction, or in the enlargement or improvement of another property exclusively with the same destination situated in Portuguese territory or in the territory of another Member State of the European Union or of the European Economic Area, provided that, in the latter case, there is an exchange of information on tax matters.

b) The reinvestment provided for in the preceding subparagraph is effected between 24 months before and 36 months after counted from the date of realization.

c) The passive subject manifests the intention to proceed with reinvestment, even if partial, mentioning the respective amount in the income declaration relating to the year of alienation"

For its part, subparagraph a) of no. 6 of article 10 of CIRS (wording at the time) provided as follows:

"6. The benefit referred to in the preceding number shall not apply when:

a) In the case of reinvestment in the acquisition of another property, the acquirer does not allocate it to his own housing or that of his family unit, until twelve months have elapsed after the reinvestment;

b) In other cases, the acquirer does not require registration in the matrix of the property or the alterations 48 months since the date of realization, and must allocate the property to his own housing or that of his family unit by the end of the fifth year following the year of realization,

c) (Repealed)

Now,

As is evident from the opinion and decision on which the dismissal of the administrative appeal was based, included in the transcription partially carried out, it appears to this tribunal as clear, that the disagreement between the parties resides precisely and only in the relevance to be given to the non-observance of the twelve-month period for allocating the acquired property to the housing of the Applicant (or of its family unit, in the terms of subparagraph a) of no. 6 of article 10 of CIRS) and, as already noted, regarding the identity of such housing with the tax domicile.

It is clear from the perspective of the AT, in the present context (as in other similar cases), that for purposes of the benefit provided for in no. 5 of article 10 of CIRS it is decisive to have correspondence/coincidence between the concept of "own and permanent housing of the passive subject or of its family unit", in the formulation of no. 5 of article 10 of CIRS and the concept of "tax domicile" which is provided to us by no. 1 of article 19 of the General Tax Law.

In summary and for what matters in the present case, the AT understands that the Applicant did not proceed (in a timely manner) to change her tax domicile to the property which is the subject of the reinvestment, from which it follows, as a consequence, that the impugned IRS assessment is based on the understanding that has been drawn that the expression "own and permanent housing" referred to in no. 5 of article 10 of CIRS, is that coincident with the tax domicile provided for in article 19 of LGT.

Now, on this question, we can only emphasize, and subscribe without any reservations, what has been said, noted in a laborious and eloquent manner, within the framework of case no. 103/2013-T handed down on 2013-11-25 within the scope of CAAD, regarding the question which equally underlies the present case, and which can be reduced, as noted, to the following: should the concept of "own and permanent housing of the passive subject or of its family unit" in the formulation of no. 5 of article 10 of CIRS be interpreted as corresponding to the concept of "tax domicile" as provided for in article 19 of the General Tax Law?

We have thus, saving your better judgment, in the decision in question:

"(…) the case questions the meaning of the requirement of allocation of the acquired housing to 'own and permanent housing of the passive subject or of its family unit' (…)

(…)

Regarding the question posed, the ATA understands that the concept of 'own and permanent housing of the passive subject or of its family unit' should be interpreted as corresponding to the concept of tax domicile, defined in LGT, in whose article 19/1 a) one can read:

'1. The tax domicile of the passive subject is, unless otherwise provided:

For natural persons, the place of habitual residence;'

In support of its thesis, the ATA invokes the systematic element of the interpretation which, referring to the norms of LGT relating to tax domicile and to the regime of the Tax Benefits Act regarding IMI exemption (article 46 of that act, former article 42), attainable in accordance with subparagraph b) of article 2 of LGT, will impose the equivalence sustained between the said concepts.

In the same sense, still in the understanding of the ATA, will weigh requirements of security and legal certainty, namely by providing situations, such as those of the case, in which passive subjects may benefit from benefits analogous to two distinct properties (the exemption of article 10/5 of CIRS and that of article 46 of EBF).

It concludes, finally ATA, that the position sustained by it does not entail any violation of the principles of legality and proportionality.

(…)

it is understood that the wording of article 10/5 a) and b) of CIRS is sufficiently clear, leaving no room for great doubts.

In effect, and from the outset, if the legislator intended that the requirement for the benefit in question be the establishment of tax domicile in the acquired property, it would have said so explicitly, as it did in the EBF.

It is granted, however, that this argument, in isolation, might give rise to the doubts that the ATA raises in the case.

However, a more careful reading of the norm in question reveals an additional detail.

Article 10/5 refers to 'own and permanent housing of the passive subject or of its family unit'. This alternation only makes sense, as will be seen below, from the perspective that 'own and permanent housing' may not coincide with tax domicile.

Consider this.

Article 13/6 of CIRS states that 'The persons referred to in the preceding numbers cannot, simultaneously, be part of more than one family unit nor, being part of a family unit, be considered autonomous passive subjects'. That is, if a family unit exists, there will be a tax domicile of the family unit itself, which will be relevant for IRS purposes, and the family unit cannot, at least for purposes of this tax, have two tax domiciles.

In this context, the aforementioned reference of article 10/5 of CIRS to 'own and permanent housing of the passive subject or of its family unit', can only be understood as having the meaning that own permanent housing may differ from tax domicile.

In effect, and making it concrete, it can effectively occur (even more so in these times of high geographical mobility, enhanced by the crisis that is being traversed globally) that one of the members to whom the direction of a family unit falls fixes his 'own and permanent housing' in a place distinct from that of the family unit to which he belongs.

'(…)

Now the expression used in article 10/5 of CIRS evidences, precisely, such divergence. In effect the reference to 'own and permanent housing of the passive subject or of its family unit', leaves no room for doubt. The legislator did not mean to say 'the own and permanent housing of the passive subject or of the family unit, meant to say 'or of his', making clear that the own permanent housing of a passive subject, which is what matters for that article, can be distinct from 'his' family unit, when tax domicile, for IRS purposes, at least, cannot!'

Further extracting from the arbitral decision we have been following:

'In summary, it is thus considered that it sufficiently results, from the outset from article 10/5 of CIRS itself the intention of the legislator not to equate the concepts of 'own and permanent housing and tax domicile'.

Reverting to the case that underlies the present case, and there being no reason to disagree with the understanding that emerges from the decision handed down within the scope of case no. 103/2013-T of 2013-11-25 of CAAD, we are led to conclude that, the circumstance that the Applicant proceeded only on 2016-08-05 (cf., document no. 9 attached with the request for arbitral pronouncement) to change her tax domicile, twelve months having elapsed since the date of acquisition of the reinvested property (2015-06-29), apart from being irrelevant in the context of the exclusion of taxation in question, shall be combined with the execution of remodelling/alteration works carried out therein.

In fact, and without prejudice to what has been said, it is further added that this tribunal finds no reason to cease considering that the contracting of services for the supply of electricity and gas, as well as the acquisition of diverse materials and furniture intended for the recovery/remodelling of the property in question, and given the dates of entering into contracts and acquiring the same cannot be considered "justificatory facts" for purposes of proof of "permanent housing", as is highlighted in the Decision of the Central Administrative Court of the South of 2015-10-08 (Case no. 06685/13, Reporting Judge Cristina Flora);

'In cases where the passive subject has failed to fulfill his obligation to communicate the change of tax domicile provided for in article 19 of LGT, his address in a certain place can be demonstrated through 'justificatory facts', and therefore, the non-communication of the change of tax domicile does not prevent the fulfillment of the requirement of 'permanent housing' in no. 5 of article 10 of CIRS'.

Concluding, given what has been exposed, that the provision of no. 5 of article 10 of CIRS does not condition the benefit provided therein to the communication of the change of tax domicile inherent in no. 3 of article 19 of LGT, it is judged that the Applicant's claim should be upheld.

III. INDEMNIFICATORY INTEREST

In accordance with the provision of subparagraph b) of article 24 of RJAT, the arbitral decision on the merits of the claim to which no appeal or challenge is available binds the tax administration from the end of the period for appeal or challenge, such administration being required, in the precise terms of the well-foundedness of the arbitral decision in favor of the passive subject and up to the end of the period for voluntary execution of the decisions of tax courts, to "restore the situation that would have existed if the tax act which is the object of the arbitral decision had not been performed, adopting the acts and operations necessary for this purpose", which is in line with what is provided for in article 100 of LGT, applicable ex vi subparagraph a) of no. 1 of article 29 of RJAT, which provides:

Article 100

Effects of decision favorable to the passive subject

"The tax administration is obliged in case of total or partial success of the administrative appeal, judicial challenge or appeal in favor of the passive subject, to the immediate and full restoration of the legality of the act or situation which is the object of the dispute, including the payment of indemnificatory interest, if applicable, from the end of the period of execution of the decision",

Although article 2, no. 1, subparagraphs a) and b) of RJAT uses the expression "declaration of illegality" to define the competence of the arbitral tribunals operating under the scope of CAAD, making no mention of 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 which harmonizes and combines with the sense of legislative authorization on which the Government based itself to approve RJAT, in which it proclaims, as the first directive, that "the tax arbitration process must constitute an alternative procedural means to judicial challenge proceedings and to the action for the recognition of a right or legitimate interest in tax matters".

No. 5 of article 24 of RJAT by affirming that "payment of interest is due, regardless of its nature, in the terms provided for in the general tax law and in the Code of Tax Procedure and Process", should be interpreted in the sense of permitting knowledge of the right to indemnificatory interest in the tax arbitration process.

Indemnificatory interest has a reparatory function of damage, damage resulting from the fact that the passive subject was unlawfully deprived of a certain amount, during a determined period of time, aiming to place him in the situation in which he would be if he had not made the payment that was unlawfully required of him.

In light of what has been exposed, and given the sense of the decision regarding the merits of the case already noted, this singular arbitral tribunal decides to condemn the Respondent to the payment of indemnificatory interest calculated on 6,385.66 €.

IV. DECISION

In harmony with the foregoing, this Singular Arbitral Tribunal decides to:

  • Hold the request for arbitral pronouncement to be well-founded;

  • Annul the IRS assessment impugned for the year 2015;

  • Declare the illegality and consequent annulment of the decision dismissing the administrative appeal to which the number ...2017... was assigned;

  • Hold the request for refund of the amounts unlawfully paid, as well as indemnificatory interest, to be well-founded;

  • Condemn the Tax and Customs Authority to the payment of the costs of the proceedings.

V. VALUE OF THE CASE

In accordance with the provisions of articles 296, nos. 1 and 2 of the Code of Civil Procedure, approved by Law no. 47/2013, of 26 June, 97-A) no. 1, subparagraph a) of the Code of Tax Procedure and Process, and article 3, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at 6,385.66 € and not that indicated by the Applicant (8,595.63 €) since it is the value of the assessment "which the passive subject, in whole or in part, seeks to contest".

VI. COSTS

In accordance with the provisions of articles 12, no. 2, and 22, no. 4 of RJAT, and articles 2 and 4 of the Regulation of Costs in Arbitration Proceedings, and Table I attached hereto, the amount of costs is fixed at 612.00 €.

NOTICE HEREBY GIVEN

Text prepared by computer, in accordance with the provisions of article 131 of the Code of Civil Procedure, applicable by reference to article 29, no. 1, subparagraph e) of the Legal Regime for Tax Arbitration, with blank verses, and reviewed by the arbitrator.

The drafting of this decision is governed by spelling prior to the 1990 Orthographic Agreement, except with respect to transcriptions made.

Thirtieth of April of two thousand and eighteen

The Arbitrator

(José Coutinho Pires)

[1] Rui Duarte Morais, About IRS, Almeida, 2006, page 109.

[2] José Guilherme Xavier de Basto, IRS, Real Incidence and Determination of Net Income, Coimbra Publisher, 2007, pages 431 and following.

Frequently Asked Questions

Automatically Created

What are the requirements for IRS capital gains reinvestment exemption on permanent residence under Article 10(5) and 10(6) of the Portuguese CIRS?
Article 10(5) and 10(6) of the CIRS establish that capital gains from the sale of a taxpayer's permanent residence (habitação própria e permanente) are excluded from taxation if the total sale proceeds are reinvested in acquiring, constructing, or improving another property intended to serve as the taxpayer's own and permanent residence within specific timeframes. The reinvestment must occur within 36 months before or after the sale (or 24 months for construction). The exemption is conditional on the new property actually becoming the taxpayer's permanent residence and maintaining that status. The taxpayer must declare the reinvestment intention in Annex G of the IRS return, specifying the amounts involved, acquisition details, and outstanding mortgage debt at the time of sale. Failure to complete the reinvestment within the legal timeframe or to allocate the property to permanent residence results in retroactive taxation of the capital gains with interest.
How does the Portuguese Tax Authority (AT) determine if a property qualifies as a taxpayer's permanent residence (habitação própria e permanente) for capital gains reinvestment purposes?
The Portuguese Tax Authority determines if a property qualifies as a taxpayer's permanent residence (habitação própria e permanente) by examining several objective criteria, with the registered tax domicile (domicílio fiscal) serving as the primary evidence. According to Article 19 of the General Tax Law (LGT), the tax domicile is where the taxpayer habitually resides and is registered in their citizen card or identity document. The AT examines utility contracts (electricity, water, gas) in the taxpayer's name at the address, official address changes on identity documents, and the timing of these registrations relative to property acquisition. The authority also considers whether the taxpayer actually occupied the property and the family unit's residential situation. In CAAD Process 619/2017-T, the taxpayer's delayed domicile change (August 2016, over one year after acquisition) and utility contract date (December 2015, six months post-acquisition) became critical factors in the AT's assessment that the property did not immediately qualify as permanent residence for capital gains exemption purposes.
Can a taxpayer challenge an IRS capital gains tax assessment through CAAD arbitration after a failed gracious complaint (reclamação graciosa)?
Yes, a taxpayer can challenge an IRS capital gains tax assessment through CAAD (Centro de Arbitragem Administrativa) arbitration after an unsuccessful administrative appeal (reclamação graciosa). Article 2(1)(a) and Article 10 of Decree-Law 10/2011 (RJAT - Legal Regime of Tax Arbitration) permit taxpayers to submit disputes to arbitration regarding tax acts, including IRS assessments and decisions dismissing administrative appeals. In Process 619/2017-T, the taxpayer first submitted an administrative appeal on April 21, 2017, against the IRS assessment issued February 7, 2017. After the Tax Authority dismissed this appeal, the taxpayer initiated arbitration on November 27, 2017, requesting annulment of both the original assessment (€6,385.66) and the dismissal decision. The arbitration process follows RJAT procedures: acceptance by CAAD's President, arbitrator designation, constitution of the singular arbitral tribunal, submission of the administrative file by the AT, presentation of responses, and issuance of an arbitral decision with binding effect equivalent to a court judgment.
What role does the registered tax domicile (domicílio fiscal) play in proving permanent residence for IRS real estate capital gains reinvestment relief?
The registered tax domicile (domicílio fiscal) plays a decisive evidentiary role in proving permanent residence for IRS real estate capital gains reinvestment relief under Article 10(5) and 10(6) of the CIRS. Portuguese tax law presumes that a taxpayer's habitual residence corresponds to the address registered as their tax domicile in official records, particularly the citizen card or identity document. For capital gains exemption purposes, the Tax Authority expects the taxpayer to update their tax domicile to the newly acquired property's address within a reasonable timeframe to demonstrate it has become their habitação própria e permanente. In Process 619/2017-T, the taxpayer's failure to change her citizen card address until August 2016—14 months after acquiring the property in June 2015—weakened her claim that the property served as permanent residence from the time of acquisition or shortly thereafter. While the taxpayer argued that necessary remodeling works prevented immediate occupation, the delayed domicile registration, combined with the December 2015 utility contract date, suggested the property was not immediately allocated to permanent residence, potentially disqualifying the capital gains reinvestment exemption under strict interpretation of CIRS requirements.
What was the outcome of CAAD Process 619/2017-T regarding the reinvestment of real estate capital gains and the taxpayer's permanent residence status?
While the full outcome of CAAD Process 619/2017-T is not disclosed in the excerpt provided (which presents only the initial report section), the case establishes important principles regarding IRS capital gains reinvestment relief. The taxpayer contested a €6,385.66 assessment arising from the Tax Authority's rejection of her claimed capital gains exclusion on the June 2015 sale of her permanent residence. The core issue was whether her June 2015 acquisition of a new property for €170,000, into which she reinvested €93,265.22 of the sale proceeds, qualified for exemption under Article 10(5) and 10(6) of the CIRS. The Tax Authority disputed whether the new property constituted the taxpayer's habitação própria e permanente, given the delayed establishment of residence evidenced by the December 2015 utility contract and August 2016 domicile change, despite the taxpayer's explanation that remodeling works necessitated the delay. The arbitral tribunal was tasked with determining whether these circumstances satisfied the legal requirements for capital gains reinvestment relief, considering the taxpayer's family situation (single mother with minor daughter), the temporal proximity of sale and purchase, the completion of Annex G declarations, and the objective evidence of permanent residence establishment.