Process: 62/2019-T

Date: August 28, 2019

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitral tax case (Process 62/2019-T) addresses the critical issue of IRS tax residency determination when a taxpayer relocates abroad during a fiscal year. The Claimant contested an IRS assessment of €22,941.81 plus €1,561.30 in compensatory interest for the 2013 tax year, arguing he should be taxed as a non-resident rather than a Portuguese tax resident. The taxpayer moved to Romania in May 2013, formally notified the Portuguese Tax Authority (AT) of his departure on July 18, 2013 (with retroactive effect to January 1, 2013), and appointed a tax representative. He earned €83,485.76 in employment income from his Portuguese employer C..., with €32,803.90 relating to work performed in Portugal and €50,861.86 to work abroad. The employer withheld IRS at resident rates (35.75%) totaling €11,728.00 plus €520.00 surtax. The taxpayer argued he qualified as non-resident under Portuguese tax law, having spent less than 183 days in Portugal in 2013 and established residence in Romania by year-end, as evidenced by Romanian registration documents, rental contracts, and Romanian tax payments. The AT rejected both his administrative complaint (reclamação graciosa) and subsequent hierarchical appeal (recurso hierárquico), maintaining he was a Portuguese tax resident because he retained permanent housing in Portugal with IMI exemption benefits. The case illustrates the complexity of establishing non-resident status, particularly regarding the 183-day rule, permanent housing availability, and proper documentation requirements. This arbitral proceeding under RJAT demonstrates taxpayers' rights to challenge residency determinations through CAAD when administrative remedies fail.

Full Decision

ARBITRAL TAX DECISION

I - REPORT

1 - OF THE PARTIES AND CONSTITUTION OF THE ARBITRAL TRIBUNAL

1.1 – A..., hereinafter referred to as the Claimant, with tax identification number..., resident in the Street..., no.... ..., ...-... Porto, comes pursuant to articles 2.º, no. 1, letter a) and 10.º, no. 1 of the Legal Regime of Arbitration (RJAT), approved by Decree-Law no. 10/2011, of 20 January, to request an arbitral decision against the rejection decision of the hierarchical appeal no. ...2016..., of the rejection decision of the administrative complaint no. ...2015... and of the tax act of IRS no. 2016... and of compensatory interest no. 2016..., of 15/11/2016 concerning the year 2016, for the declaration of illegality of the aforementioned IRS assessment of 2013, in the amount of €22,941.81, plus compensatory interest in the amount of €1,561.30, totalling €24,503.11.

The assessment in question is duly identified and attached to the case file (docs. nos. 13 and 14).

1.2 - The request for constitution of the Arbitral Tribunal was presented by the Claimant on 31/01/2019, and was accepted by the President of CAAD on the same date. The Claimant chose not to appoint an arbitrator, whereupon, pursuant to article 6.º, no. 1 of RJAT, the undersigned, Dr. José Rodrigo de Castro, was appointed by the CAAD Deontological Council on 20-02-2019, a task which he had accepted on 15/02/2019, of which the Parties were notified.

1.3 - By order of 09/04/2019, the President of the Deontological Council constituted the arbitral tribunal, determining that the legal procedures be carried out, as provided for in article 17.º of Decree-Law no. 10/2011, of 20 January.

1.4 - The Parties were notified of the constitution of the tribunal on that same date of 09/04/2019.

1.5 - On 10/04/2019 an arbitral order was issued, determining the notification of the Tax and Customs Authority (AT) to submit a response within the legal timeframe and sending of the respective administrative file, in accordance with and for the purposes of articles 17.º, nos. 1 and 2 of RJAT.

1.6 - The Respondent attached to the case file its Response on 21/05/2019, as well as the respective Administrative File, which are hereby reproduced.

1.7 - On 24/05/2019 an arbitral order was issued, in which the Tribunal indicated its position in favour of waiving the holding of the Meeting provided for in article 18.º of RJAT, despite the listing of three witnesses and the matter being merely a matter of law and the alleged facts appearing sufficiently proved in the case file, with notification of the parties to submit their comments.

1.8 - Given that the parties did not object, a new arbitral order was issued on 07/06/2019, determining the waiver of the meeting referred to in article 18.º of RJAT, with notification to the parties on the same date for optional and simultaneous written submissions, until 7 June 2019, with 30 September designated for the issuance of the decision. The said arbitral order was notified to the Parties on the same date of 7/06/2019.

1.9 - Written submissions were made by the Claimant on 09/07/2019, within the indicated date.

19.1 - The Respondent made no written submissions.

2 - OF THE REQUEST FORMULATED BY THE CLAIMANT

2.1 - The Claimant submitted a request for an arbitral decision against the rejection decision of hierarchical appeal no. ...2016..., the rejection decision of administrative complaint no. ...2015... and the act of self-assessed IRS assessment no. 2016... and compensatory interest no. 2016..., of 15/11/2016 concerning the year 2016, against the illegality of the aforementioned 2013 IRS assessment in the amount of €22,941.81, plus compensatory interest in the amount of €1,561.30, totalling €24,503.11, the payment of which he has made.

2.2 - The challenged assessment relates, first, to the rejection of the aforementioned Hierarchical Appeal, which does not recognize his status as a non-resident in Portuguese territory in 2013, nor grants him reimbursement of the tax withheld in excess, and of the IRS surtax.

2.3 - The Claimant therefore intends to discuss his tax status in IRS, alleging that he is a non-resident, because he remained in Portuguese territory in 2013 for a period of less than 183 days and because he transferred his residence to Romania in May 2013, where he resided on 31 December of that same year.

2.4 - For this reason, he appointed as his Tax Representative B..., with tax identification number.... .

2.5 - The notice of his departure from Portuguese territory took place on 18/07/2013, with retroactive effect to 01/01/2013, a situation which the Tax Authority did not contest.

2.6 - Further, the Claimant states that in the year 2013 he earned remuneration from employment paid by his then employer, C..., in the amount of €83,485.76, as shown in Doc. 6 - Declaration issued by C..., where it appears that the withholding was not applied to the full remuneration of €83,485.76, but only to €32,803.90, with withholding value of €11,728.00 (at the rate of 35.75%) and surtax of €520.00 (at the rate of 1.59%).

2.7 - He further states that of the aforementioned amount, €32,803.90 relate to income from work performed in Portugal and €50,861.86 to work carried out abroad.

2.8 - Hence, C..., when paying him those remuneration (relating to the period from January to May 2013), effected source withholdings in accordance with the rates applicable to resident taxpayers, due to lack of knowledge of his situation as a non-resident, and reported both the remuneration and the withholdings in the monthly reporting declarations to AT.

2.9 - Whereupon he presented an Administrative Complaint addressed to the Finance Director of... contesting the self-assessment carried out by AT on 12-02-2016, no. 2016..., in the amount payable of €24,503.11, which includes source withholdings on account of IRS due ultimately, in the amount of €11,728.00 and applicable surtax of €2,218.73, already deducted from the €520.00 withheld at source.

2.9.1 - He also presented a Hierarchical Appeal due to the rejection of the administrative complaint, on the grounds that he possessed permanent housing at his disposal, of which, moreover, he was benefiting from IMI exemption. The Hierarchical Appeal was also rejected.

2.9.2 - In January 2016 he was notified of the expiration of the IMI exemption, regarding his habitual residence, due to alteration of tax domicile and 18-07-2013, ceasing, according to Doc. 11, to meet the conditions for exemption in accordance with the provisions contained in no. 1 of article 46.º of the EBF.

2.9.2 - The Claimant, on the grounds that in 2013 he ceased to be resident in Portuguese territory, submitted the present request for arbitral challenge, alleging that he should have been taxed in 2013 as a non-resident and, therefore, subject to the liberatory rate of 25%, without any surtax.

2.9.3 - The Claimant alleges that AT should have acted accordingly, in view of his "Certificat de Inregistrate", which he says shows the date of formal registration in Romania, or rather the date of the contract concluded in Romania on 4-08-2013 with D..., cf. Doc. 2.

2.9.4 - He also attaches a rental contract proving that he had habitual residence in that country, namely on 31 December 2015, cf. Doc. 3.

2.9.5 - And he also emphasizes that when on 18 July 2013 he altered his residence to Romania, with retroactive effect to 1 January of that year, he immediately appointed his Tax Representative, cf. Doc. 4.

2.9.6 - He further alleges that when he did so he received no objection from the Portuguese Tax Administration.

2.9.7 - For purposes of corroborating his allegations, he also attaches evidence of payment of tax in Romania, for reference to the months of June to December 2013, cf. Doc. 5.

2.9.8 - He therefore contests the form of taxation as resident in Portuguese territory in 2013, because, despite here having received some income relating to the period from January to May 2013, the same should be taxed as a non-resident, given that he did not reside in Portuguese territory in 2013 for more than 183 days.

2.9.9 - And being taxed as a non-resident, as he believed should have been the case, the consequent assessment should be annulled, with reimbursement of the amounts withheld in that year, in the amount of €4,072.02.

3 - OF THE RESPONDENT'S ANSWER

3.1 - The Respondent, for its part, considers that the assessment made as a resident in Portuguese territory does not suffer from any legal defect that calls into question its legality and validity.

3.2 - The Claimant was notified to comment on the failure to submit his 2013 IRS declaration on 24-10-2018, which he did, alleging that he had no obligation to comply with such obligation because he altered his residence to Romania on 18/07/2013, with effects retroactive to 01/01/2013.

3.3 - He was replied that such obligation was enforceable, and he should attach to his declaration annexes A, J and B.

3.4 - The Respondent emphasizes that his employer, C..., S.A., effected payment of remuneration and made source withholdings until May 2013, as if dealing with a resident taxpayer, especially since the work was performed in Portugal.

3.5 - It further states that there is no basis for the allegation that his paying entity, when making the withholdings, was not aware of his situation as a non-resident - when the Claimant himself admits to remaining in Portuguese territory until May 2013.

3.6 - And it emphasizes that the Claimant has been, since 26-07-2002 and continues to be, registered as carrying out self-employed activity (IRS Code 1003 - Engineers), and would always have to submit the declaration with income earned in Portugal (Category A until May) and (Category B).

3.7 - The Respondent states that the Complainant, now Challenger, confesses, in prior hearing, to accepting that he should have submitted the income declaration with annex B, although without income in 2013.

3.8 - The Respondent emphasizes that the claimant is owner of property located on the Street..., ...- Porto, and has benefited from IMI exemption from 2011 to 2013, and has not, to the Respondent's knowledge, complied with the provisions of article 46.º, no. 8 of the EBF, combined with article 13.º, no. 1, letter g) of CIMI, regarding the cessation of such exemption.

3.9 - And it is this fact that, in the Respondent's view, prevents the Claimant from being recognized the status of non-resident in 2013.

3.9.1 - Whereupon, concludes the Respondent, the source withholding made by his employer in Portuguese territory, C..., S.A., was correctly effected.

3.9.2 - Further states the Respondent that, having the Challenger earned, in 2013, income in Portuguese territory and in Romanian territory, he should, in particular on the basis of article 4.º, no. 2 of the Convention concluded between the Portuguese Republic and Romania, published in DR no. 159, I Series, of 10-07-1999, have submitted the income declaration in Portugal with all universally obtained income, by possessing housing in Portuguese territory in conditions that suggested the intention to maintain and occupy it as habitual residence, and, therefore by being considered here resident.

3.9.3 - On the other hand, because C..., S.A, with NIPC..., with registered office on the Street..., no...., in..., is the holding company of 3 other companies in Portugal, the Respondent understands that both the remuneration that was subject to Portuguese withholding and those that were not paid by the same company and appear in model 30 (relating to income paid or made available to non-residents), must all be taxed in Portugal.

3.9.4 - This is because, according to the Respondent, the requirements of letters a) and b) of no. 1 of article 16.º of CIRS not being met, the Claimant must be considered resident in Portuguese territory in 2013 and, consequently, in view of the provisions of no. 1 of article 15.º and article 16.º of CIRS, all income earned is subject to IRS, including that obtained outside that territory.

3.9.5 - And this is because at the time of 2013 the reform envisaged by Law no. 82-E/2014, of 31 December, which came to admit the successive existence of two residence statuses (resident and non-resident) for the same year, was not yet in force.

3.9.6 - Wherefore, alleges the Respondent, AT in accordance with the provisions of letter b) of no. 1 and no. 3 of article 76.º of CIRS, at the time of the self-assessment, took into account the elements that were at its disposal and which determined that the Claimant be considered resident in Portuguese territory, determining the inclusion in Annexes A and J of income obtained in Portugal and abroad, respectively.

3.9.7 - Income contained in Annex A which, moreover, C..., his employer in Portugal included in the Declaration model 30 (income paid and withholdings made to residents) which he duly submitted to AT.

3.9.8 - Further states the Respondent that through consultation of the Taxpayer Management and Registration System, AT verified that the Claimant appears as resident in Portugal until 11-07-2013, at which time he altered his registry status to resident in Romania, without further specifications, namely city, locality or street.

3.9.9 - Wherefore, on that date of 11-07-2013, more than 183 days of stay in Portuguese territory had already elapsed and, therefore, he would have to be considered resident here.

3.9.9.1 - To which is added that the Claimant only ceased his self-employed activity as an Engineer on 02-04-2018.

3.9.9.2 - Hence, according to the Respondent, it notified the Claimant to deliver the missing annual income declaration within 30 days, pursuant to no. 3 of article 76.º of the IRS Code.

3.9.9.3 - It further states that regarding the documents presented by the Claimant, for proof purposes, namely, the documents "romania/certificat de inregistrate", "contract de inchirieri no.01 din 04.08.2013", "declaratie 224" and "Romanie tax compliance 2013", the Respondent understands that they cannot constitute proof elements, because they are not translated into Portuguese for their full understanding and analysis, cf. article 54.º of CPA applicable ex-vi letter e) of article 2.º of CPPT, respectively, regarding the procedure and tax process.

3.9.9.4 - And it reinforces its understanding, in view of the provisions of nos. 1 and 2 of article 365.º of CC, which it transcribes, as well as in the Jurisprudence of STJ of 25/10/1974 - BMJ 240.º-199, also cited in the Decision of STJ of 8/5/2003 - Proc. 03B1123 and still in the Decision of STJ of 17/6/1998, issued in Proc. no. 988313.

3.9.9.5 - Furthermore, the Respondent understands that these are forms completed by the claimant himself, and it does not appear to be official documents issued by the Romanian Tax Authority, "it also appearing to result from the same that they correspond to declarations of non-residents carrying out activity in Romania" - wherefore it also challenges that they cannot serve to prove alleged facts.

3.9.9.6 - Furthermore, the Respondent reinforces, "it is indubitable that the situation of non-resident in Portuguese territory of the Claimant is not proven, since, pursuant to letter a) of no. 1 of article 16.º of CIRS, he remained more than 183 days in national territory, and not having proven that he was taxed as a resident in Romania, the issued declaration is, in the Respondent's understanding, correct and suffering from no illegality.

3.9.9.7 - The Respondent further emphasizes that the Claimant's absence from the country was due to a secondment and, given that there is no definition of secondment in Portuguese tax law, on the basis of no. 2 of article 11.º of LGT, it is necessary to resort to the branch of law that encompasses it - which is labour law.

3.9.9.8 - Thus, in view of the combined provisions of articles 6.º to 8.º and 108.º of the Labour Code, it results that "secondment implies the existence of a working relationship between the company that seconded and the seconded worker (with the worker remaining subject to the direction and authority of the company that seconded him, maintaining his status as its subordinate worker) and that the seconded worker must return to the country of origin"- that is, "secondment always supposes a temporary character".

3.9.9.9 - Further states the Respondent that certainly C..., allegedly would have required the foreign company to bear the costs paid by way of remuneration to the Claimant. And, if such is the case, "this proof would have been easily obtained by attaching the addendum or the complementary contractual information underlying the secondment or other elements that would make it possible to conclude that at the end of May 2013, the claimant ceased to remain in Portugal" - and this proof was not effected.

4. - OF THE CLAIMANT'S SUBMISSIONS

4.1 - After clarification of the immediate and mediate object of his request for an arbitral decision, the Claimant comes to disagree with the position assumed by the Tax Authority, based on the premise that the Claimant was resident in Portuguese territory for tax purposes in the year 2013, which, in his understanding, is erroneous.

4.2 - In addition to invoking his legitimacy and the timeliness of his request for an arbitral decision, he presents the facts, which are moreover already known.

OF THE FACTS IN THE CLAIMANT'S VIEW:

4.3 - He thus states the following, in summary, considering the documentary evidence attached to the case file.

4.4 - That in the year 2013 he was seconded to perform functions in Romania, pursuant to an employment contract concluded with C..., S.A. and that, for this reason, in the year 2013 he remained in Portuguese territory for a period of less than 183 days, which leads to his qualification as a non-resident.

4.5 - And this is because, from May 2013 onwards, the Claimant transferred his habitual residence to Romania, where he was resident for tax purposes on 31 December 2013.

4.6 - And he alleges that his habitual residence in Romania is shown to be proven through the Certificate of Registration in Romania ("Certificat de Inregistrate"), which shows the date of formal registration in that country - cf. Doc. 2.

4.7 - He also intends to prove his stay in Romania in the year 2013 through the rental contract concluded by the Claimant in Romania, proving that he had habitual residence in that country, namely on 31 December 2013 - cf. Doc. no. 3.

4.8 - Hence he proceeded to appoint a tax representative on 18/7/2013, with retroactive effect to 1/1/2013, designating for this purpose B..., holder of NIF...- cf. Doc. 4.

4.9 - As a consequence of his residence change to Romania, he states he paid tax in Romania for reference to the months of June to December 2013 - cf. Doc. no. 5.

4.9.1 - He further states that in the year 2013, his employer in Portugal proceeded to pay the remuneration owed to the Claimant, which amounted to €83,485.76 - cf. Doc. 6, from which the total values appear, as well as the identification of income from work performed in Portugal, in the amount of €32,803.90 and €50,861.86, relating to work carried out abroad - cf. Doc. 6.

4.9.2 - As appears in the same Doc. 6, the Claimant affirms that his employer proceeded to make source withholdings in accordance with the rates applicable to resident taxpayers, as well as to withholding of surtax and reported these withholdings and remuneration paid in the Monthly Reporting Declarations to the Tax Authority, as if dealing with a resident.

4.9.3 - Hence the Claimant understands that he was subject to IRS source withholding at a rate higher than the liberatory rate of 25%, applicable to non-resident taxpayers, wherefore he filed an administrative complaint, hierarchical appeal and the present arbitral challenge, due to rejection of the previous requests, despite the opportunity to be heard, in the exercise of the right to a hearing.

OF THE LAW ALLEGED BY THE CLAIMANT:

4.9.4 - The Claimant emphasizes that the Tax Authority "understands that the Claimant, in 2013, met the legal requirements to be considered resident in Portugal", wherefore it also understands that "the challenged assessment does not suffer from illegality", as appears from the decisions made on the administrative complaint and on the hierarchical appeal.

4.9.5 - The Claimant states that the Tax Authority also alleges that the Claimant "did not present any probative elements regarding the income earned in Romania for purposes of proving payment of income tax and possible elimination of double taxation, as stipulated in article 81.º of CIRS and article 24.º of the Convention".

4.9.6 - And that AT further alleged that "the IMI exemption relating to the property owned by the appellant ceased in 2013, because the appellant on 18/07/2013 requested the alteration of his tax domicile, verifying that he did not indicate any address, merely altered the country of residence to Romania".

4.9.7 - Beyond the aforementioned, the Claimant states that the Tax Authority impugns the probative value of the documents presented by the Claimant.

4.9.8 - All the arguments presented by the Tax Authority are contested by the Claimant, based on the grounds already contained in his PI and which are hereby reproduced. He clarifies, however, additionally, that "the tax residence of a taxpayer was assessed by the availability of housing on 31 December of the year in question and not on 'any day of the year', expression which only came to appear in article 16.º of the IRS Code in 2015".

4.9.9 - And that not even the fact that he benefited from IMI exemption from 2011 to 2013 regarding his property located on the Street..., ...-Porto, can lead the Tax Authority to neglect the factual situation of the Claimant, that he was a non-resident in Portugal, by reason of the secondment in Romania in the year 2013 and presume that the property held in Portugal was used as habitual residence in 2013, when, according to the legislation then in force, the Claimant's habitual residence on 31 December 2013 was, in fact, in Romania.

4.9.9.1 - And the Tax Authority cannot even "conclude that he had such property in conditions that would suggest his intention to occupy it as habitual residence, the criterion provided for in letter b) of no. 1 of article 16.º of the IRS Code not being verified".

4.9.9.2 - And that the Tax Authority also cannot presume his residence from the IMI exemption which he enjoyed in 2013, "when it appears that he should have lost this exemption by force of the relocation of his residence to Romania, as stated in Office no...., of 21 January 2016", cf. Doc. 10.

4.9.9.3 - Which, the Claimant emphasizes, the Tax Authority contradicts its own position, wanting, on one hand, to assess IMI considering the expiration of the benefit, due to the fact that the Claimant qualifies as a non-resident in the year 2013 and, on the other, to consider the Claimant as resident in the same year, and he emphasizes, "we are faced with two contradictory positions issued by the same Tax Authority".

4.9.9.4 - The Claimant regards as contradictory the position set out in Doc. 11 (Information, Opinion and Notification of the rejection order of the Administrative Complaint), because in his understanding it violates the principle of reasoned decision-making enshrined in no. 1 of article 77.º of LGT, for making no mention of the document proving the registration of non-residence filed by the Claimant.

4.9.9.5 - And also regarding the IMI exemption of the property for housing in Portugal, the Claimant refers to his condition of emigrant, the concept of which appears in article 3.º of decree-law no. 323/95, of 29/11, and, as a consequence, to the provisions of article 46.º, no. 13.º of the EBF, according to which "emigrants may benefit from the exemption provided for in this article, as defined in that diploma.

4.9.9.6 - This is because the aforementioned article 3.º of Decree-Law 323/95, of 29 November defines the concept of emigrant in the following terms: "Portuguese emigrants are considered, for the purposes of this diploma, Portuguese citizens who have left the territory to, abroad, exercise remunerated activity and reside there with permanent character (…)".

4.9.9.7 - On the question of his tax status as a non-resident, the Claimant recalls that he fulfilled all the obligations established regarding his relocation to Romania, presenting his change of residence on 18 July 2013, with retroactive effect to 1 January of the same year, which AT accepted without objection.

4.9.9.8 - And that even in accordance with no. 7 of article 13.º of CIRS "the personal and family situation of taxpayers relevant for tax purposes is that which occurs on the last day of the year to which it relates".

4.9.9.9 - Regarding the taxation of employment income earned in Portugal in 2013 with C..., the Claimant does not contest it, but understands that on the basis of letter a) of no. 4 of article 71.º of CIRS (in force at the time of the facts), this income (dependent work and self-employment income) is subject to source withholding as a final matter, at the liberatory rate of 25%" - hence the incorrect application of the withholding rates effected by C....

4.9.9.9.1 - Regarding the total income paid by C... in 2013, in the overall amount of €83,485.76, it states that it includes income from work performed in Portugal in the amount of €32,803.90 and €50,681.86 relating to work carried out abroad,

4.9.9.9.2 - The Tax Authority could not apply to the former the withholding rate for residents and tax in Portugal the latter, in the amount of €50,681.86, because they were earned as a consequence of work developed during the secondment period in Romania.

WHEREFORE IT CONCLUDES, in summary and in view of the foregoing:

a) To be considered a non-resident in Portuguese territory during the entire year 2013, because he remained there for a period of less than 183 days, because he transferred his habitual residence to Romania from May 2013 onwards;

b) That regarding the months of June to December 2013 he paid tax in Romania.

c) That the withholdings made on income earned in Portugal were incorrectly effected, because his employer was unaware, at the time, that he had the status of non-resident;

d) That the fact of possessing property in Portugal in 2013 could not lead the Tax Authority to "presume its use as habitual residence";

e) For all the foregoing it cannot agree with the taxation effected by the Tax Authority, not only because it is based on error regarding the factual and legal premises, but also because it is inconsistent with previously assumed positions;

f) That on 31 December 2013 his habitual residence was in Romania and that, for this reason, the Claimant understands that the income earned in Portugal from his work carried out here is subject to taxation at the liberatory rate of 25% and that the rest is not subject to taxation in Portugal;

g) That the decision rejecting the Hierarchical Appeal by the Tax Authority is inconsistent with the acceptance of the alteration of the Claimant's status to non-resident for tax purposes with effect from 1 January 2013;

h) That the fact of enjoying the IMI exemption regarding the property held in Portuguese territory, to conclude that the said property is the habitual residence of the Claimant and, simultaneously, to consider that the Claimant is resident in Portugal for IRS purposes in 2013, by having such property in conditions that suggested the intention to occupy it as habitual residence.

Whereupon he requests:

  1. The annulment of the decision rejecting the hierarchical appeal and the administrative complaint;

  2. The annulment of the underlying IRS and compensatory interest assessments, because they suffer from error regarding the factual and legal premises;

  3. The reimbursement of the difference of €3,527.02, between the source withholdings effected of €11,728.00 and the IRS of €8,200.98, resulting from the application of the liberatory rate, as well as the reimbursement of the IRS surtax of €520.00; And

  4. The payment of the indemnity interest that is shown to be due.

4.1 - OF THE RESPONDENT'S SUBMISSIONS

No submissions were made by the Respondent.

II - CLARIFICATION OF ISSUES

    • The Arbitral Tribunal is regularly constituted and is materially competent, pursuant to article 2.º, no. 1, letter a) of RJAT.
    • The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to articles 4 and 10.º, no. 2 of RJAT and article 1.º of Ordinance no. 112/2011, of 22 March.
    • The process does not suffer from defects that invalidate its examination.
    • The documentary evidence attached to the case file regarding his situation in Romania is partly contested by the Respondent on the grounds that they are not suitable in view of the provisions of articles 365.º of CC and 540.º of CPC, given the lack of recognition regarding documents issued abroad by diplomatic or consular agent.

It is therefore necessary to establish the factual matter relevant to the decision and to issue the same.

III - FACTUAL MATTER

A) - Proven Facts

The Tribunal considers as relevant factual matter the following duly proven facts:

  1. That the Claimant worked in Portuguese territory for C..., S.A., during part of the year 2013, at least, as can be known from documents considered official, until May, with his said employer effecting the respective IRS withholding of €11,728.00 and surtax in the amount of €520.00, applicable to residents, on the amount of €32,803.90 (Doc. 5).

  2. That regarding 2013 the Claimant was registered as a self-employed professional, but without any known earned income.

  3. He did not present the IRS model 3 declaration regarding the year 2013, despite the income earned from employment, at least until May of that year, and being registered as a self-employed professional.

  4. On 18/07/2013 and with retroactive effect to 01/01/2013, a declaration of change of residence to a foreign country was presented at the Finance Service of Lisbon-..., more precisely to Romania, without indication of an address in that country, having designated as his legal representative B..., with NIF... (Doc. 4).

  5. The Employer in Portugal still paid him, in that same year 2013, employment income in the amount of a further €50,681.86, on which it made no withholding, according to Declaration issued in accordance with the provisions of letter b) of no. 1 of article 119.º of the IRS Code, because, according to his statement, they were charged to the Claimant's employer in Romania (Doc. 5).

  6. The Tax and Customs Authority instituted Notice of Infraction against the Claimant on 17/02/2016, for failure to submit the IRS Model 3 Declaration for the year 2013, to which it states he is obliged, for having earned in Portuguese territory income of Category A in the amount of €38,461.30, with withholdings of €3,684.42 and €520.00 of surtax and also for not having declared in Annex J (Income obtained abroad) in the amount of €50,681.86, as well as for failure to include Annex B (self-employed work), although without any income (Doc.12).

  7. For this reason, AT effected on 12/02/2016 the self-assessment no. 2016..., original IRS to pay of €24,503.11, until 20-04-2016, which includes compensatory interest of €1,561.30, amounts which the Claimant paid in a timely manner (Docs. 13 and 15).

  8. That the Claimant was the owner of a property which he intended for his permanent housing, registered in the property record to which correspond the cadastral article... and..., of the parish of.../Porto, and AT proceeded to notify the Claimant's Representative on 21/01/2016, for exercise of the right to be heard regarding the expiration of the tax benefit consisting of the IMI exemption (Municipal Property Tax), due to alteration of tax domicile on 18/07/2013, ceasing thus to meet the conditions for IMI exemption in accordance with the provisions of no. 1 of article 46.º of the EBF.

B) - Facts Whose Proof is Contested by the Respondent

Various documents were attached which intend to prove both the receipt of income in Romania from 1 June 2013 onwards, and the payment of taxes in that country, namely:

  1. "Declarate" 224, relating to June to December 2013, with the respective earned income and withholdings effected (Doc. 6), but which are not translated into Portuguese, nor authenticated by any tax or consular authority.

  2. Excel sheets in Romanian, where "Romania Tax Compliance 2013" is referenced, with amounts earned between June to December and respective withholdings, also without any tax or consular authentication, which are also part of Doc. 5.

  3. "Certificat de Inregistrare" in "Romania", with no. 6043 and valid from 13/06/2013 to 01/06/2015, regarding the Claimant and already with declared domicile in "...", whose authenticating entity is not decipherable. (Doc. 2).

  4. He also attached a document designated "CONTRACT DE INCHIRIERE" with "N.º 01 din 04.08.2013", in Romanian language and simultaneously in English, both by the "proprietor" and by the worker A..., without legible authentication, which constitutes Doc. 3.

C) - Rationale of the Proven Facts

All the facts previously described and invoked by the Claimant are based on the documentary evidence attached to the case file, therefore considering as proven those referred to in A) and contested by the Respondent those referred to in B).

The Respondent invokes the legal and probative validity of Docs. 2, 3, 5 and 6 referred to in B, due to absence of legalization, sustained in the provisions of no. 1 of article 540.º of CPC, article 365.º of CC and two Decisions of STJ already previously cited.

However, this Tribunal understands that they may merely assist in the correct interpretation of the facts for the purpose of the taxpayer's tax classification in the year 2013 and the application of the law to the situation at issue.

IV - OF THE LAW

With the factual matter fixed in accordance with the terms and conditions mentioned above, it is necessary to determine the applicable law.

The issue to be decided hinges fundamentally on defining what the Claimant's tax situation was in 2013. That is, whether in light of the applicable law he is a taxpayer resident in Portuguese territory, or a non-resident.

Let us resort to the law, more properly and first to the IRS Code, as redacted at the time of 2013, and more specifically to the following provisions:

1. IRS Code:

Article 16.º

Residence

1 - Residents in Portuguese territory are persons who, in the year to which the income relates:

a) Have remained therein for more than 183 days, consecutive or interpolated;

b) Having remained for less time, have available there, on 31 December of that year, housing in conditions that suggest the intention to maintain and occupy it as habitual residence;

c) On 31 December, are crew members of ships or aircraft, provided such are at the service of entities with residence, registered office or effective management in that territory;

d) Exercise abroad functions or public commissions, in service of the Portuguese State.

2 - Are always considered residents in Portuguese territory persons who constitute the family group, provided any of those to whom the direction thereof falls reside there.

3 - The condition of resident resulting from the application of the provisions in the previous number may be set aside by the spouse who does not meet the criterion provided for in letter a) of no. 1, provided he proves the non-existence of a link between the greater part of his economic activities and Portuguese territory, in which case he is subject to taxation as a non-resident regarding the income of which he is the holder and which is considered obtained in Portuguese territory as per article 18.º (As amended by Law no. 60-A/2005 of 31 December)

4 - Once the proof referred to in the previous number is made, the spouse resident in Portuguese territory presents a single declaration of his own income, his share in common income and the income of dependents in his charge according to the regime applicable to persons in the situation of de facto separated according to the provisions of no. 2 of article 59.º (Added by Law no. 60-A/2005 of 31 December)

5 - Are also considered residents in Portuguese territory persons of Portuguese nationality who move their tax residence to a country, territory or region subject to a clearly more favourable tax regime listed in an ordinance approved by the Minister of Finance, in the year in which such change is verified and in the four subsequent years, unless the interested party proves that the change is due to justifiable reasons, in particular the exercise in that territory of temporary activity on behalf of an employer domiciled in Portuguese territory. (Added by Law no. 60-A/2005 of 31 December - Previous no. 3.)

6 - Non-habitual residents in Portuguese territory are considered to be taxpayers who, becoming fiscally resident pursuant to nos. 1 or 2, were not residents in Portuguese territory in any of the five preceding years. (As amended by Law no. 20/2012, of 14/05)

7 - The taxpayer who is considered a non-habitual resident acquires the right to be taxed as such for the period of 10 consecutive years from the year, inclusive, of his registration as resident in Portuguese territory.(As amended by Law no. 20/2012, of 14/05)

8 - The taxpayer must request registration as a non-habitual resident at the time of registration as resident in Portuguese territory or, subsequently, until 31 March, inclusive, of the year following that in which he becomes resident in that territory. (As amended by Law no. 20/2012, of 14/05)

9 - The enjoyment of the right to be taxed as a non-habitual resident in each year of the period referred to in no. 7 depends on the taxpayer being, in that year, considered resident in Portuguese territory. (As amended by Law no. 20/2012, of 14/05)

10 - The taxpayer who has not enjoyed the right referred to in the previous number in one or more years of the period referred to in no. 7 may resume the enjoyment thereof in any of the remaining years of that period, from the year, inclusive, in which he once again becomes resident in Portuguese territory.(Added by article 5.º of Law no. 20/2012, of 14/05)

11 - The exercise of functions as a Member of the European Parliament falls within the provisions of letter d) of no. 1. (Added by Law no. 66-B/2012, of 31 December).

In view of article 16.º transcribed, as redacted in force in 2013, the following may be concluded regarding the Claimant:

a) That the Claimant remained in Portuguese territory until 31 May 2013, as can be concluded from the remuneration paid until that date by his former employer, C..., S.A., the only amounts to which it made withholdings and surtax withholding;

b) That by the said employer were delivered to the Tax Administration Services the respective Monthly Remuneration Declarations "DMR-AT", as if dealing with a resident and with the values of remuneration paid and withholdings made;

c) That in such circumstances he does not meet the requirements required by no. 1, letter a) of article 16.º above;

d) There is no knowledge of the existence of a family group, nor do the parties make known its existence from the case file, despite possessing housing intended for his residence, on Street... in the city of Porto;

e) Therefore, it cannot be stated that the requirement of no. 2 of the same article 16.º is satisfied;

f) It was also not proven by the Tax Authority that, due to the fact of possessing the said residence, such situation suggested "the intention to maintain and occupy it as habitual residence", wherefore neither is the premise for being considered resident in Portuguese territory satisfied here;

g) That provably having the Claimant notified the Tax Authority - Finance Service - Lisbon..., of his residence abroad, more precisely in Romania on 08/07/2013, to which he states he intended to give retroactive effect to 01/01/2013, which he alleges was accepted, this notification could lead us to two conclusions:

g.1 - That if the effects of the change of residence to Romania are only given retroactively to 08/07/2013, on that date the Claimant would have remained in Portugal more than 183 days and, consequently, would be considered resident in Portuguese territory for the whole year 2013, in light of the provisions of letter a) of no. 1 of article 16.º;

g.2 - But if we consider that the Claimant left Portuguese territory before the said date of 08/07/2013, either by force of the retroaction of effects which he sought to give to the said notification, 01-01-2013, - which is not plausible because he earned employment remuneration in Portuguese territory at the service of C..., S.A., until 31 May - then, being this the period which provably he was in Portuguese territory, as can also be verified from the Monthly Reporting Declarations to AT, the Claimant cannot be considered resident in Portuguese territory in the year 2013;

h) As to the fact of possessing his residence in the city of Porto, which was benefiting from the IMI exemption pursuant to the provisions of article 46.º, no. 1 of the EBF, the implications of its non-use for this purpose throughout the year 2013 has and had only as consequence the loss of the exemption, which led, moreover, to his notification by AT for this effect;

i) Not being able to be invoked as legally valid the probative documents which he attached to the process, either regarding his registration in Romania, or the employment contract and the payslips and proof of tax payment in that country from June 2013 onwards, because not authenticated by any state or consular authority, it is certain that they cannot fail to help the Tribunal form a conviction that the previous conclusions are well-founded;

j) That, thus being, the Claimant should have presented the IRS Model 3 Declaration, with Annex A, in the capacity of non-resident and making appear therein the income earned in Portuguese territory until 31 May 2013, in service of C..., S.A., in accordance with the declaration provided by this same employer;

k) For all the foregoing and in light of the applicable law, this Tribunal cannot fail to consider the Claimant as a non-resident in Portuguese territory in 2013.

V - INDEMNITY INTEREST

Given the recognition of the Claimant's legitimacy to request payment of the indemnity interest due pursuant to the provisions of article 43.º of the General Tax Law, and because this Tribunal is materially competent, and also because the self-assessment effected by the Tax Administration with no. 2016..., of 2016-02-12, in the amount of €24,503.11, which includes €1,561.30 of compensatory interest, appears to be affected by illegality, the consequent annulment should be proceeded of the amount of IRS which he claims as wrongfully paid, including the surtax assessed and paid, with right to payment to the Claimant of indemnity interest at the legal rate in force, as the prerequisites set forth in article 43.º of the General Tax Law appear to be satisfied.

VI - DECISION

For these reasons, it is decided:

a) To uphold the arbitral request formulated by the Claimant, based on the legal grounds previously expressed, and, in consequence, remove from the legal order the challenged IRS assessment, including compensatory interest and surtax, as well as the Statement of assessment of compensatory interest, with indication of the total amount to pay, in the amount of €24,503.11, with the legal consequences of its reimbursement, given that the tax assessed by the Respondent as resident was paid by the Claimant;

b) To proceed with the annulment of the decision rejecting the administrative complaint and hierarchical appeal, duly presented;

c) To proceed also, in consequence, with the Reimbursement to the Claimant of the difference between the source IRS withholdings made by the employer and paid to the State coffers in the amount of €11,728.00 on the income of €32,803.90 earned in Portuguese territory in 2013, in accordance with the respective table, and those due at the liberatory rate of 25% on the same income, in the amount of €8,200.98 (€32,803.90 X 0.25), applicable to non-residents, from which results an excess amount to reimburse of €3,527.02;

d) To proceed equally with the reimbursement of the surtax of €520.00, withheld by the employer on the aforementioned income earned in Portuguese territory in 2013, as resident, when his quality in that year is non-resident and, in consequence, undue;

e) To uphold the request for payment of indemnity interest in favour of the Claimant, for the difference between the tax paid and the actually due, at the respective legal rate, pursuant to article 43.º of LGT and 61.º of CPPT, until the date of payment of the total amount of the reimbursements referred to above of €24,503.11 + €4,047.02 (€3,527.02 + €520.00), totalling €28,550.13.

f) To condemn the Respondent Tax and Customs Authority to pay the full costs of the process.

VALUE OF THE PROCESS

The value of the process is fixed at €28,550.13 (24,503.11 + 4,047.02), the former being the amount to be reimbursed due to the nullity of the self-assessment and the latter to be reimbursed due to taxation at the liberatory rate applicable to non-residents, pursuant to article 97.º-A, no. 1, a) of CPPT, applicable by force of letters a) and b) of no. 1 of article 29.º of RJAT and no. 2 of article 3.º of the Regulation of Costs in Tax Arbitration Processes.

COSTS

Costs to be paid exclusively by the Tax and Customs Authority, in the amount of €1,530.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Processes, by force of article 4.º, no. 4 of the same Regulation and articles 12.º, no. 2 and 22.º, no. 4, both of RJAT, given that the request was entirely successful.

Notify.

Lisbon, 28 August 2019.

The Arbitrator of the Singular Arbitral Tribunal,

(José Rodrigo de Castro)

Frequently Asked Questions

Automatically Created

What happens when the Portuguese Tax Authority (AT) issues an IRS assessment treating a taxpayer as a tax resident?
When the Portuguese Tax Authority issues an IRS assessment treating a taxpayer as a tax resident, it applies progressive tax rates and potential IRS surtax (sobretaxa) to worldwide income. Resident taxpayers face withholding rates appropriate to their income bracket (in this case 35.75%) plus additional surtax charges. The assessment becomes enforceable unless challenged through administrative remedies (reclamação graciosa followed by recurso hierárquico) or arbitral proceedings. If the taxpayer believes they qualify as non-resident, they must provide compelling evidence of tax residence abroad, including spending fewer than 183 days in Portugal and not maintaining permanent housing available for use. Compensatory interest (juros compensatórios) accrues on amounts considered due, increasing the financial burden. Taxpayers assessed as residents when they claim non-resident status must act promptly to contest the classification, as residency status fundamentally determines tax obligations, applicable rates, and whether income sourced abroad is taxable in Portugal.
Can a taxpayer challenge an IRS tax assessment through arbitral proceedings at CAAD?
Yes, taxpayers can challenge IRS tax assessments through arbitral proceedings at CAAD (Centro de Arbitragem Administrativa) under the RJAT (Legal Regime of Arbitration in Taxation), approved by Decree-Law 10/2011 of January 20. This arbitral procedure is available after exhausting administrative remedies or when hierarchical appeals are rejected. In this case, the Claimant filed for arbitration after both his administrative complaint (reclamação graciosa) and hierarchical appeal (recurso hierárquico) were rejected. The request must identify the contested acts, amounts involved, and legal grounds. The CAAD President accepts the request, appoints arbitrators, and the tribunal follows procedures outlined in RJAT articles 2, 6, 10, 17, and 18. Arbitral proceedings offer an alternative to judicial courts, typically providing faster resolution of tax disputes. Parties can waive oral hearings when disputes involve purely legal questions with sufficient documentary evidence, as occurred here when the tribunal issued an order dispensing with the article 18 meeting after neither party objected.
What is the procedure for filing a hierarchical appeal (recurso hierárquico) after a rejected tax claim (reclamação graciosa) in Portugal?
After a rejected tax claim (reclamação graciosa) in Portugal, taxpayers must file a hierarchical appeal (recurso hierárquico) with the superior tax authority to contest the rejection decision. The hierarchical appeal challenges both the underlying tax assessment and the decision rejecting the administrative complaint. In this case, the taxpayer first submitted a reclamação graciosa to the Finance Director contesting the IRS self-assessment of €24,503.11. When AT rejected the complaint on grounds that the taxpayer maintained permanent housing in Portugal with IMI exemption benefits, the taxpayer filed a recurso hierárquico. This hierarchical appeal was also rejected, maintaining that the taxpayer qualified as resident. After exhausting these mandatory administrative remedies, the taxpayer gained standing to pursue arbitral proceedings at CAAD under RJAT. The hierarchical appeal process is essential because Portuguese administrative law generally requires exhaustion of administrative remedies before accessing judicial or arbitral review. Taxpayers must observe strict deadlines at each stage to preserve their rights to challenge tax assessments through subsequent arbitration or court proceedings.
How does Portuguese tax law determine tax residency for IRS purposes?
Portuguese tax law determines IRS residency under article 16 of the IRS Code (CIRS) using two primary tests: the 183-day rule and the permanent housing test. A person is considered tax resident in Portugal if they spend more than 183 days in Portuguese territory (consecutive or interpolated) during the relevant tax year, or if they maintain permanent housing available as their habitual residence on December 31 of that year. In this case, the taxpayer argued he spent fewer than 183 days in Portugal during 2013 and transferred his residence to Romania in May 2013, where he resided on December 31. However, the Tax Authority maintained he was resident because he retained permanent housing in Portugal for which he benefited from IMI exemption as habitual residence. The dispute centered on whether maintaining property in Portugal, even while living abroad, constitutes sufficient connection for tax residency. Taxpayers claiming non-resident status must demonstrate both physical absence (under 183 days) and establishment of habitual residence abroad, supported by documentation such as foreign registration certificates, rental contracts, employment contracts abroad, and foreign tax payments. The retroactive change of tax domicile to January 1, 2013, though notified in July 2013, required substantiation through concrete evidence of actual residence abroad.
Are compensatory interest charges (juros compensatórios) applied on contested IRS tax assessments in Portugal?
Yes, compensatory interest charges (juros compensatórios) are applied on contested IRS tax assessments in Portugal under article 35 of the General Tax Law (LGT). These interest charges compensate the State for delayed tax collection when assessments reveal unpaid or under-paid taxes. In this case, the original IRS assessment of €22,941.81 included €1,561.30 in compensatory interest, totaling €24,503.11. Compensatory interest accrues from specific dates depending on the tax type and assessment circumstances, calculated at legally established rates. Importantly, compensatory interest continues accruing even during administrative and arbitral proceedings unless the taxpayer obtains suspension of enforcement by providing guarantees. Taxpayers who successfully challenge assessments receive refunds including the interest paid, while unsuccessful challenges result in liability for the full amount including accumulated interest. The application of compensatory interest creates financial pressure on taxpayers to resolve disputes quickly and provides incentive for accurate, timely tax reporting. When assessments are contested, compensatory interest represents a significant additional cost beyond the principal tax amount, making early resolution through administrative remedies or arbitration economically important for taxpayers facing residency or other classification disputes.