Process: 634/2017-T

Date: September 6, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 634/2017-T) addresses the complex issue of fiscal residence determination for IRS purposes when a taxpayer works abroad while family remains in Portugal. The claimant, who worked in Madrid, Spain from 2007 under an employment contract with a Spanish company, challenged an additional IRS assessment of €104,679.77 for 2012. Despite establishing residence in Spain, his wife and children remained in Portugal. The core legal dispute centers on whether Article 16(2) of the Portuguese IRS Code (CIRS), which establishes 'residence by dependence' when a taxpayer's spouse and children reside in Portugal, should apply or be overridden by the Portugal-Spain Double Taxation Convention (CDT). The claimant argued that Article 4 of the CDT only references the primary residence criteria in Article 16(1) CIRS (183-day rule and habitual residence), not the derivative 'residence by attraction' provision in paragraph 2. He also challenged the assessment on procedural grounds, claiming insufficient statement of grounds and violation of the right to be heard, as the notification allegedly referenced different taxpayers. The case represents a critical test of whether international tax treaties override domestic 'residence by dependence' rules, a question with significant implications for Portuguese taxpayers working abroad while maintaining family ties in Portugal. The tribunal must determine the hierarchy between domestic law presumptions and treaty provisions in fiscal residence determination.

Full Decision

ARBITRAL DECISION

I. REPORT

On 04/12/2017, A..., taxpayer with number ... (hereinafter referred to as the Claimant), came, pursuant to article 2, paragraph 1, of Decree-Law No. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters (RJAT) and of Ordinance No. 112-A, of 22 March, to request the constitution of an Arbitral Tribunal, in which the Tax and Customs Authority (hereinafter AT or Respondent) is the Respondent, with a view to the declaration of illegality and consequent annulment of the additional assessment of Personal Income Tax (IRS) with number 2016..., relating to the year 2012, in the total amount payable of € 104,679.77.

The Claimant chose not to appoint an arbitrator.

The request for constitution of the arbitral tribunal was accepted by His Excellency the President of CAAD on 05/12/2017 and notified to the Respondent on 12/12/2017. The Deontological Council appointed the undersigned as arbitrators, who communicated acceptance of the task within the applicable time frame.

On 26/01/2018, the Parties were duly notified of this appointment and did not manifest their will to refuse the appointment of the arbitrator, in accordance with the combined provisions of article 11, paragraph 1, subparagraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

In accordance with the provision contained in subparagraph e) of paragraph 1 of article 11 of the RJAT, the collective arbitral tribunal was constituted on 15/02/2018.

Notified to state its position, the AT submitted a response in which it petitioned that the request for arbitral decision be judged without merit, defending itself by way of exception of unimpugnability of the status of resident for tax purposes in Portuguese territory, and the impugned tax act should be maintained in the legal order, and the Respondent entity should accordingly be absolved of the claim.

The Claimant and the AT submitted pleadings within the respective time frame, with the AT attaching additional documentation with its pleadings.

After analysis of the additional documentation submitted with the pleadings by the AT, and the response of the Claimant after notification for this purpose, the collective tribunal decided to have both documents withdrawn as they constituted an untimely submission of evidence and exceeded the scope of the present request for arbitral decision ("PPA").

Summary of the Parties' Positions

a. Of the Claimant:

From the request made and pleadings presented, it follows, in the understanding of the Claimant, the following:

In January 2007, the Claimant was hired by the company "B..., S.L", with registered office in ..., ..., ... Madrid, to work in Madrid, Spain, and for this purpose entered into an indefinite-term employment contract with the aforementioned company to exercise his professional activity as a consultant (partner) there.

From that date, the Claimant established his residence (both factual and for tax purposes) in Spain, notwithstanding that his wife and two children resided in Portugal.

In the year 2012 the Claimant earned, in Spain, dependent employment income in the total amount of € 232,062.78 (two hundred thirty-two thousand and sixty-two euros and seventy-eight cents), with the withholding by the employer of the amount of € 57,435.51 (fifty-seven thousand four hundred thirty-five euros and fifty-one cents).

In respect of this income, beyond the amounts withheld at source, the Claimant paid the respective adjustment [of tax], in Spain, in the amount of € 281.69 (two hundred eighty-one euros and sixty-nine cents), and also made deductions for Social Security in Spain.

Notwithstanding his actual residence in Spain since 2007, the Claimant only in 2017 rectified his tax status, requesting registration as a non-resident, with retroactive effect to 2007, understanding that there is no justification for considering him resident for tax purposes in Portugal in the years in question.

However, although the requested retroactive registration with effect from 2007 was initially accepted, the Claimant was notified of the assessment now being contested, which he considers illegal:

i) for lack of grounds on the grounds that he considers that "(...) the assessment notified to the Claimant is insufficient as to the necessary statement of grounds, in fact and in law, as it did not allow knowledge of the cognitive process underlying it, and is therefore tainted by violation of law (...)";

ii) for omission of an essential legal formality (right to be heard) in that, as he alleges, the act for the exercise of the right to be heard, although notified to him, contained an assessment act directed at different taxpayers and with grounds different from those possibly applicable to the Claimant. Thus, the Claimant understands that "(...) he should have been expressly notified to, if he wished, state his position on the intention of the tax administration to proceed with the contested assessment and on the assumptions, in fact and in law, of that decision.", and given that this did not occur, "(...) the assessment act in question is, moreover, illegal, not only by virtue of its lack of grounds, but also by reason of the omission of another essential legal formality (...)".;

iii) for violation of law in contending that the application of the legal criterion of residence then contained in article 16, paragraph 2 (text of the Personal Income Tax Code (CIRS) in force at the date of the facts) should be set aside in this case, which enshrined the so-called "residence by dependence" or "residence by attraction", by force of the application of the Convention to Avoid Double Taxation ("CDT") concluded between Portugal and Spain, in particular its article 4, in accordance with the widely defended jurisprudential and doctrinal interpretation that the referral to domestic law contained in that provision should not be extended to the situations referred to in the then article 16, paragraph 2 of the CIRS. That is, the Claimant understands that, given that residence is determined in accordance with the applicable CDT, it cannot be assessed on the basis of the then current article 16, paragraph 2 of the CIRS, since, in his view, the referral contained in article 4 of the said CDT to domestic law does not cover the criterion contained in that normative provision, but only those contained in paragraph 1 of that same article. Thus, given that none of the requirements contained in the then current paragraph 1 of article 16 of the CIRS (stay in Portuguese territory for more than 183 days, consecutive or non-consecutive, or existence of housing in conditions that would suggest the intention to maintain and occupy it as habitual residence) are met, and these being the only ones for which the referral contained in article 4 of the CDT in question here should be understood, the Claimant could never, under that same CDT, be considered resident for tax purposes in Portugal in the year in question. Furthermore, on this matter, and in response to the Respondent's requirement in the administrative procedure as to the probative value of the documents submitted, the Claimant understands that "As regards the question of copies, it is a requirement found in circulars and not in law, so obviously it cannot be applied to the detriment of the material truth that has already been proven!".

Thus, the Claimant further explains that it was only by oversight that he declared himself as resident for tax purposes in Portugal in the Income Tax Return Forms, Model 3, submitted between 2007 and 2015, having, however, already requested – and accepted – the correction of that oversight with the Respondent.

Finally, and further in relation to the assessment now being contested, the Claimant also impugns the assessment of compensatory interest, as it is dependent on the contested tax debt.

b. Of the Respondent:

Notified in accordance with the terms and for the purposes provided in article 17 of the RJAT, the AT submitted a Response and attached the administrative file (PA), defending the legality and maintenance of the assessment that is the subject of the present PPA.

Already in the pleadings, the Respondent maintained the understanding previously expressed, reinforcing the defense of the legality and maintenance of the assessment that is the subject of the present PPA.

As to the formal questions, the Respondent made no pronouncement.

As to the underlying material question, the Respondent understands, first of all, that the elements attached to the file by the Claimant are not apt to prove his tax residence in Spain.

Thus, the Respondent argues that "In reality, the aforementioned document 5 (certificate of registration of citizen of the union) only proves that the Claimant declared himself to the Spanish Central Register of Foreigners as resident (not for tax purposes) in that State, and such document does not constitute a declaration issued and certified by the Spanish tax authorities, in which the income actually earned and the tax actually paid in the end by the Claimant is stated."

The Respondent further continues, "and document no. 6 apparently certifies that the Claimant was resident for tax purposes in Spain in 2012 (exclusively)", explaining that "Apparently, because as we shall see below (23 and ss.), given that the Claimant actually enjoyed full tax residence in Spain in the year 2012, it would not make sense for that Tax Administration to inform the AT of the income obtained in Spain in that year, under article 26 of the Convention to Avoid Double Taxation and Prevent Tax Evasion in the Matter of Income Taxes (...)".

Thus, the Respondent understands that, not only is the documentation attached not apt to prove what is alleged by the Claimant in that, being copies, they do not comply with the formal requirements established by the Respondent, but also in that it does not demonstrate, unequivocally, that the Claimant was actually resident for tax purposes in Spain.

The Respondent further argues, in defense of its position, that having received tax information relating to the Claimant from the Spanish Tax Administration under article 26 of the CDT between Portugal and Spain, it is the Spanish Tax Administration itself that is recognizing the status of non-resident for tax purposes in Spain of the Claimant. Specifically, the Respondent understands that "If Spain understood that the Claimant was its resident for tax purposes it would not send his tax information to Portugal, as this would be contrary to the provisions of the Convention.".

On the other hand, the Respondent invokes a situation of venire contra factum proprium in which the Claimant would have incurred in that he comes to allege his non-residence for tax purposes in Portugal in the year in question, having, however, declared himself as resident for tax purposes, and benefited from deductions in tax collection and tax benefits in Portugal in the Income Tax Return Form, Model 3, submitted annually between 2007 and 2015, clarifying that "ignorance or misinterpretation of the law does not justify non-compliance with it nor exempt persons from the sanctions established therein".

Finally, the Respondent invokes an exception of unimpugnability of the status of resident for tax purposes due to untimeliness. In fact, the Respondent argues:

"What resulted from the additional IRS assessment promoted by the AT was an increase in the income obtained by the Claimant in Spanish territory, by consideration of amounts communicated by the tax authorities of that State, in annex J of the Model 3 IRS Return for 2012.

That is, the AT merely increased in annex J of the Model 3 IRS Return for 2012 by way of income the amount of € 237,514.00.

The AT did not promote any other change to the Model 3 IRS Return for 2012 of the Claimant, in particular as to the residence status thereof.

Thus, unless we are mistaken, the Claimant could not in 2017, when the periods for administrative review and for appeal had terminated, call into question a tax act that resulted from declarations of the Claimant himself.

Declarations that the Claimant reiterated for the years 2013 to 2015.

In reality the Claimant is engaging in "venire contra factum proprium", as to this matter.

In 2016 the status of resident for tax purposes in Portuguese territory of the Claimant with reference to the Model 3 IRS Return for 2012, as well as to the following Model 3 IRS Returns, and the resulting assessments therefrom, was already perfectly consolidated and unshakeable by any means of defense.

To argue otherwise would call into question the principle of legal certainty and legal security, stemming from the principle of the democratic rule of law, enshrined in article 2 of the Portuguese Constitution.

This is because the condition of resident for tax purposes in Portuguese territory was declared by the Claimant, whose effects he accepted, for lack of timely appeal, and because the assessment resulting therefrom resulted in a refund that reflected this condition of resident for tax purposes in Portuguese territory.

Nor should it be said that in 2017 by engaging in venire contra factum proprium, as to the question of tax residence in Portuguese territory, the Claimant would still be within the four-year period after assessment, provided for in article 78, paragraph 1 of the General Tax Law (LGT), for that period would only be applicable if it were proven "error attributable to the services", as to this question.

Which, in light of the above, clearly did not occur, since as to this matter the AT merely reiterated what was declared by the Claimant, both as to the Model 3 IRS Return for 2012, and as to the Model 3 IRS Returns for 2013 to 2015.

Thus, we understand that the act of additional IRS assessment of 2016, with reference to the year 2012, can only be impugned as to the modified segment, that is, as to the income added in annex J, and never as to the segment that has already been consolidated and stable in the legal order, in particular, as to the tax residence in Portuguese territory of the Claimant."

The Respondent thus concludes with the understanding that the assessment made should be maintained, further refusing payment of any compensatory interest.

II. PRELIMINARY EXAMINATION

1. The Arbitral Tribunal is competent and was regularly constituted, in accordance with articles 2, paragraph 1, subparagraph a), 5 and 6, all of the RJAT.

2. The parties have legal personality and capacity, have standing and are legally represented, in accordance with articles 4 and 10 of the RJAT, and article 1 of Ordinance No. 112-A/2011, of 22 March.

3. The proceedings are not vitiated by defects that would invalidate them.

4. As to the exception invoked by the Respondent, the following should be stated:

i) with the argumentation made in the Response and Pleadings presented by the Respondent it is intended to prevent the tribunal from hearing the case, in the aspect of the determination of the tax residence of the Claimant in the year in question, based on the argument that such fact would be, at the present date, unimpugnable as consolidated in the legal order;

ii) thus, the Respondent opposes the hearing of the case, in this respect, with the invocation of a peremptory exception that must be examined;

iii) and the Respondent supports this argument based on the fact that it was the Claimant himself who declared himself as resident for tax purposes in Portugal in the respective Income Tax Return Forms, Model 3, in successive years, and cannot now come to change those declarations;

iv) however, notwithstanding that the declarations of taxpayers should be considered true and made in good faith (in accordance with article 75 of the General Tax Law (LGT)), article 59 of the Tax Procedure Code (CPPT) provides that errors of fact or law declared by taxpayers may be corrected by them, until the end of the legal period for administrative review or judicial appeal of the assessment act, in the case that the correction results in tax of an amount lower than the amount assessed on the basis of the declaration (initially) submitted;

v) that is, provided that the aforementioned period is observed, the Claimant could correct the elements of his declaration – in particular his condition as resident in Portugal – even though the burden of proof of the alleged facts rested on him (and which would demonstrate his non-residence for tax purposes in Portugal);

vi) it is important to recall in this respect that, according to the documents attached to the case file, the deadline for voluntary payment of the contested assessment ended on 23/01/2017, with the request for retroactive change of address being submitted on 16/03/2017;

vii) thus, it is verified that the Claimant requested the correction of his tax registry within the legally provided period, and therefore should be admitted, even though the burden of proof of his non-residence for tax purposes in Portugal in the periods in question, and in particular, in the year 2012, to which the assessment now being contested relates, rests on him;

viii) moreover, it should be understood that the argument that the Claimant could, at this point, only impugn the segment modified by the additional assessment – which consists of the increase in income from foreign sources in Annex J – is not valid, since taxation, and the obligation to include the income in Annex J, are inseparable from the Claimant's tax status;

ix) in these terms the exception of unimpugnability of tax status raised by the Respondent should be rejected, and nothing prevents the tribunal from hearing the case;

x) in fact, the Respondent itself acknowledges this fact having initially accepted the request for correction of the tax registry submitted by the Claimant, only later deciding to revoke the previous decision.

III. GROUNDS

III.1. FACTUAL MATTER

The factual matter relevant to the understanding and decision of the case, following critical examination of the documentary evidence attached to the initial petition, the administrative file, the response and the pleadings of the Claimant and the Respondent, is established as follows:

A – Proven Facts

1. In January 2007, the Claimant was hired by the company "B..., S.L", with registered office in ..., ..., ... Madrid, to work in Madrid, Spain;

2. The Claimant entered into an indefinite-term employment contract with the aforementioned company to exercise his professional activity as a consultant (partner) there;

3. At the date of the facts, the Claimant's wife and two children resided in Portugal;

4. In the year 2012 the Claimant earned, in Spain, dependent employment income in the total amount of € 232,062.78 (two hundred thirty-two thousand and sixty-two euros and seventy-eight cents), and withheld at source € 57,435.51 (fifty-seven thousand four hundred thirty-five euros and fifty-one cents);

5. In respect of this income, beyond the amounts withheld at source, the Claimant paid the respective tax adjustment, in Spain, in the amount of € 281.69 (two hundred eighty-one euros and sixty-nine cents);

6. The Claimant also made deductions for Spanish Social Security;

7. The Claimant is registered in the Central Register of Foreigners of Spain as a permanent resident community member in Spain since 02/01/2007, with his domicile in ..., ..., floor..., ..., Madrid;

8. The Spanish tax authorities issued, in the name of the Claimant, a certificate in which they declare that he is resident for tax purposes in Spain in the fiscal year 2012;

9. Spanish Social Security issued a document informing that the Claimant has been registered with social security for 10 years, 1 month and 23 days, totaling 3,706 days;

10. The Claimant submitted a request requesting that his status as a non-resident be reflected in the registry of the Tax and Customs Authority from the year 2007, and the same was granted.

B – Unproven Facts

There are no facts relevant to the decision of the case that should be considered unproven.

III.2. STATEMENT OF REASONS

Regarding factual matters the Tribunal does not have a duty to rule on all the matters alleged; rather it has a duty to select those that are relevant to the decision, taking into account the cause (or causes) of action that supports the claim presented by the Claimant.

With regard to the assessment of evidence, the Tribunal makes its judgment, paying attention to the principle of free assessment, on the basis of the examination and evaluation it makes of the means of evidence brought to the proceedings and in accordance with its experience.

Thus the Tribunal's conviction was based on the documentary evidence attached to the case file as well as on the positions assumed by the Claimant and the Respondent.

III.3. ON THE LAW

1. The question to be decided:

Considering the positions of the Claimant and the Respondent, as well as the established facts, the question to which an answer must be given will, in summary, be whether, in this case, the Claimant should be considered as resident or non-resident for tax purposes, from which the extent of his tax obligation will be derived.

Without prejudice to the response to be given to the above identified question, this Tribunal will also respond, as a matter of completeness of analysis, to the formal questions raised by the Claimant.

Thus, a first reference is necessary as to the order of analysis of the questions raised. Indeed, taking into account the provision of article 124, paragraph 2, of the CPPT, applicable here by virtue of the provision of article 29, paragraph 1, subparagraph a), of the RJAT, the Tribunal understands that it should first rule on substantial defects since that order is the one that ensures more effective protection of the rights of the taxpayer[1].

Beginning, then, with the analysis of the question of (non) residence for tax purposes in Portugal of the Claimant in the year 2012, it is important, first of all, to clarify the order of application of the various legal instruments to which the Claimant and Respondent allude in this case, in particular the CIRS and the CDT concluded between Portugal and Spain, by performing an exercise of delimitation of the scope of both regimes and the relationship between them.

As the establishment of (non) residence of a natural person is at issue, this must be, prima facie, assessed in light of the provision of article 16 of the Personal Income Tax Code.

This means that the status of (non) resident in Portugal of the Claimant, even in a situation such as that in the present case, must be assessed, solely and exclusively, in light of the provision of the CIRS, with the concept of residence contained in the CDT being relevant only for the purposes of application of the said CDT, as will be analyzed hereinafter.

In fact, the conventional concept of residence does not have an autonomous independent value applicable in an independent manner, but is rather limited, solely, to the effects necessary for and arising from the application of the CDT.

It is the very wording of article 4 of the said CDT that confirms this when it establishes that the concept of residence established therein is relevant only "For the purposes of this (that) convention (...)".

This means that the concept of residence established in that CDT (in CDTs in general) applies, in the majority of cases, and certainly in the Portuguese case, only for the purposes of application of the CDT itself, that is for the purposes of elimination of double taxation (or other aspects related to the CDT in question), without any impact on the tax status of the subject under domestic law.

Thus, the determination of residence or non-residence in a particular country (in this case in Portugal) under the rules of the CDT has no effect on the qualification as (non) resident for tax purposes of the subject under domestic law. Similarly, from the fact that a person is not considered resident in Portugal under the CDT and for the purposes of the CDT (for example because the rules known as tiebreaker rules make residence in the other State prevail) no legal consequence can result – does not result – as to the tax status of the subject in Portugal.

That is, even if a particular subject were to be considered non-resident in Portugal under the CDT, it would not be possible to draw any conclusion as to his tax status (as resident or non-resident) for the purposes of domestic law.

It could very well be, then, that a person who ended up being qualified as non-resident for the purposes of application of the CDT would continue, for the purposes of application of the CIRS and other domestic legislation, to be considered resident for tax purposes in Portugal.

By focusing his argument on the fact that article 4 of the CDT, in the interpretation most widely accepted by Portuguese doctrine and case law, excludes the concept of residence by dependence as a relevant criterion for establishing residence for the purposes of the CDT, the Claimant makes a reasoning error, from which the conclusion he defends regarding his non-residence in Portugal cannot be drawn.

In fact, not only does the norm of the CDT – and its interpretation – invoked by the Claimant have the effect that he intends – to prevent his classification as resident for tax purposes in Portugal – but the very invocation of the CDT will always be devoid of meaning when the analysis is exhausted in determining the residence (for the purposes of the CDT, it should be recalled) of the subject in question.

Thus, and this important preliminary point being established, it is then necessary to determine the elements, legal and factual, that are considered relevant for the required analysis.

In line with the argument being made, the status of (non) resident of the Claimant in Portugal should then be assessed in light of the CIRS then in force.

At that time, article 16 of the CIRS, on residence, in force at the date of the facts, provided:

"1 – Persons who, in the year to which the income relates:

a) have remained therein for more than 183 days, consecutive or non-consecutive;

b) having remained for a shorter time, have available therein, on 31 December of that year, housing in conditions that would suggest the intention to maintain and occupy it as habitual residence;

c) (...)

d) (...)

2 – Persons constituting the family unit are always considered as resident in Portuguese territory, provided that any of the persons responsible for the direction thereof resides therein.

3 – The condition of resident resulting from the application of the provision of the preceding paragraph may be set aside by the spouse who does not meet the criterion provided for in subparagraph a) of paragraph 1, provided that he proves the non-existence of a connection between the majority of his economic activities and Portuguese territory, in which case he is subject to taxation as non-resident (...)."

It is thus this rule in light of which the question must be assessed.

Having been established, in the course of evidence discussion, that the Claimant did not remain, in 2012, for more than 183 days in Portugal, as he pursued his professional activity in Spain, maintaining permanent housing therein as shown by documents attached to the PPA, the first condition, of an objective nature (physical presence in Portuguese territory is required), for residence for tax purposes in Portugal to be established, will not be fulfilled.

The same will be true as to the second criterion, now of a primarily subjective nature (physical presence in Portuguese territory is required but, in particular, the intention to maintain a habitual residence therein), which is moreover facilitated by a judgment of retroactive prognosis, in that it is today obvious that the Claimant intended to maintain his professional life in Spain, establishing his habitual residence therein in the years following the one under discussion here.

It could, however, be argued that the fact that the Claimant declared himself as resident for tax purposes in Portugal in the Income Tax Return Forms, Model 3, in particular in the one relating to the year 2012, could demonstrate the intention to maintain his habitual residence in Portugal.

However, such reasoning would always be disagreed with in that the evidence of such intention should be sought, according to the law, in the conditions in which the housing is maintained – namely whether it is operational and usable – and further in the fact that, as of today, it is readily evident that the Claimant's intention was to remain in Spain, without prejudice to the fact that his family was located in Portugal and he could indeed have housing available there.

It remains, then, to analyze the invoked "residence by dependence".

In this regard, verifying the requirements on which the application of the presumption depends (residence in Portugal of one of the persons responsible for the direction of the family unit), it is important to evaluate the possible exclusion of the presumption, in accordance with paragraph 3 of article 16 of the CIRS then in force.

Well, having reached this point, it is widely demonstrated that the center of the Claimant's economic interests was located in Spain, being there that the main source of his income was located and where his professional activity was exercised.

In these terms, there is no doubt that, under the CIRS then in force, the Claimant could not be considered as resident for tax purposes in Portugal in the year in question.

Added to this is, as has already been mentioned, that, although the burden of proof of the facts alleged by him to prove his situation as non-resident rests on the Claimant – since he himself declared himself as resident in the Model 3 Declaration submitted in relation to 2012 – it does not seem that it can be excluded that this could still be done, as it was indeed in the request, granted by the Tax Administration, for correction of the tax registry making him count as non-resident in Portugal from 2007[2].

Thus, it is understood to be admissible that the Claimant can, a posteriori, correct his tax status, provided that he manages to demonstrate, as it is understood he has done, that the conditions for him to be considered as resident for tax purposes in Portugal were not met.

And it should not be said that this conclusion is hindered by the fact that the Claimant took advantage – it is now concluded, wrongfully – of deductions in tax collection and other tax benefits. The Tax Administration may, under the conditions legally provided, act on these. What it cannot do is deny the possibility of correction of elements declared by him on the grounds that they result in a reduction of the tax collection theoretically exigible.

In this respect, there is also a note to be made regarding the evidence exercise carried out by the Tax Administration, in disregarding all the factual elements submitted by the Claimant, with the argument that they do not unequivocally prove non-residence for tax purposes in Portugal, including the very certificate of tax residence issued by the Spanish tax authorities and submitted by the Claimant, with the argument that it is a copy, thus not observing the documentary requirements established by the Tax Administration itself by way of "circulatory law".

While it is understandable, legitimate and entirely defensible that the Tax Administration's concern for the quality and authenticity of documents submitted by taxpayers is justified, such requirements cannot become disproportionate, particularly when what is at issue is a set of elements of such breadth that it can scarcely lead to any other conclusion than that the Claimant, in the year in question, actually resided in Spain, having been considered there as resident for tax purposes and paid his taxes there.

This is not to say that a situation of double tax residence could not occur (in which case the CDT would be useful to find a solution for elimination of double taxation). Conversely, it is submitted that the presumption of residence cannot be taken to such a point as to impose a burden of proof that is impossible to fulfill. In fact, it appears that the Tax Administration most often makes the proof of residence depend on specific documents – such as the certificate of tax residence issued by the tax authorities of the other country – as if it were a legal and essential requirement. Note that article 16 of the CIRS nowhere makes reference to the necessary elements of proof, nor establishes any notion of residence by default. In fact, the focus is placed on the concrete situation of the taxpayer – of the Claimant – which can be demonstrated by the available means and which can support, with a high degree of certainty, the conviction that none of the legally provided criteria for residence are met.

Finally, there must be noted the argument presented by the Respondent that the Spanish tax administration itself considers the Claimant as non-resident in that it shared information with the Respondent under the clause on exchange of information of the CDT between the two countries.

It appears, from this argument, to result the understanding that the possibility of exchange of information is limited to the situation in which the State of Residence asks the State of Source for information on the quantity and/or quality of income of one of its residents, from which it would be presumed that, in responding, the questioned State would consider, ipso facto, the subject in question as not being resident for tax purposes in its territory.

If that is so, there will always be a need here to recall the OECD Commentary on the Model Convention, in particular its article 26, where it is clearly and expressly stated that the information to be exchanged between the Contracting States under that rule should be of the greatest scope necessary having regard to the tax purposes of each State, and may include information relevant to the application of domestic legislation, including in connection with taxes or situations not covered by the CDT itself that is applicable.

Thus, here too the argument adduced must be refuted given the understanding that the response given by the Spanish State to the request for information made under article 26 of the CDT Portugal – Spain contains no value judgment, on the part of the latter country, on the tax status of the Claimant.

Having analyzed the substantial question that is the subject of the present dispute, the formal questions also raised must always be analyzed.

With regard to lack of grounds, it is important to note that it must be express, clear, congruent, sufficient and contemporaneous with the act. That is, it must contain the explanation of the reasons of fact and of law that motivate the act (the assumptions taken into account by the author of the act), which cannot be confused or ambiguous, and the content of the act must have a logical relationship with the grounds invoked.

For the act to be grounded, it is essential that the contextual discourse allow knowledge of the entire course of the apprehension and evaluation of the assumptions of fact and of law that support the decision or the reasons why it was decided in one way and not another.

Now from the entire course of the proceedings from the administrative phase, with the hearing of the Claimant, in accordance with article 60 of the General Tax Law, it is evidenced the clear perception by the Claimant of the reasons invoked by the AT for the performance of the act.

And, the fact is, that in the exercise of the invoked right to be heard, there appears in the position of the Claimant no indication of justified impossibility or difficulty in understanding the argumentative course of the AT to conclude for the additional assessment. Naturally there is disagreement; however, this is not to be confused with lack of grounds.

The invoked formal illegality thus does not succeed.

From what has been stated results also the lack of merit of the following formal illegality pointed at the act relating to the omission of an essential legal formality.

In fact, even if it has been proven that the notice for right to be heard contained elements and situations concerning another taxpayer, it results from the entire administrative proceedings attached to the case file that the Claimant well understood the meaning and justification of the assessment made, and thus the imputation of the alleged defect to the act is not sustainable.

IV. DECISION

Based on the factual and legal grounds stated above and, in accordance with article 2 of the RJAT, the Arbitral Tribunal decides:

I) To judge the request for arbitral decision to be entirely well-founded and, in consequence, to annul the additional assessment of Personal Income Tax (IRS) with number 2016..., relating to the year 2012, in the total amount payable of € 104,679.77;

II) To condemn the Respondent to the restitution of the amount of the annulled tax;

III) To condemn the Respondent to the payment of compensatory interest in favor of the Claimant, in accordance with articles 43 and 100, both of the General Tax Law (LGT); and

IV) To condemn the Respondent to the payment of all costs, given the entire merit of the claim.

VALUE OF THE CASE: In accordance with the provision of article 306, paragraphs 1 and 2, of the Code of Civil Procedure (CPC), article 97-A, paragraph 1, subparagraph a), of the Tax Procedure Code (CPPT) and article 3, paragraph 2, of the Regulation of Costs in Tax Arbitration Proceedings, the case is assigned a value of € 104,679.77 (one hundred four thousand, six hundred seventy-nine euros and seventy-seven cents).

COSTS: Calculated in accordance with article 4 of the Regulation of Costs in Tax Arbitration Proceedings and Table I attached thereto, in the amount of € 3,060.00 (three thousand and sixty euros).

Lisbon, 06 September 2018

The Collective Arbitral Tribunal,

José Poças Falcão

(President)

Luís M. S. Oliveira

(Vogal – Member)

José Calejo Guerra

(Vogal – Member)

Document prepared by computer, in accordance with paragraph 5 of article 131 of the Code of Civil Procedure, applicable by referral from subparagraph e) of paragraph 1 of article 29 of Decree-Law 10/2011, of 20 January.

The preparation of this decision is governed by the 1990 Orthographic Agreement.

[1] See the Decisions of the Administrative Supreme Court of 12 July 2010, 7 June 2011 and 9 July 2011, respectively rendered in cases nos. 0569/10, 0355/11 and 023/11

[2] See, admitting this possibility, Decision of the Administrative Court of the South, of 28 November 2013, rendered in case no. 06935/13.

Frequently Asked Questions

Automatically Created

What determines fiscal residence in Portugal for IRS purposes when a taxpayer works abroad?
Fiscal residence in Portugal for IRS purposes is determined primarily by Article 16 of the CIRS. A person is considered resident if they spend more than 183 days (consecutive or not) in Portuguese territory, or if they have housing under conditions suggesting intention to maintain it as habitual residence. Additionally, Article 16(2) establishes 'residence by dependence' or 'residence by attraction,' whereby Portuguese nationals working abroad are considered tax residents if their spouse and minor/dependent children reside in Portugal. This provision creates a rebuttable presumption of Portuguese tax residence based on family connections, even when the taxpayer works and potentially resides abroad. The application of this criterion becomes complex when international double taxation conventions are involved.
Can a taxpayer be considered a non-resident in Portugal if their spouse and children remain in the country?
Yes, under Portuguese domestic tax law, specifically Article 16(2) of the CIRS as it existed in 2012, a taxpayer can be considered a Portuguese tax resident even while working abroad if their spouse and dependent children remain in Portugal. This 'residence by attraction' or 'residence by dependence' rule creates a legal presumption that the taxpayer maintains their center of vital interests in Portugal due to family ties. However, this classification is subject to challenge, particularly when double taxation conventions apply. The critical interpretative question is whether the Portugal-Spain CDT's reference to domestic law in Article 4 encompasses this derivative residence criterion or only the primary criteria in Article 16(1) CIRS. Courts and arbitration tribunals have increasingly scrutinized whether such presumptions should apply when they conflict with treaty provisions designed to avoid double taxation.
How does the Portugal-Spain double taxation agreement resolve dual tax residency conflicts?
The Portugal-Spain Double Taxation Convention resolves dual tax residency conflicts through Article 4, which establishes tie-breaker rules. When a person is considered resident in both countries under their respective domestic laws, the Convention provides hierarchical criteria: first, residence is determined by where the individual has a permanent home available; if permanent homes exist in both states, residence is where personal and economic relations are closer (center of vital interests); if this cannot be determined, residence is where the individual has a habitual abode; failing that, residence follows nationality; and ultimately, competent authorities resolve the matter by mutual agreement. The critical interpretative dispute in this case concerns whether Article 4's reference to 'domestic law' for initial residence determination includes only the primary criteria of Article 16(1) CIRS (physical presence and habitual housing) or also encompasses the derivative 'residence by dependence' provision of Article 16(2). Judicial and arbitral precedent increasingly favors limiting the reference to primary criteria, thereby preventing family-based presumptions from triggering dual residence conflicts that the Convention aims to resolve.
What are the grounds for challenging an additional IRS tax assessment based on fiscal residence status at CAAD?
Taxpayers can challenge additional IRS assessments based on fiscal residence status at CAAD (Administrative Arbitration Center) on several grounds. First, substantive grounds include violation of law, arguing that residence determination incorrectly applied domestic law provisions or failed to properly apply double taxation conventions that should override domestic presumptions. Second, procedural grounds include insufficient statement of grounds (falta de fundamentação), where the tax authority fails to adequately explain the factual and legal basis for the residence determination, preventing the taxpayer from understanding the decision's rationale. Third, omission of essential legal formalities, particularly violation of the right to be heard (direito de audição prévia), where taxpayers were not properly notified and given opportunity to present their position before the assessment was finalized. Fourth, challenges to evidentiary requirements, such as disputing administrative circulars that impose documentation standards beyond what law requires. In residence cases, taxpayers typically argue that treaty provisions override domestic 'residence by attraction' rules, that they met all requirements to be considered non-resident, and that procedural guarantees were violated during the assessment process.
Is the classification of tax residency status subject to challenge through arbitration proceedings in Portugal?
Yes, the classification of tax residency status is fully subject to challenge through arbitration proceedings in Portugal under the RJAT (Legal Regime for Arbitration in Tax Matters). Tax residence determination constitutes an 'impugnável act' (challengeable administrative act) that affects taxpayers' substantive tax obligations. While the Tax Authority raised an exception arguing the 'unimpugnability of the status of resident for tax purposes,' this defense rarely succeeds because residence classification directly determines tax liability and is inherently reviewable. CAAD arbitration tribunals have jurisdiction to review both the substantive merits of residence determinations (including interpretation of CIRS provisions and double taxation conventions) and procedural compliance (statement of grounds, right to be heard). The arbitration process allows taxpayers to contest residence-based assessments without first paying the disputed amount, unlike traditional judicial appeals. Challenges typically involve complex interpretative questions about the interaction between domestic law presumptions and international treaty obligations, making arbitration an increasingly popular forum for resolving residence disputes given the specialized expertise of arbitrators in tax matters.