Summary
Full Decision
ARBITRAL DECISION
I – REPORT
A..., taxpayer number ..., with tax residence in ..., house ..., ..., ..., ...-... Sintra, ("1st Claimant") and B... ("2nd Claimant"), taxpayer number ..., with tax residence in ..., number ... – ..., ..., ... - ... Lisbon (hereinafter jointly referred to as "Claimants"), have, pursuant to the provisions of article 95 of the General Tax Law ("LGT"), article 99, paragraph a), of the Code of Tax Procedure and Process ("CPPT"), article 140, number 1, of the Personal Income Tax Code ("CIRS"), and article 3, number 1, and article 10, number 1, paragraph a), and number 2, of the Legal Framework for Tax Arbitration ("RJAT"), requested the establishment of an arbitral tribunal.
The request for arbitral pronouncement aims at the declaration of illegality and consequent partial annulment of the Personal Income Tax ("IRS") assessments, relating to the year 2016, number 2017 ... and number 2017 ..., both dated 29 July 2017, respectively in the amounts of €26,736.62 and €124,984.50.
The Tax and Customs Authority is the Respondent (hereinafter referred to only as "Respondent").
The request for establishment of the arbitral tribunal was accepted by the Illustrious President of the CAAD and automatically notified to the Respondent on 06-12-2017.
Given that the Claimants did not proceed to appoint an arbitrator, pursuant to the provisions of article 6, number 2, paragraph a), of the RJAT, the undersigned was appointed as arbitrator by the President of the Deontological Council of the CAAD, the appointment having been accepted within the legally prescribed timeframe and terms.
On 26-01-2018 the Parties were duly notified of this appointment, and did not express a desire to refuse the appointment of the arbitrator, pursuant to the provisions of article 11, number 1, paragraphs a) and b) of the RJAT, in conjunction with articles 6 and 7 of the Code of Ethics.
In accordance with the provision contained in paragraph c), of number 1, of article 11 of the RJAT, the Arbitral Tribunal was established on 15-02-2018.
By order dated 23-03-2018, this Tribunal, pursuant to the principles of autonomy in case management, celerity and simplification and procedural informality (articles 19, number 2, and 29, number 2, of the RJAT), and considering that no objections were raised, decided to dispense with the holding of the meeting provided for in article 18 of the RJAT, determining that the proceedings continue with optional written submissions.
Only the Claimants submitted submissions.
The Claimants substantiate the request for arbitral pronouncement by alleging, in summary, the following:
The Claimants have resided since 1 January 2015 in Portugal, tax-wise classified under the non-habitual residents regime, and obtained, in 2016, income arising from the liquidation and distribution of assets of the Spanish law company C..., S.L.;
The difference between the value attributed by the distribution of assets of C..., S.L. (€108,550.34) and the acquisition value of the respective equity interests (€1,503.00) corresponded to a gain for each of the Claimants of €107,047.34;
The value arising from the distribution of assets of C..., S.L. was reported by each of the Claimants to the Spanish Tax Authorities and taxed in Spain, under the "Impuesto sobre la Renta de no Residentes", and also to the Tax Administration, through Annex J of their Income Tax Declarations "Modelo 3" of IRS for the year 2016;
The IRS assessments numbers 2017 ... and 2017 ... reflect the taxation by the Tax Authority of income obtained from the liquidation and distribution of C..., S.L., notwithstanding the fact that the Claimants opted in Annex L of their Income Tax Declarations "Modelo 3" of IRS for the year 2016 for the exemption method in order to eliminate international double taxation of such income;
The requirements for the application of the IRS exemption provided for in article 81, number 5, paragraph a), of the CIRS are met, since the income obtained by the Claimants from the liquidation and distribution of C..., S.L. was taxed in Spain, pursuant to article 10, numbers 1 and 2, of the Tax Treaty Portugal/Spain and numbers 2, paragraph a) and 3, of its Protocol;
The IRS assessments numbers 2017 ... and 2017 ... are illegal and voidable ex vi article 163 of the Administrative Procedure Code ("CPA"), for violation of article 81, number 5, paragraph a), of the CIRS, insofar as they reflect the taxation in Portugal of the values attributed to the Claimants as a result of the liquidation and distribution of the assets of C..., S.L.;
The Claimants are entitled to compensatory interest, on the ground of error attributable to the Tax Administration services, pursuant to articles 43, number 1, of the LGT, and 61, number 3, of the CPPT.
The Respondent submitted a defence by way of objection, contending for the rejection of the request for arbitral pronouncement, with the arguments summarized hereinafter:
For the purposes of applying the exemption provided for in number 5 of article 81 of the CIRS to income of category G obtained abroad by non-habitual residents, there is a need to first proceed with the classification of the disposals declared in annexes J, in light of article 13 of the Conventions with the countries where the disposals declared in sections 9.2A of annexes J (Spain and Luxembourg) were carried out, in order to avoid international double taxation;
From the analysis of article 13 of the Conventions in question, it appears that in certain situations the State of residence has the right to exclusive taxation of income (number 6 of article 13 of the Tax Treaty with Spain and number 4 of article 13 of the Tax Treaty with Spain and Luxembourg);
Pursuant to article 81 of the CIRS, the exemption of income is conferred on non-habitual residents only in cases where the right to tax is cumulative for both States and provided that certain requirements set out in the said Conventions are met;
There being no evidence, in the present case, that the right to tax is cumulative for both States, the rule of exclusive taxation by the State of residence was applied, provided respectively in numbers 6 and 4 of article 13 of the Conventions with Spain and Luxembourg;
As regards the elimination method indicated in annex L (exemption), number 5 of article 81 of the CIRS provides that to income of categories E, F and G the exemption method is applied (if that is the option made), provided that such income may be taxed in the other contracting state (Source State), in accordance with a convention to eliminate double taxation.
II – PRELIMINARY MATTERS
No objections were raised.
The Arbitral Request was submitted in conjunction of multiple claimants, pursuant to article 3, number 1, of the RJAT.
This tribunal considers that the requirements for admission of the conjunction of multiple claimants are met in the present proceedings, given that the situation of both Claimants regarding the taxation of the value received by each as a result of the liquidation of C..., S.L. is manifestly identical – both qualitatively and even quantitatively – for which reason the success of the request for partial annulment of each of the assessments under challenge depends on the examination of the same factual circumstances and the interpretation and application of the same principles or rules of law.
The Parties enjoy legal and procedural capacity, are entitled to the request for arbitral pronouncement and are duly represented, pursuant to the provisions of articles 4 and 10 of the RJAT and article 1 of Ordinance number 112-A/2011, of 22 March.
No nullities are found, wherefore it is necessary to consider the merits.
III. MERITS
III. 1. MATTERS OF FACT
§1. Established Facts
The Tribunal considers the following facts to be established:
The Claimants were tax residents in Spain until 2014;
The Claimants have resided in Portugal since 1 January 2015, being classified tax-wise under the non-habitual residents regime;
The assessments in question reflect taxation by the Tax Authority of foreign source gains;
The Spanish law company C..., S.L. was acquired by the Claimants on 25 March 2009 (at that date under the designation D..., S.L.), each having acquired 50% of the respective capital stock for €1,503.00;
By public deeds of 25 June 2015 and 22 December 2015, the Claimants liquidated C..., S.L. and distributed the assets of the company in proportion to their respective equity interests, which resulted in the attribution of a value of €108,550.34 to each of the Claimants, which was to be received during the course of 2016;
The difference between the value attributed to each of the Claimants by the distribution of assets of C..., S.L. (€108,550.34) and the acquisition value of each of their respective equity interests (€1,503.00) resulted in a gain for each Claimant of €107,047.34, being precisely this value reported by each of the Claimants to the Spanish Tax Authorities for the purpose of the "Impuesto sobre la Renta de no Residentes" (Spanish non-resident income tax);
On 20 January 2016 the Claimants individually submitted the said "Modelo 210" declarations to the Spanish Tax Authorities, declaring the gain ascertained – on which tax was ascertained and duly paid in Spain in the amount of €20,338.99 for each Claimant;
On 18 October 2016 the Claimants divorced by mutual consent, having been married, under the regime of community of acquired property, on 18 June 1988;
On 31 May 2017 the 1st Claimant delivered his Income Tax Declaration "Modelo 3" relating to IRS for the year 2016, in which he declared the aforementioned gain obtained in Spain;
On the same date, 31 May 2017, the 2nd Claimant delivered her Income Tax Declaration "Modelo 3" relating to IRS for the year 2016, in which she declared the aforementioned gain obtained in Spain;
In Annexes J of each of the Income Tax Declarations submitted, both the amount of foreign tax borne by each Claimant by reason of the value attributed by the distribution of C..., S.L., and the fact that Spain was the source state of that income, were expressly indicated;
In Annexes L of each of the Income Tax Declarations submitted, the option for the exemption method was exercised regarding income obtained abroad, as a method intended to eliminate international double taxation;
On 7 August 2017 the 2nd Claimant was notified of the IRS assessment number 2017 ..., dated 29 July 2017, in the amount of €26,736.62, having paid the same on 4 September 2017;
On 10 August 2017 the 1st Claimant was notified of the IRS assessment number 2017 ..., dated 29 July 2017, in the amount of €124,984.50, having paid the same on 1 September 2017;
Despite the option exercised by both Claimants regarding the exemption method to eliminate double taxation, the Tax Administration proceeded to tax the gains declared relating to the result of the liquidation and distribution of C..., S.L., including the respective tax in the IRS assessment notes that are the subject of these proceedings;
In concrete terms, this taxation carried out by the Tax Administration resulted in an IRS assessed amount of €29,973.26 for each Claimant, resulting from the application of the rate of 28% to the value of €107,047.34.
§2. Unproven Facts
With relevance to the decision, there are no material facts not established.
§3. Reasoning as to Matters of Fact
With regard to the factual matters established, the Tribunal's conviction was based on the free assessment of the positions assumed by the Parties on matters of fact and on the content of the documents attached to the proceedings, not contested by the Parties.
III.2. MATTERS OF LAW
§1. Question to be Decided
From the factuality set out above it follows that the question to be decided in the present proceedings consists of assessing the legality of the IRS assessments numbers 2017 ... and 2017 ..., both dated 29 July 2017, insofar as these reflect the taxation in Portugal of the value received by the Claimants as a result of the liquidation of the Spanish company C..., S.L., namely in light of the foreign source income exemption regime applicable to non-habitual residents.
§2. Assessment of the Question
The gains obtained by the Claimants as a consequence of the liquidation and distribution of the assets of C..., S.L. are, in the Portuguese legal system, qualified as capital gains and taxable under Personal Income Tax (IRS) in accordance with the rules applicable to Category G, at the rate of 28%, as results from the provisions contained in articles 10, number 1, paragraph b), sub-paragraph 3), and 72, number 1, paragraph c), of the IRS Code (CIRS).
In accordance with the provisions of article 81, number 5, of the CIRS, "[t]o non-habitual residents in Portuguese territory who obtain income [...] of categories E, F and G abroad, the exemption method is applied, provided that any one of the following conditions is met: a) such income may be taxed in the other contracting State, in accordance with a convention to eliminate double taxation concluded by Portugal with that State; [...]".
According to the Respondent, for the purposes of applying the exemption provided for in number 5 of article 81 of the CIRS it is necessary, previously, to proceed with the classification of the disposals declared in Annexes J, on the basis of articles 13 of the Conventions to prevent international double taxation (CEDT) concluded between Portugal and Spain and between Portugal and Luxembourg.
However, no connection is identified between the income obtained by the Claimants from the liquidation and distribution of C..., S.L. and Luxembourg, whereby, already from the outset, the applicability, in the case sub judice, of the CEDT concluded between Portugal and Luxembourg is ruled out.
For the purposes of applying number 5 of article 81 of the CIRS to the concrete case, what is relevant is, rather, the CEDT concluded between Portugal and Spain.
The Respondent contends that article 13 of the said CEDT is applicable in the present case, which, under the heading "Capital Gains", provides as follows:
"1 – Gains that a resident of a contracting State derives from the disposal of immovable property, as defined in article 6, situated in the other contracting State, may be taxed in that other State.
2 – Gains derived from the disposal of shares or other interests in the capital of a company, whose assets consist, directly or indirectly, principally of immovable property situated in a contracting State, may be taxed in the contracting State in which the immovable property is situated.
3 – Subject to the provisions of number 2, gains derived from the disposal of shares or other interests resulting from a substantial participation in a company resident of a contracting State, may be taxed in that State. It is considered that there is a substantial participation when the person disposing of the interest, alone or together with associated persons, has held, directly or indirectly, at any time during the 12-month period preceding the disposal, at least 25% of the company.
4 – Gains derived from the disposal of movable property which is part of the assets of a permanent establishment which an enterprise of a contracting State has in the other contracting State, or of movable property pertaining to a fixed base which a resident of a contracting State has in the other contracting State for the exercise of an independent profession, including gains from the disposal of that permanent establishment, isolated or together with the remainder of the enterprise or that fixed base, may be taxed in that other State.
5 – Gains derived from the disposal of ships or aircraft used in international traffic, of boats used in inland navigation or of movable property pertaining to the operation of such ships, aircraft or boats, may only be taxed in the contracting State in which the effective management of the enterprise is situated.
6 – Gains derived from the disposal of any other property not mentioned in the preceding numbers of this article, may only be taxed in the contracting State of which the person making the disposal is a resident."
The Respondent concludes that "there being no evidence that the right to tax is cumulative for both States, the rule of exclusive taxation by the State of residence was applied, provided respectively in numbers 6 and 4 of article 13 of the Conventions with Spain and Luxembourg".
However, as the Claimants correctly point out, paragraph a), of number 2, of the Protocol to the CEDT concluded between Portugal and Spain (which forms an integral part of this Convention), provides that "[r]elating to article 10, number 3 [of the said CEDT], it is considered that the term "dividends" includes profits derived from the liquidation of a company".
In this manner, for the purposes of applying the CEDT concluded between Portugal and Spain, the income obtained by the Claimants from the liquidation and distribution of C..., S.L. is qualified as dividends, with the legal regime of article 10, and not that of article 13, of the said CEDT being applicable.
Being qualified as dividends, the income in question could be taxed in Spain, as it indeed was, pursuant to article 10, numbers 1 and 2, of the Portugal-Spain Tax Treaty and number 3 of its Protocol.
And once the income obtained by the Claimants from the liquidation and distribution of C..., S.L. was taxed in Spain pursuant to article 10, numbers 1 and 2, of the Portugal-Spain Tax Treaty and numbers 2, paragraph a), and 3 of the Protocol to the said CEDT, the requirements for the application of the IRS exemption provided for in article 81, number 5, paragraph a), of the CIRS are met in the case sub judice.
All things considered, the income obtained by the Claimants from the liquidation and distribution of C..., S.L., in the amount of €107,047.34, could not have failed to benefit from the IRS exemption provided for in article 81, number 5, paragraph a), of the CIRS.
In these terms, it is concluded that the IRS assessments numbers 2017 ... and 2017 ... are illegal and partially voidable, ex vi article 163 of the CPA, insofar as such acts reflect the taxation of the Claimants' gains from the liquidation and distribution of C..., S.L., totalling €59,946.52 in tax – corresponding to €29,973.26 for each of the Claimants.
§3. Reimbursement of Amounts Paid and Compensatory Interest
The Claimants further request that this tribunal determine the reimbursement of the amounts unduly borne and condemn the Respondent to the payment of compensatory interest.
In accordance with the provisions of paragraph b), of number 1, of article 24 of the RJAT, "[t]he arbitral decision on the merits of the claim against which no appeal or challenge lies binds the tax administration from the end of the period provided for appeal or challenge, with this authority, in the exact terms of the success of the arbitral decision in favour of the taxpayer and until the end of the period provided for the voluntary execution of sentences of tax courts [...] [r]estore the situation that would have existed if the tax act that is the subject of the arbitral decision had not been performed, adopting the acts and operations necessary for this purpose".
This provision of the RJAT is consistent with the provision contained in article 100 of the General Tax Law, whose text is as follows:
"The tax administration is obliged, in case of total or partial success of complaints or administrative appeals, or of judicial proceedings in favour of the taxpayer, to immediately and fully restore the situation that would have existed if the illegality had not been committed, including the payment of compensatory interest, in accordance with the terms and conditions set out in the law."
As regards the possibility of the arbitral tribunal recognizing the right to compensatory interest, number 5 of article 24 of the RJAT provides that "payment of interest, irrespective of its nature, is due in accordance with the terms provided in the general tax law and in the Code of Tax Procedure and Process".
And, pursuant to number 1 of article 43 of the LGT, "[c]ompensatory interest is due when it is determined, in administrative or judicial challenge, that there was error attributable to the services which results in payment of the tax debt in an amount exceeding that legally due".
Given the full success of the request for arbitral pronouncement, each of the Claimants is recognized the right to be reimbursed of the amount of €29,973.26, by virtue of the provisions of articles 24, number 1, paragraph b), of the RJAT and 100 of the LGT, as such reimbursement is essential for the restoration of the situation that would have existed if the tax acts that are the subject of the present arbitral decision had not been performed.
This tribunal also recognizes that the illegality of the assessments in question in the present proceedings resulted from error attributable to the Tax Administration services, reflected in the incorrect interpretation and application of the law, whereby each of the Claimants is entitled to compensatory interest, pursuant to articles 43, number 1, of the LGT and 61 of the CPPT, relating to the amount to be reimbursed.
The compensatory interest shall be paid from the dates on which each of the Claimants made the payment until the issuance of the respective credit note, at the legal default rate, in accordance with articles 43, number 4, and 35, number 10, of the LGT, article 61 of the CPPT, article 559 of the Civil Code and Ordinance number 291/2003, of 8 April.
IV – DECISION
In these terms, and with the grounds set out, this Arbitral Tribunal decides:
To declare the request for declaration of illegality and partial annulment of the IRS assessments numbers 2017 ... and 2017 ..., both dated 29 July 2017, well-founded, insofar as these reflect the taxation in Portugal of the values attributed to the Claimants as a result of the liquidation and distribution of the assets of C..., S.L.;
To declare the request for reimbursement to each of the Claimants of the amount of €29,973.26 well-founded, and condemn the Respondent to pay to each of the Claimants that amount plus compensatory interest, calculated thereon at the legal rate, from the date of payment made by each of the Claimants until the issuance of the respective credit notes.
V- VALUE OF THE PROCEEDINGS
In accordance with the provisions of article 306, number 2, of the Code of Civil Procedure and 97-A, number 1, paragraph a), of the CPPT and article 3, number 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at €59,946.52.
VI – COSTS
Pursuant to article 22, number 4, of the RJAT, the amount of costs is fixed at €2,142.00, in accordance with Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Respondent.
Lisbon, 15/05/2018
The Arbitrator
(Paulo Nogueira da Costa)
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