Process: 644/2017-T

Date: May 30, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD Process 644/2017-T addressed discriminatory IRS taxation of capital gains from real estate sales by EU non-residents. The claimant, a Portuguese citizen residing in Belgium, sold properties in Portugal in 2016, generating capital gains of €166,671. The Portuguese Tax Authority applied a 28% tax rate to the full amount under Article 43(1) of the IRS Code, resulting in a €46,667.88 assessment. The claimant contested this treatment, arguing it violated EU law principles of free movement of capital under Article 63 TFEU. The core issue was that Portuguese residents benefit from taxation on only 50% of capital gains (Article 72(9) of the IRS Code), while non-residents were taxed on 100% of gains under Article 43(2). The claimant invoked the CJEU 'Hollmann Judgment' (C-443/06, 2007), which established that subjecting EU non-residents to higher tax burdens on Portuguese property disposals than residents constitutes prohibited discrimination. The Supreme Administrative Court had previously ruled in case 01172/14 (2016) that Article 43(2)'s exclusion of non-residents from the 50% limitation violates Community law. The arbitration followed the claimant's payment of the assessed amount and subsequent dismissal of their administrative appeal (reclamação graciosa). This case exemplifies how EU tax residents can challenge discriminatory IRS treatment through CAAD arbitration, relying on the primacy of EU law over conflicting national provisions that create unjustified distinctions between residents and non-residents in objectively comparable situations.

Full Decision

ARBITRAL DECISION

I - REPORT

A. THE PARTIES. CONSTITUTION OF THE TRIBUNAL. CONDUCT OF PROCEEDINGS.

  1. On 7 December 2017, A... (hereinafter abbreviated as Claimant), resident in ... - Brussels, Belgium, filed a request for constitution of an arbitral tribunal, under the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by article 228 of Law No. 66-B/2012, of 31 December (hereinafter abbreviated as RJAT), seeking a declaration of illegality of the PIT assessment/2013, No. 2017 ... of 27/06/2017, concerning the tax year 2016, made by the Tax Authority (hereinafter abbreviated as Respondent).

  2. To substantiate its request, the Claimant alleged, in summary:

  • The Claimant was notified by the Tax Office of Vila Nova de Gaia - ... of assessment No. 2017..., dated 27/06/2017, document No. 2017..., corresponding to the 2016 PIT assessment.

  • The assessment stated an amount payable of €46,667.88, with the payment deadline of 31/08/2017.

  • On 25/08/2017, the Claimant made the payment corresponding to this assessment.

  • The Claimant, not agreeing with the assessment, filed, through its tax representative, the respective administrative appeal, which was received at the Tax Office of Vila Nova de Gaia - ... on 02/08/2017.

  • On 13/09/2017, the Claimant's tax representative was personally notified of the decision of dismissal.

  1. The Claimant, not agreeing with the dismissal of the administrative appeal, filed on 07/12/2017 the present request for arbitral decision.
  • On 11/12/2017, the request for constitution of the arbitral tribunal was accepted and automatically notified to the AT.

  1. The Claimant did not proceed to appoint an arbitrator, whereby, under the provisions of paragraph a) of article 6(2) and paragraph a) of article 11(1) of the RJAT, the President of the CAAD Deontological Council appointed the undersigned as arbitrator of the singular arbitral tribunal, who communicated acceptance of the appointment within the applicable period.

  2. On 01/02/2018, the parties were notified of such appointments and did not express any wish to object.

  3. In accordance with the provisions of paragraph c) of article 11(1) of the RJAT, the singular arbitral tribunal was constituted on 21/02/2018.

  4. On 08/04/2018, the Respondent, duly notified for that purpose, filed its response defending itself solely by way of objection and attached the administrative file (PA).

  5. On 11/04/2018, an arbitral order was issued dispensing with the meeting referred to in article 18 of the RJAT, granting a period of ten days for submission of written submissions and setting 30/05/2018 as the date for delivery of the arbitral decision.

  6. On 24/04/2018, written submissions were filed by the Claimant reiterating and developing its legal position.

  7. The Respondent did not file written submissions.

  8. On 30/05/2018 the arbitral decision was delivered.

B. CLAIM OF THE CLAIMANT AND ITS GROUNDS

  • The Claimant is a Portuguese citizen resident in Brussels, that is, a resident in a Member State of the European Union, namely Belgium.

  • The Claimant appointed B..., as its tax representative in Portugal.

  • The Claimant's tax representative proceeded with the filing of the PIT return - Form 3 of its principal, concerning the year 2016, together with the respective Annex G regarding income from real property capital gains obtained from property disposals made in December 2016.

  • In the PIT return, concerning 2016, the Claimant's non-resident status was declared.

  • Having, in Form 3 of 2016, declared only one type of income obtained, namely capital gains (category G).

  • It also appears from Annex G of the income return that the onerous disposals of real properties that occurred in December 2016 generated total income of €170,000.00, from which the sum of the acquisition values (€2,300.00) and expenses and charges (€615.00) were deducted.

  • The capital gain calculated amounted to €166,671.00, concerning income obtained from the disposal of real properties.

  • The Tax Authority proceeded to calculate the tax due, pursuant to article 43(1) of the PIT Code, based on the balance calculated between capital gains and losses realised in the same year and applying a rate of 28% to the entire amount of the capital gains.

  • In this manner, the Tax Authority applied the rate of 28% to total income of €166,671.00, and the Claimant was notified to pay the assessed tax, which amounted to €46,667.88.

  • The Claimant believes that this assessment is affected by the defect of violation of law.

  • Because, in accordance with the jurisprudence of the CJEU, namely that sustained in the judgment of 16/03/1999 Trummer and Mayer C.222/97, residents in the Union (as is the case of the Claimant) and residents in Portuguese territory cannot receive different treatment.

  • Resulting from a reading of article 65 of the CJEU that discrimination between residents and non-residents may occur, provided that this is not arbitrary and does not constitute a disguised restriction on the movement of capital.

  • And jurisprudence considers that such a distinction may occur, provided that it respects objectively non-comparable situations (cf. Judgments of 7 September 2004, Manninen, 0319/02 and 14 September 2006, Centro di Musicologia Walter Stauffer, C-386/04).

  • In the Claimant's view, in the case at hand, it does not appear that citizens resident and non-resident are in objectively non-comparable situations.

  • Because, as decided in the Judgment of the Court of Justice of the European Union, of 11 October 2007, delivered in case C-443/06, designated "Hollmann Judgment", not even the need to ensure the consistency of the national tax regime is presented as reasonable to allow the restriction advocated by article 43(2) of the PIT Code.

  • Thus, in the aforementioned judgment, the Court of Justice considered that "article 56 EC (current article 63 TFEU) must be interpreted as precluding national legislation, (...), which subjects capital gains resulting from the disposal of an immovable property situated in a Member State, in the present case in Portugal, when such disposal is carried out by a resident of another Member State, to a higher tax burden than that which would apply, in relation to this type of operation, to capital gains realised by a resident of the State in which that immovable property is situated."

  • Also, the Supreme Administrative Court has ruled on this matter in case 01172/14, through its Judgment dated 03/02/2016, whose summary is transcribed as follows:

"I- The provisions of the EC Treaty, which governs the European Union, prevail over national ordinary law, in the terms defined by the organs of Union law, provided they respect the fundamental principles of the democratic rule of law.

II- Incompatible with Community law, as it limits the movement of capital which article 56 of the EC Treaty establishes, is the provision contained in article 43(2) of the PIT Code, for non-application to non-resident taxpayers of the limitation of taxation to 50% of the capital gains realised that it establishes for residents in national territory."

  • Thus, the Supreme Administrative Court decided to confirm the sentence appealed, which concluded "the illegality of the act of assessment of PIT, which taxed the calculated capital gains in full, following the sale of a property, under article 43(1) and (2) of the PIT Code, by contra sensum interpretation, an interpretation that would violate the Treaty establishing the European Community."

  • Also the Administrative Arbitration Centre, when asked about the same matter, considered the taxation illegal for incompatibility of article 43(2) of the PIT Code with article 63 of the Treaty on the Functioning of the European Union, given that it restricts taxation of 50% of capital gains to non-foreign nationals, as per arbitral decisions of cases Nos. 45/2012-T, 127/2012-T and 748/2015-T, dated 05/07/2012, 14/05/2013 and 27/07/2016, respectively.

  • The Claimant believes that the administrative appeal should have been granted and, consequently, the assessment here in dispute should have been partially annulled, as it is affected by the defect of violation of law, which should have been declared.

  • The Claimant made full payment of the assessment here in dispute.

  • The Claimant has paid to the Tax Authority undue amounts, which amount to €23,333.94.

  • Whereby, under article 43 of the General Tax Code, which establishes that compensatory interest is due when there is error attributable to the services, the Claimant should be compensated for accrued and accruing interest from the date of payment until full settlement.

C. RESPONDENT'S RESPONSE AND ITS GROUNDS

  • The Claimant submitted, in the capacity of non-resident taxpayer, the Form 3 income declaration and respective Annex G, with code No. ..., in which it declared, for purposes of calculating capital gains obtained from the sale of various rural properties acquired in 2004.

  • Having opted for the general regime, the said Form 3, was accepted and validated, giving rise to the assessment of tax payable in the amount of €46,667.88.

  • From the comparison of the norms of article 72(1) with article 43(2), both of the PIT Code, it appears that the national legislator makes a differentiated treatment regarding the taxation of capital gains from the onerous disposal of real properties depending on tax residence.

  • Thus, if the taxpayer is resident in national territory, the capital gain is considered at only 50%, if the same is non-resident in national territory, even if in a Member State of the European Union (MS), the capital gain is considered in full.

  • In the present case, the AT considered the Claimant, for purposes of determining taxable income and consequent PIT assessment, as non-resident in Portugal, and the entire capital gain realised in the disposal of the properties was considered.

  • The Claimant believes that the AT, by not considering only 50% of the capital gain for purposes of calculating the tax, violated article 62(1) of the Treaty on the Functioning of the European Union (TFEU), which expressly prohibits all restrictions on the movement of capital between MS and between MS and third countries, and also violated the general principle of non-discrimination provided for in article 18 of the TFEU, which expressly provides that within the scope of application of the Treaties, and without prejudice to their special provisions, all discrimination on the grounds of nationality is prohibited.

  • MS cannot introduce unjustified discrimination between their nationals and other citizens of the European Union (EU), under penalty of such discrimination resulting in a less favourable tax regime for non-residents, resulting from article 8(4) of the CRP, the principle of the primacy of European law and the prevalence of the interpretation of the CJEU over law of Community source, prohibiting any unjustified discrimination between resident and non-resident citizens.

  • In this sense the CJEU has already ruled, in its judgment of 11/10/2017, in case C-443/06, when considering that article 43(2) of the PIT Code, by establishing a differentiated regime for residents in Portugal and residents in other MS of the EU, violated article 56 of the European Community Treaty (ECT), and in the same sense, the judgments of the SAC of 22/03/2011 (Case 1031/10) and of 30/04/2013 (Case 01374/12), and CAAD has also ruled in the same sense, namely in cases No. 45/2012-T, 127/2012-T and 748/2015-T.

  • The Claimant believes that the contested assessment is partially illegal, insofar as it does not have in its origin the application of the provision of article 43(2) of the PIT Code, from which resulted, in the present case, the non-application of the PIT rate to half of the capital gain, since the Claimant is resident in another MS of the EU.

  • The Claimant filed Form 3 for the year 2016, in which the Claimant indicated the status of "non-resident" in Portugal, seeking taxation under the general regime, accompanying the return with Annex G, relating to the onerous disposal of immovable property.

  • Now, in the context of PIT, in the Respondent's view, capital gains are gains obtained which, not being considered business and professional income, capital or real property income, result from the onerous disposal of real rights over immovable properties, as per paragraph a), of article 10(1) of the PIT Code.

  • The value of the income qualified as capital gains is that corresponding to the balance calculated between capital gains and losses realised in the same year, and when relating to transfers made by residents provided for in paragraph a), of article 10(1) of the PIT Code, positive or negative, is considered only at 50% of its value, pursuant to articles 43(1) and (2), both of the same PIT Code.

  • Capital gains provided for in paragraph a), of article 10(1) of the PIT Code earned by non-residents in Portuguese territory not attributable to a permanent establishment situated therein are taxed at the autonomous rate of 28%, pursuant to paragraph a), of article 72(1) of the PIT Code.

  • However, residents in another MS of the EU or of the European Economic Area (EEA), provided that, in the latter case, there is an exchange of information on tax matters, may opt, regarding income from capital gains resulting from the onerous disposal of real rights over immovable properties, for the taxation of such income at the rate which, in accordance with the table provided for in article 68(1), of the PIT Code, would be applicable in the event that they were earned by residents in Portuguese territory, and for purposes of determining such rate all income is taken into account, including that obtained outside this territory, under the same conditions applicable to residents, pursuant to articles 72(9) and (10), of the PIT Code, in the wording given by addition by Law No. 67-A/2007, of 31/12.

  • This addition given by Law No. 67-A/2007, of 31/12, was intended to adapt the national tax system to the decision contained in the judgment of the CJEU of 11/10/2007, in Case No. C-443/06, better known as the Hollmann judgment.

  • The CJEU considered that the issue which it was important to clarify was whether the provision contained in article 56 of the ECT opposed "national legislation, such as that which is the subject of the dispute in the main proceedings, which subjects capital gains resulting from the disposal of an immovable property situated in a MS, when such disposal is carried out by a resident of another MS, to a higher tax burden than that which would apply, in relation to this same type of operation, to capital gains realised by a resident of the State in which that immovable property is situated" (No. 22 of the Judgment).

  • The CJEU's response to this question was as follows:

"Article 56 EC must be interpreted as precluding national legislation, such as that which is the subject of the dispute in the main proceedings, which subjects capital gains resulting from the disposal of an immovable property situated in a Member State, in the present case in Portugal, when such disposal is carried out by a resident of another Member State, to a higher tax burden than that which would apply, in relation to this same type of operation, to capital gains realised by a resident of the State in which that immovable property is situated."

  • As follows from this statement, what is relevant, from the point of view of compatibility with Community law, is not simply the fact that article 43(1) of the PIT Code excludes from the limitation of the tax burden to 50% capital gains realised by a resident of another MS of the EU, but rather, decisively, the fact that this may result in a higher tax burden than that which would be applicable to a resident for the same type of operations, now, as stated in the judgment, what is not admissible from the point of view of Community law is "unequal tax treatment of non-residents, insofar as it allows, in the case of realisation of capital gains, a more burdensome taxation and, therefore, a higher tax burden than that borne by residents in an objectively comparable situation" (No. 54 of the Judgment).

  • The key to resolving the question of incompatibility with Community law verified in the situation at hand rests on the fact that, as stated in No. 58 of the CJEU Judgment, "the tax benefit granted to residents, which consists of a reduction by half of the taxable matter corresponding to capital gains, in any case exceeds the counterpart which consists in the application of a progressive rate to the taxation of its income".

  • In this way, in order to detect unequal tax treatment of non-residents, one must take account of the reduction by half of the taxable matter of real property capital gains, but,

  • It is equally necessary to consider the rate that would apply at the same level of income by reason of the progressivity by brackets in relation to residents, this not being a matter of proceeding to the unlimited and unconditional extension of the advantage resulting from article 43(2) of the PIT Code to non-residents, which would have the inadmissible consequence and unwanted in light of the principle of non-discrimination that would be borne, regardless of the value of the taxable matter, tax only at a rate of 12.5% by application of the proportional rate of 25% corresponding to 50% of the positive balance between capital gains and losses.

  • Therefore, the legal framework within which, in relation to the taxation of real property capital gains, the existence of a "higher tax burden than that borne by residents in an objectively comparable situation" (No. 54 of the judgment) is assessed, comprises, in addition to article 43(2) of the PIT Code, the provisions contained in article 22(1) and article 68, both of the PIT Code, as regards non-residents and their taxation at the rate of 25%.

  • As results from the case file, the Claimant only indicated on the form of Form 3 for the year 2016 that it intended taxation under the general regime.

  • The Claimant not having indicated the option for the general rates of article 68 of the PIT Code, under articles 72(9) and (10), also of the PIT Code, which option would imply recording all income obtained abroad, if any, and the respective country, whereby the assessment was made in accordance with the elements recorded by the Claimant.

  • As referenced, the AT merely applied the law, with no issue of interpretation arising therefrom at the level of non-conformity or incompatibility with Community law.

  • The AT could not fail to apply a norm on this ground, as it is subject to the principle of legality, pursuant to article 266(2) of the CRP, combined with article 55 of the General Tax Code.

  • The current wording of articles 72(9) and (10) of the PIT Code were added following the pronouncement of the CJEU, which did not proceed to the unlimited and unconditional extension of the advantage resulting from article 43(2) of the PIT Code to non-residents.

  • The Claimant opted for the method of taxation for non-residents, when it could have opted for the method of aggregation, equivalent to the regime of residents in national territory, which it did not do.

D. QUESTIONS TO BE DECIDED

In light of the positions assumed by the Parties in accordance with the arguments presented, it is fundamentally the following question that falls to be considered and decided:

Whether in the case of capital gains resulting from the disposal of immovable properties, the differentiated taxation regime applicable to residents in national territory and to residents in the territory of the European Union, as regards the limitation of the PIT incidence for those here resident to 50% of the balance of capital gains, constitutes, or does not constitute, discrimination in the field of freedom of movement of capital, violating art. 63 of the Treaty on the Functioning of the European Union, when it does not extend to residents of another Member State of the European Union.

E. PROCEDURAL REQUIREMENTS

  • The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to articles 2(1)(a), 5 and 6(1) of the RJAT.

  • The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to articles 4 and 10 of the RJAT and article 1 of Order No. 112-A/2011, of 22 March.

  • The proceedings are not affected by nullities.

  • Thus, there is no obstacle to consideration of the case.

All considered, it is necessary to deliver

II. DECISION

A. MATTER OF FACT

A.1. Facts Established as Proven

With relevance for consideration of the issues raised, the Tribunal establishes as proven the following facts:

  1. The Claimant A..., NIF ... is a Portuguese citizen resident in Brussels.

  2. The Claimant appointed B..., as its tax representative in Portugal.

  3. The Claimant's tax representative proceeded with the filing of the PIT return - Form 3 of its principal, concerning the year 2016, together with the respective Annex G regarding income from real property capital gains obtained from property disposals made in December 2016.

  4. In the PIT return, concerning 2016, the Claimant's non-resident status was declared.

  5. In Form 3 of 2016, only one type of income obtained was declared, namely capital gains.

  6. It also appears from Annex G of the income return that the onerous disposals of real properties that occurred in December 2016 generated total income of €170,000.00, from which the sum of the acquisition values (€2,300.00) and expenses and charges (€615.00) were deducted.

  7. The capital gain calculated amounted to €166,671.00.

  8. The Tax Authority proceeded to calculate the tax due, pursuant to article 43(1) of the PIT Code, based on the balance calculated between capital gains and losses realised in the same year.

  9. It proceeded to apply a rate of 28% to the entire amount of capital gains in the amount of €166,671.00.

  10. The Claimant was notified to pay the assessed tax, which amounted to €46,667.88, having made such payment on 25/08/2017.

  11. Not agreeing with the assessment at hand, the Claimant filed, through its tax representative, an administrative appeal on 02/08/2017 at the Tax Office of Vila Nova de Gaia - ... .

  12. On 13/09/2017, the Claimant's tax representative was notified of the decision of dismissal.

A.2. Facts Established as Not Proven

With relevance for the decision, there are no facts that should be considered as not proven.

A.3. Substantiation of the Proven and Not Proven Matter of Fact

The facts established as proven are based on the documents indicated in relation to each of them, in the administrative file and in the factual elements introduced into the proceedings by the Parties, insofar as their correspondence to reality has not been questioned.

B. OF LAW

Having established the matter of fact, we proceed hereinafter to its legal subsumption and to the determination of the Law to be applied, taking into account the question to be decided which was enunciated.

The question to be decided in the present proceedings consists in knowing whether the Tax Authority, in taxing the entire amount of capital gains resulting from the onerous disposal of the immovable property sub judice by a taxpayer who does not reside in Portugal, but in Belgium, a member country of the European Union, on the grounds that article 43(2) of the PIT Code should be applied only to taxpayers resident in Portugal, has violated the Treaty on the Functioning of the European Union, namely its article 63 which ensures freedom of movement of capital, constituting such fact a discriminatory behaviour between residents in Portugal and residents in another Member State of the European Union.

Indeed, the Respondent considers that the discipline of article 43(2) of the PIT Code is applicable only to residents in national territory, taking into account the literal element of the norm and the specificities of the taxation regime for natural persons in Portugal, based on the principle of aggregation and progressivity.

However, and as will appear from what follows, the Respondent's thesis supporting the coexistence in the Portuguese legal system of two regimes, one applicable to natural persons resident in Portuguese territory and another applicable to natural persons not resident therein, although also resident in the territory of a Member State of the European Union, completely lacks legal foundation.

Now, as is moreover alleged by the Claimant, this matter was already considered by the Court of Justice of the European Union (CJEU), in its Judgment of 11/10/2007, delivered in case C-443/06, designated "Hollmann Judgment", which ruled that the said article 43(2) of the PIT Code, by being of a less favourable character for non-residents, thus breaches the principle of freedom of movement of capital between Member States of the European Union, violates article 63 of the Treaty on the Functioning of the European Union.

Thus, it now remains to be determined whether the option which the Portuguese tax system introduced, following the publication of the said "Hollmann Judgment", and which is contained in articles 72(8) and (9) of the PIT Code, has eliminated the discrimination judgment of the CJEU, formulated with respect to the provision of article 43(2) of the PIT Code, in the terms indicated above.

Indeed, for the Respondent the regime contained in article 72 of the PIT Code restored equality of treatment between residents and non-residents, thus eliminating any discrimination that might exist.

Now, this does not occur, as follows from what is explained hereafter.

In a parallel situation, the CJEU came to rule on 18 March 2010, in the so-called "Gielen Judgment" (case C-440/08), clearly emphasizing that the equalization option that would permit a non-resident taxpayer the possibility of choosing between a discriminatory tax regime and another supposedly non-discriminatory regime does not exclude the discriminatory effects of the first of these two regimes, for if this were to be recognized one would be validating a tax regime violating the Treaty, by reason of its discriminatory character.

And, peremptorily, it concludes that the Treaty "precludes national legislation that discriminates against non-resident taxpayers... even if those taxpayers can opt for the regime applicable to resident taxpayers".

Now, article 8(4) of the Constitution of the Republic enshrines the principle of the primacy of Community law and the prevalence of the interpretation of the CJEU, as follows:

"3. Rules emanating from the competent organs of international organizations of which Portugal is a member are directly applicable in the domestic order, provided that this is established in the constitutive treaties."

Thus, with the jurisprudence of the CJEU prevailing in the Portuguese legal system, in matters of Community law, binding the same on national courts, as is recognized by the SAC, and in light of the parallelism of the questions which were decided with the question now under consideration, the decision in the present proceedings will not differ, nor could it differ from the orientation established in the said jurisprudence, that is, that the solution which the Portuguese legislator adopted did not eliminate the discriminatory character in which, in this matter, taxpayers resident in Member States of the European Union find themselves.

Also this has been the Jurisprudence adopted by the Supreme Administrative Court, as appears from the Judgment of 22 March 2011, delivered in case No. 1031/10, in which to substantiate the annulment of the assessment issued by the Tax Authority, this venerable Court said as follows:

"faced with the declaration of taxpayers, it assessed the tax which it considered due (as has always been the case in PIT): at the rate provided for non-residents (25%, under article 72(1) of the PIT Code) and on the total amount of the capital gain realised and not merely on 50% of this value (article 43(2) of the PIT Code), thus ignoring Community jurisprudence and that of this Supreme Court which adopted it (cf. the Judgment of 16 January 2008, case No. 439/06) as to the incompatibility of such legal provision, as so applied, with the (then) article 56 of the TCEC (current article 63 of the Treaty on the Financing of the European Union), thus subjecting, as came to happen, to the annulment in that respect the contested assessment, given the primacy of Community law."

And, as regards the principle of non-discrimination, in situations of equal treatment between European citizens, regardless of their nationality and residence, as a structuring principle of the European Union, the Judgments of the SAC of 16/01/2008 (case No. 439/06) of 27/11/2013 (case No. 0654/13) and of 14/05/2014 (case No. 01319/13) are cited.

In the same sense, this CAAD has ruled on the matter sub judice, as appears from the Decisions, which are cited in the procedural pleadings and which were delivered in cases No. 45/2012-T, of 05/06/2012, No. 127/2012-T, of 14/05/2013 and No. 748/2915, of 27/07/2016, which considered illegal the assessments made by the AT in these circumstances, and proceeded to their annulment, as these restricted the right to a reduction of 50% of capital gains to taxpayers resident in Portugal.

Thus, there is no doubt that the normative solution which was adopted by the national legislator did not eliminate the discriminatory character in the treatment of residents and non-residents, in matters of capital gains arising from the disposal of immovable properties.

In this manner, having regard to what has been stated, the defect of violation of law invoked by the Claimant regarding the assessment made by the Respondent in the aforementioned terms and which is contested herein, proceeds, due to manifest incompatibility of article 43(2) of the PIT Code with article 63 of the Treaty on the Functioning of the European Union, in the respect in which it restricts the reduction of capital gains subject to PIT to 50% only to taxpayers who are resident in Portugal, with its consequent annulment.

As regards compensatory interest, this matter is regulated in article 24 of the RJAT, which expressly determines in its paragraph (1)(b) that the arbitral decision obliges the tax administration, in the cases listed therein, to "Restore the situation that would exist if the tax act which is the subject of the arbitral decision had not been undertaken, adopting the acts and operations necessary for that purpose", and further provides, in its paragraph (5), that "Payment of interest, regardless of its nature, is due, under the terms provided for in the general tax law and in the Code of Tax Procedure and Process", thus recognizing the right to interest in arbitral proceedings.

Also article 100 of the General Tax Code, whose application is authorized by article 29(1)(a), provides in the same manner, in the sense of immediate restoration of legality, including payment of compensatory interest, if applicable.

For its part, article 43 of the General Tax Code conditions the right to compensatory interest to cases in which "there has been error attributable to the services from which results payment of a tax debt in an amount exceeding that legally due".

In this conformity, the question that arises is whether, in light of the circumstances demonstrated, it can be considered that there was, or not, error attributable to the services in the situation at hand.

Upon analysis of the situation, it appears that the Tax Authority, in proceeding with the assessment in the manner it did, was aware that it was incurring in the commission of an illegality, as the understanding here endorsed has already been established in the legal system for many years and the Respondent recognizes knowing it.

Thus, it must be recognized that the act of assessment, which is the sole responsibility of the Respondent and which resulted in payment of PIT in an amount exceeding that legally due and is affected by the defect of violation of law, was undertaken due to error attributable to the services, whereby there shall be place for payment of compensatory interest.

C. DECISION

In these terms this Arbitral Tribunal decides to find the arbitral claim filed to be entirely well-founded and, in consequence:

a) Annul the tax act which is the subject of the present proceedings

b) Condemn the Respondent to refund to the Claimant the amount of tax improperly paid, increased by compensatory interest, as from the date on which the payment was made

c) Condemn the Respondent to pay the costs of the proceedings,

D. Value of the Proceedings

The value of the proceedings is fixed at €23,589.55, pursuant to article 97-A(1)(a) of the Code of Tax Procedure and Process, applicable by force of paragraphs a) and b) of article 29(1) of the RJAT and of article 3(2) of the Regulations on Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is fixed at €1,224.00, pursuant to Table I of the Regulations on Costs in Tax Arbitration Proceedings, to be paid by the Respondent, as the claim was entirely well-founded, pursuant to articles 12(2) and 22(4), both of the RJAT, and article 4(4) of the aforementioned Regulations.

Let notification be made.

(This decision was written in the old spelling)

Lisbon, 30 May 2018

The Arbitrator

(José Nunes Barata)

Frequently Asked Questions

Automatically Created

How are capital gains from real estate sales taxed in Portugal for non-residents from other EU Member States?
Capital gains from real estate sales by non-residents from EU Member States are taxed under Article 43 of the IRS Code at a 28% rate on the net gain. However, Article 43(2) historically excluded non-residents from the 50% capital gains exemption (Article 72(9)) available to Portuguese residents, taxing 100% of their gains. This discriminatory treatment has been successfully challenged as violating Article 63 TFEU (free movement of capital). Following the CJEU Hollmann Judgment (C-443/06) and Portuguese Supreme Administrative Court precedent, EU residents should receive the same 50% exemption as Portuguese residents, with only half the capital gain subject to the 28% rate, ensuring equal treatment across the EU.
Can EU non-residents challenge discriminatory IRS taxation on property capital gains through tax arbitration at CAAD?
Yes, EU non-residents can challenge discriminatory IRS taxation on property capital gains through tax arbitration at CAAD (Centro de Arbitragem Administrativa). The procedure requires first filing an administrative appeal (reclamação graciosa) within the legal deadline after notification of the IRS assessment. If dismissed or not decided within the statutory period, the taxpayer can then file an arbitration request under Decree-Law 10/2011 (RJAT - Legal Regime for Arbitration in Tax Matters). EU residents must appoint a fiscal representative in Portugal to handle these proceedings. The arbitration process offers a faster, specialized alternative to judicial courts for contesting tax assessments based on violations of EU law principles, particularly discrimination against non-residents.
What is the legal basis for contesting the full taxation of capital gains for EU non-residents versus the 50% exemption for Portuguese residents?
The legal basis for contesting full taxation of capital gains for EU non-residents versus the 50% exemption for Portuguese residents rests on Article 63 TFEU, which prohibits restrictions on capital movement between Member States. Article 43(2) of the IRS Code, which denied non-residents the 50% capital gains reduction available to residents under Article 72(9), violates this principle. The landmark CJEU Hollmann Judgment (C-443/06, 11 October 2007) established that Portugal cannot subject EU non-residents to higher tax burdens on property disposals than residents. The Supreme Administrative Court confirmed in judgment 01172/14 (03/02/2016) that this discriminatory provision is incompatible with Community law. EU law principles have primacy over conflicting national legislation, providing grounds for annulment of assessments applying the discriminatory treatment.