Process: 65/2019-T

Date: October 11, 2019

Tax Type: IRS

Source: Original CAAD Decision

Summary

This 2019 Portuguese tax arbitration case addresses the discriminatory taxation of real estate capital gains for non-residents under IRS (Personal Income Tax). A Spanish national residing in Belgium sold inherited Portuguese property in 2016 and was taxed on 100% of the capital gain, while Portuguese residents benefit from a 50% exclusion under Article 43(2) of the IRS Code. The taxpayer argued this violated Articles 63 (free movement of capital) and 18 (non-discrimination) of the TFEU. Following the CJEU's Hollmann judgment (C-443/06), Portugal amended Article 72 of the IRS Code through Law 67-A/2007, allowing non-resident EU/EEA citizens to opt for resident taxation rates by consolidating worldwide income. However, the taxpayer had not exercised this option in fields 9 and 11 of Form 3, instead selecting non-resident taxation. The Tax Authority defended the assessment's legality, arguing the discriminatory regime identified in Hollmann had been remedied. The AT requested a preliminary ruling to the CJEU under Article 267 TFEU if doubts persisted about compatibility with EU law. The arbitral tribunal initially declined the referral but faced pressure to reconsider. This case illustrates the ongoing tension between Portugal's territorial tax system and EU principles of free movement and non-discrimination, particularly regarding differential treatment of real estate capital gains based on tax residence status.

Full Decision

TAX ARBITRATION JURISPRUDENCE

Arbitration Case No. 65/2019-T

Date of decision: 2019-10-11

Tax type: Personal Income Tax (IRS)

Value of claim: € 1,661.35

Subject matter: IRS - Real property capital gains. Non-residents. Referral to the CJEU for a preliminary ruling.

ARBITRAL DECISION

I. REPORT

On 4 February 2019, the taxpayer A..., a tax subject with TIN ..., of Spanish nationality and resident in ..., ..., ... – Belgium (hereinafter referred to as Claimant), pursuant to the provisions of articles 2, paragraph 1, subparagraph a) and 10, paragraphs 1 and 2, of Decree-Law No. 10/2011, of 20 January, which approved the Legal Regime of Arbitration in Tax Matters (RJAT) and articles 1 and 2 of Order No. 112-A/2011, of 22 March (Binding Order), requested the constitution of an Arbitral Tribunal, in which the Tax and Customs Authority (hereinafter AT or Respondent) is the Respondent, informing that it does not intend to use the power to appoint an arbitrator.

The request for constitution of the arbitral tribunal was accepted by the Honorable President of CAAD and automatically notified to the AT, and, pursuant to paragraph 1 of article 6 and subparagraph b) of paragraph 1 of article 11 of the RJAT, as amended by article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council appointed the undersigned as arbitrator of the sole arbitral tribunal, a task accepted within the applicable period, without opposition from the Parties.

A. Subject matter of the claim:

The Claimant seeks a declaration of illegality and annulment of the Personal Income Tax assessment No. 2018..., in the amount of € 3,151.40 and the associated compensatory interest assessment No. 2018... in the amount of € 171.29, relating to the year 2016, in the total amount of € 3,322.69, as well as its replacement with another, equivalent to 50% of the first, assigning to the claim the economic value of € 1,661.35.

Summary of the Parties' positions
a. Of the Claimant:

The Claimant alleges, in summary, that in its capacity as a non-resident it alienated, in 2016, a portion of a real property situated in national territory that formed part of its inheritance share from the estates of its parents, opened in 2014 and 2015, respectively, with the AT calculating the taxable capital gains by the totality of the difference between the acquisition value and the realization value, with which it does not agree.

The Claimant invokes the differentiated treatment regarding the taxation of capital gains arising from the onerous alienation of real property as a function of the tax residence of the tax subject, taxing non-residents differently from residents in Portugal, violating the provision of article 63 of the Treaty on the Functioning of the European Union, as well as the principle of non-discrimination provided for in article 18 of the same Treaty.

The Claimant considers that even after the amendments introduced by Law No. 67-A/2007, of 31 December, with the objective of adapting the national tax system to the decision rendered by the Court of Justice of the European Union in case C-443/06, known as the Hollmann Judgment, the discriminatory effect persisting from the differentiation of the regimes applicable to residents and non-residents is maintained.

The Claimant concludes by formulating the request for annulment of the Personal Income Tax assessment for the year 2016 and its replacement with a new assessment based on 50% of the capital gain realized, from which will result the amount to be paid of € 1,661.35.

b. Of the Respondent:

Notified pursuant to the terms and for the purposes provided for in article 17 of the RJAT, the AT presented a Response in which it came to defend the legality and maintenance of the assessment act that is the subject of the present request for arbitral pronouncement.

The AT argues that the non-conformity of national legislation with community law, noted by Judgment C-443/06 of the Court of Justice of the European Communities (CJEU), of 11.10.2007, was remedied by the legislative amendments introduced to article 72 of the Personal Income Tax Code, by Law No. 67-A/2007, of 31/12.

That such amendments, translated into the addition to article 72 of the Personal Income Tax Code, of paragraphs 7 and 8 (current paragraphs 9 and 10), came to permit that residents in another Member State of the European Union or of the European Economic Area, provided that, in the latter case, there is an exchange of information in tax matters, could opt for the taxation of capital gains income earned by them, at the rate that, in accordance with the table provided for in paragraph 1 of article 68, would be applicable in the case of being earned by residents in Portuguese territory, with the rate determined by the sum of all income, including that obtained outside this territory.

That, in accordance with such legislative amendments, the Model 3 declaration, from 2009 onwards, had a field to exercise the option for the rate of article 68 of the Personal Income Tax Code.

That, in the case at hand, the Claimant marked in section 8 B of Model 3 the field 4 (non-resident) and field 7 (requests taxation under the general regime applicable to non-residents); if it intended to be taxed at the rate of article 68, that is, as a resident, it was necessary to have completed fields 9 (option for the rates of article 68 of the Personal Income Tax Code) and 11 (total income obtained abroad).

That the amendment effected by way of the introduction of the current paragraphs 9 and 10 of article 72 of the Personal Income Tax Code, came to permit that both residents and non-residents benefit from the regime provided for in article 43, paragraph 2 (consideration of the capital gain balance in only 50% of its value), of the same Code, provided that they opt for the consolidation of income obtained both in Portugal and outside this territory.

Considering that the legal framework in force in the year to which the income earned by the Claimant relates is no longer that which existed at the date of the situations analyzed by the CJEU in Judgment C-443/06, of 11/10/2007 (Personal Income Tax of 2003) and in C-184/18, of 6/09/2018 (Personal Income Tax of 2007), the AT comes to request that, should doubts persist regarding the compatibility of the capital gains taxation regime on which the assessment that is the subject of the present request for arbitral pronouncement was based with European Union law, a preliminary referral of the question to the CJEU be made, pursuant to article 267 of the TFEU.

By arbitral order of 23.05.2019, the meeting referred to in article 18 of the RJAT was dispensed with, considering that a preliminary referral was not justified, in light of the "RECOMMENDATIONS" of the Court of Justice of the European Union to national courts of justice, relating to the presentation of preliminary ruling proceedings (2012/C 338/01)", published in the Official Journal of the European Union C 338/1, of 06.11.2012.

By request of 29.05.2019, the AT came to request the suspension of proceedings, as a decision on a preliminary referral was pending in a case with an identical subject matter to that of these proceedings.

In the silence of the Claimant, notified to pronounce on the content of the Respondent's request, and in the conviction of the arbitral tribunal that the prerequisites for suspension of proceedings were not met, the continuation of the case was determined with written submissions, within a simultaneous period of 20 (twenty) days, pursuant to article 91-A of the Code of Procedure in Administrative Courts, ex vi article 29, paragraph 1, subparagraph c), of the RJAT, with the date of 14 October 2019 fixed for the rendering of the arbitral decision.

Both Parties produced written submissions, reiterating their initial positions.

II. PRELIMINARY EXAMINATION

  1. The sole arbitral tribunal is competent and was regularly constituted on 16 April 2019, pursuant to subparagraph c) of paragraph 1 of article 11 of Decree-Law No. 10/2011, of 20 January, as amended by article 228 of Law No. 66-B/2012, of 31 December;

  2. The parties have legal personality and capacity and are legitimate;

  3. The AT is legally represented, pursuant to articles 4 and 10 of the RJAT and article 1 of Order No. 112-A/2011, of 22 March, with the following applying to the Claimant, who also uses the name B..., the provision of paragraph 2 of article 6 of the Code of Procedure and Tax Process, as in force on the date of the request, ex vi article 29, paragraph 1, subparagraph a), of the RJAT, with the signature having been compared with that contained in the passport issued by the Kingdom of Spain, with No. ... – R..., with a copy attached to the proceedings, which is taken as reproduced;

  4. The case is not subject to defects that would invalidate it;

  5. No exceptions were invoked that the arbitral tribunal is required to assess and decide.

III. REASONING

III.1 FACTUAL MATTERS

A – Proven facts:

  1. During the period to which the production of the tax event pertains (2016), the Claimant resided in ..., ..., ... – Belgium (fact admitted by agreement of the Parties);

  2. On 09.10.2018, the Claimant submitted the Model 3 Personal Income Tax declaration regarding income earned in national territory in the year 2016, registered under No. ..., integrating the front, in which it declared the status of non-resident, with residence in the "European Union or the European Economic Area", opting for taxation under the general regime (section 8 B, fields 04 and 07, respectively) and an Annex G (with a copy attached to the request for arbitral pronouncement, hereinafter, p.p.a., which is taken as reproduced);

  3. In section 4 of Annex G to the Model 3 Personal Income Tax declaration for the year 2016, the Claimant declared (copy attached to the p.p.a., which is taken as reproduced):

    a. The alienation, for the value of € 49,750.00, of 50% of the fraction I of the urban property registered under article ... of the parish ..., in May 2016;

    b. The acquisition of a part of the same property, in September 2014, for the value of € 11,806.66;

    c. The acquisition of another part of the identified property, in June 2015, for the value of € 23,613.34;

    d. Expenses and charges incurred, in the total amount of € 3,075.00;

  4. On 12 October 2018, the AT issued in the name of the Claimant the Personal Income Tax assessment No. 2018..., regarding income for the year 2016, in the amount of € 3,322.69, being € 3,151.40 of tax and € 171.29 of compensatory interest (copy of assessment certificate, attached to the p.p.a., which is taken as reproduced);

  5. The said assessment resulted from the application of the rate of 28% to the taxable base of € 11,255.00, equivalent to the totality of the capital gain realized;

  6. The collection notice No. 2018... was issued, with a voluntary payment deadline of 26.11.2018 (copy of assessment certificate, attached to the p.p.a., which is taken as reproduced).

B – Unproven facts:

It was not proved that the Claimant proceeded to pay the challenged assessment.

C – Reasoning for the proven and unproven factual matters:

Regarding factual matters, the Court does not have to pronounce on everything that was alleged by the parties, but rather it is incumbent upon it to select the facts that are relevant to the decision and to discriminate between the proven and unproven matter.

Thus, the facts relevant to the adjudication of the case are chosen and delineated in function of their legal relevance, which is established in light of the various plausible solutions of the legal question(s) (see article 596 of the Code of Civil Procedure, applicable ex vi article 29, paragraph 1, subparagraph e), of the RJAT).

The facts taken as proven and unproven resulted from the critical analysis of the documents attached to the request for arbitral pronouncement and from the position assumed by the Parties in their respective pleadings, since the AT did not attach the administrative file, which it declared to be non-existent.

III.2 ON THE LAW
1. The question to be decided:

The question to be decided in the present proceedings consists in determining whether the provision of paragraph 2 of article 43 of the Personal Income Tax Code, in which it was determined, at the date of the tax event, that "The balance referred to in the preceding number, regarding transfers effected by residents provided for in subparagraphs a), c) and d) of paragraph 1 of article 10, positive or negative, is only considered in 50% of its value", is applicable in the determination of real property capital gains income obtained by non-residents.

This is a question extensively addressed by national and community jurisprudence, on which the Court of Justice of the European Union (CJEU) pronounced itself in the context of case C-443/06, of 11/10/2007 (Hollmann Judgment), at a date prior to the amendments introduced to article 72 of the Personal Income Tax Code, by Law No. 67-A/2007, of 31/12 (State Budget for 2008), having decided that "Article 56 EC [current article 63 TFEU] must be interpreted as precluding national legislation, such as that at issue in the main proceedings, which subjects capital gains resulting from the alienation of an immovable property situated in a Member State, in the case in point in Portugal, when that alienation is effected by a resident of another Member State, to a tax burden higher than that which would be imposed, in relation to this same type of operation, on capital gains realized by a resident of the Member State in which that immovable property is situated." (available at https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:62006CJ0443&from=EN).

The addition of paragraphs 7 and 8 (current paragraphs 9 and 10) to article 72 of the Personal Income Tax Code, by Law No. 67-A/2007, of 31/12, came, from the perspective of the Respondent, to reconcile the taxation regime of capital gains income earned by non-resident tax subjects with European Union law, not contravening the principles of non-discrimination and freedom of movement of capital, to which articles 18 and 63 of the TFEU refer, respectively.

In the year to which the income that gave rise to the assessment now impugned relates, the following was the wording of paragraphs 1, subparagraph a), 9 and 10, of article 72 of the Personal Income Tax Code:

"Article 72 – Special rates

1 – Taxed at the autonomous rate of 28%:

a) Capital gains provided for in subparagraphs a) and d) of paragraph 1 of article 10 earned by non-residents in Portuguese territory that are not attributable to a permanent establishment situated there;

(…)

9 – Residents in another Member State of the European Union or of the European Economic Area, provided that, in the latter case, there is an exchange of information in tax matters, may opt, with regard to the income referred to in subparagraphs a) and b) of paragraph 1 and in paragraph 2, for the taxation of such income at the rate that, in accordance with the table provided for in paragraph 1 of article 68, would be applicable in the case of being earned by residents in Portuguese territory.

10 – For the purposes of determining the rate referred to in the preceding number, all income is taken into account, including that obtained outside this territory, under the same conditions that are applicable to residents.

(…)"

It is regarding the regime resulting from the combination of the rules transcribed with those contained in articles 9, paragraph 1, subparagraph b), 10, paragraph 1, subparagraph a), 43, paragraph 2 and 68, all of the Personal Income Tax Code, in the wording in force at the date of the facts, that the AT requests the assessment of the CJEU, since this EU Court has not yet pronounced itself on the same, in the current legislative framework.

However, taking into account the "RECOMMENDATIONS" of the Court of Justice of the European Union to the attention of national courts of justice, relating to the presentation of preliminary ruling proceedings (2012/C 338/01)", published in the Official Journal of the European Union C 338/1, of 06.11.2012, from which it follows that "(…) a court or tribunal against whose decisions there is no judicial remedy under national law is obliged to bring the matter before the Court, except where it is clear that the existing case-law of the Court already addresses the point of law in question and that the legal problem put before it is substantially the same as the one that was the subject of the case-law already given (and where the new legal framework does not raise any real doubt as to the possibility of applying that case-law to the concrete case) or where the correct application of the rule of Union law is obvious", the arbitral tribunal understood that the prerequisites for the obligation to make a preliminary referral to the CJEU were not met in the concrete case.

In fact, judicial and arbitral jurisprudence have already pronounced on situations identical to those of the proceedings, occurring at a date subsequent to the legislative amendments made to article 72 of the Personal Income Tax Code, by Law No. 67-A/2007, of 31/12, in a sense contrary to that here defended by the AT.

First, it is worthy of note the Judgment rendered by the Supreme Administrative Court on 20.02.2019, in case No. 0901/11.0BEALM 0692/17, available at http://www.dgsi.pt/.

The said Judgment addressed an appeal brought by the AT of the decision rendered by the Administrative and Tax Court of Almada, which partially upheld a judicial challenge of a Personal Income Tax assessment for the year 2010, determining its annulment in 50%. It appears in its summary:

"I - By constitutional imperative the provisions of the Treaty governing the European Union prevail over national ordinary law rules, in the terms defined by European Union law bodies, provided that they respect the fundamental principles of the democratic rule of law. Pursuant to article 8, paragraph 4, of the CRP 'the provisions of the treaties governing the European Union and the rules emanating from its institutions, in the exercise of their respective competencies, are applicable in the internal legal order, in the terms defined by European Union law, with respect for the fundamental principles of the democratic rule of law'.

II - Although Portugal has competence to legislate on income tax, as this is not a matter of exclusive competence of the EU, it cannot include in that regulation rules that, in concreto, are violative of the Treaties, in the interpretation of them that, as it did, the Court of Justice of the EU makes.

III - The impugned act, which applied the referred article 43, paragraph 2 of the Personal Income Tax Code, incompatible with the referred article 56 of the Treaty establishing the European Community, suffers from a defect of violation of the latter rule, which constitutes illegality, justifying its annulment (article 135 of the Code of Administrative Procedure).".

It is also appropriate to refer, among others, to the arbitral decision rendered on 08.04.2019, in case No. 600/2018-T, relating to real property capital gains earned by non-residents, available at https://caad.org.pt/tributario/decisoes, in whose reasoning, among other things, the following is read:

"Thus, what essentially matters for this purpose is to know whether or not there is a negative discrimination in the application to the Claimants of the regime that was applied to them.

The regime provided for by default (in the absence of an option) in paragraph 1 of article 72 is more burdensome for non-residents than for residents, since while the maximum rate applicable to capital gains realized by residents is 24% of its value (maximum rate of 48% provided for in article 68, applicable to 50% of the capital gain balance), the rate provided for in paragraph 1 of article 72 of the Personal Income Tax Code is 28%, applicable to the totality of the balance.

(…)

Thus, it is certain that the taxation regime at the liberatory rate provided for in article 72 of the Personal Income Tax Code, in the wording in force in 2017, is incompatible with the referred article 63 of the Treaty on the Functioning of the European Union, since it makes the transfer of capital less attractive for non-residents and constitutes a restriction on the movement of capital prohibited by the Treaty.

(…)

The fact that currently this regime can be circumvented by tax subjects, if they manifest an option, does not eliminate the negative discrimination, since an obligation to opt is imposed on them that is not extensive to residents.".

Adhering to the cited jurisprudence, with which we agree, also in the case of the proceedings, even though the Claimant did not opt for the taxation regime referred to in paragraphs 9 and 10 of article 72 of the Personal Income Tax Code, it is concluded that the Personal Income Tax assessment for the year 2016 is illegal, in the terms in which it was effected, that is, having as a basis the totality of the capital gain determined and not only 50% of its value, in accordance with paragraph 2 of article 43 of the said Code.

Illegality that justifies the partial annulment of the Personal Income Tax assessment No. 2018..., in accordance with article 163, paragraph 1, of the Code of Administrative Procedure, subsidiarily applicable in accordance with article 29, paragraph 1, subparagraph d), of the RJAT, in 50% of the respective amount, with the other legal consequences.

IV. DECISION

On the basis of the factual and legal grounds set out above and, pursuant to article 2 of the RJAT, it is decided that, finding the present request for arbitral pronouncement entirely well-founded, the illegality of the Personal Income Tax assessment No. 2018..., relating to the year 2016, is declared, determining its partial annulment, in 50% of the respective value.

VALUE OF THE CASE: In accordance with the provision of article 306, paragraphs 1 and 2, of the Code of Civil Procedure, article 97-A, paragraph 1, subparagraph a), of the Code of Procedure in Administrative Courts and article 3, paragraph 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at € 1,661.35 (one thousand, six hundred and sixty-one euros and thirty-five 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 € 306.00 (three hundred and six euros), to be borne by the Tax and Customs Authority.

Notify the parties.

Lisbon, 11 October 2019.

The Arbitrator,

/Mariana Vargas/

Document prepared by computer, pursuant to paragraph 5 of article 131 of the Code of Civil Procedure, applicable by reference of subparagraph e) of paragraph 1 of article 29 of Decree-Law 10/2011, of 20 January.

The wording of this decision is governed by the 1990 spelling agreement.

Frequently Asked Questions

Automatically Created

How are real estate capital gains taxed for non-residents in Portugal under IRS?
Non-residents in Portugal are taxed under IRS on real estate capital gains at a flat rate (currently 28% under Article 72 of the IRS Code) on 100% of the gain, calculated as the difference between sale price and acquisition value. However, following EU law compliance amendments in 2007, non-resident EU/EEA citizens can opt for taxation under the general resident regime by consolidating worldwide income on Form 3 (Model 3), fields 9 and 11, which may provide access to progressive rates and the 50% capital gains exclusion.
What is the discriminatory tax treatment of non-residents vs residents regarding property capital gains in Portugal?
The discriminatory treatment lies in the automatic application of different regimes: Portuguese residents benefit from a 50% exclusion on real estate capital gains under Article 43(2) of the IRS Code (only 50% of the gain is taxable), while non-residents are taxed on 100% of the gain unless they affirmatively opt into the resident regime. This creates a disadvantage for non-residents who may be unaware of the option or find the worldwide income consolidation requirement burdensome. The CJEU's Hollmann judgment (C-443/06) found similar Portuguese provisions violated Article 63 TFEU on free movement of capital.
How does Article 63 TFEU on free movement of capital apply to Portuguese taxation of non-resident property sellers?
Article 63 TFEU prohibits restrictions on the movement of capital between Member States and third countries. The CJEU has ruled that differential tax treatment of capital gains based solely on tax residence constitutes a restriction on capital movement. In the Hollmann case (C-443/06, 2007), the Court found Portugal's discriminatory taxation of non-residents' real estate gains violated this principle. Portugal must justify such restrictions as necessary for overriding reasons of public interest (e.g., tax coherence, prevention of tax avoidance) and proportionate. The mere administrative convenience or fiscal sovereignty cannot justify discrimination that deters non-residents from investing in Portuguese property.
What is a preliminary ruling request (reenvio prejudicial) to the CJEU in Portuguese tax arbitration cases?
A preliminary ruling request (reenvio prejudicial or questão prejudicial) under Article 267 TFEU allows Portuguese courts and arbitral tribunals to refer questions of EU law interpretation to the Court of Justice of the European Union (CJEU) before rendering final decisions. In tax arbitration under the RJAT (Legal Regime of Tax Arbitration), arbitrators may suspend proceedings to request CJEU clarification when a case's outcome depends on interpreting EU law provisions. The CJEU's response binds the referring tribunal and establishes precedent across the EU. Portuguese tax authorities increasingly request such referrals when defending assessments against EU law challenges, as demonstrated in this case where the AT sought CJEU guidance on whether post-Hollmann legislative amendments sufficiently eliminated discrimination.
Can non-residents claim the 50% capital gains exclusion available to Portuguese tax residents under IRS rules?
Non-residents can claim the 50% capital gains exclusion available to Portuguese residents, but only by affirmatively opting into the resident taxation regime under Article 72(9) and (10) of the IRS Code (added by Law 67-A/2007). This requires: (1) being resident in an EU Member State or EEA country with tax information exchange; (2) completing fields 9 and 11 of Form 3 (Model 3) to opt for Article 68 rates; and (3) declaring all worldwide income for consolidation. This option allows application of progressive resident rates and access to Article 43(2)'s 50% exclusion. Failure to exercise this option results in automatic taxation as a non-resident on 100% of the gain at the flat 28% rate, as occurred in this case where the taxpayer only completed fields 4 and 7, selecting standard non-resident treatment.