Process: 662/2015-T

Date: April 28, 2016

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 662/2015-T) addresses a dispute over tax residency classification for IRS purposes in 2013. The applicant, a dual Portuguese-US citizen who lived in the USA from 2008, was offered a position with a Portuguese company in June 2013 but only physically relocated to Portugal in November 2013. The applicant challenged an IRS assessment of €10,124.83, arguing he did not meet the legal criteria for Portuguese tax residence in 2013 under Article 16 of the IRS Code, particularly the 183-day presence test, and should be considered a US tax resident. The Tax Authority (AT) contended the applicant was a Portuguese tax resident from June 2013, citing: (i) the employer's monthly remuneration declarations classifying him as Portugal-resident from June 2013, (ii) the employment contract indicating functions commenced in Portugal in June 2013, and (iii) the applicant's failure to present a US tax residence certificate (forms 6166 or 8802). Critical to the case are the legal presumptions under Article 16 of the IRS Code establishing Portuguese tax residency when a person remains in Portuguese territory for more than 183 days or has a habitual residence in Portugal. The burden of proof rests on the taxpayer to rebut these presumptions with credible documentary evidence, particularly tax residence certificates from the claimed country of residence. The arbitral tribunal's analysis would focus on whether the applicant effectively rebutted the legal presumption of Portuguese tax residency, particularly given his self-declaration as Portugal-resident in June 2013 and the absence of conclusive US tax residence certification for 2013.

Full Decision

ARBITRAL DECISION

  1.  REPORT

1.1. The Applicant A... (Applicant), taxpayer no. ..., resident at Rua..., ..., ..., in Lisbon, submitted on 29/10/2015 a request for arbitral pronouncement with a view to the assessment and declaration of illegality of the Personal Income Tax (IRS) assessment no. 2014 ..., relating to the year 2013, in the amount of € 10,124.83 (ten thousand, one hundred and twenty-four euros and eighty-three cents).

1.2. The Honourable President of the Deontological Council of the Centre for Administrative Arbitration (CAAD) designated, on 18/11/2015, as sole arbitrator the signatory of this decision.

1.3. On 20/01/2016 the arbitral tribunal was constituted.

1.4. In compliance with the provisions of article 17, paragraph 1 of the Legal Regime for Tax Arbitration (RJAT), the Tax and Customs Authority (AT) was notified on 20/01/2016 to, if it so wished, submit a reply and request the production of additional evidence.

1.5. On 19/02/2016 the AT submitted a reply, in which it requested the Applicant to indicate the facts to be proven through witness evidence that were not susceptible to documentary proof.

1.6. On 04/03/2016 the Applicant indicated the facts to be proven through witness evidence not susceptible to documentary proof.

1.7. On 15/03/2016 the meeting referred to in article 18, paragraph 1 of the RJAT was held, during which the witnesses previously indicated by the Applicant were examined. The AT requested, under the principle of investigation and material truth, the attachment to the record of the Applicant's employment contract and, likewise, forms 6166 and 8802, with the arbitral tribunal determining that the Applicant attach the same by 25/03/2016. The arbitral tribunal also invited both parties to, if they so wished, submit optional written submissions by 04/04/2016 and 11/04/2016, respectively, and scheduled the date for pronouncement of the final decision.

1.8. On 31/03/2016 the Applicant submitted written submissions.

1.9. On 11/04/2016 the AT submitted written submissions.

  1.  PROCEDURAL ISSUES

The arbitral tribunal was duly constituted and is materially competent.

The parties have legal personality and capacity and are legitimate, with no defects in representation.

There are no nullities, exceptions or preliminary questions that prevent the examination of the merits and that should be addressed ex officio.

The request for constitution of the arbitral tribunal was submitted within the time limit provided for in article 10, paragraph 1, letter (a) RJAT, calculated from the implied rejection of the request for ex officio revision submitted by the Applicant with reference to the IRS assessment identified above, and therefore is timely.

Consequently, the conditions are met for the final decision to be rendered.

  1.  POSITIONS OF THE PARTIES

There are two positions in confrontation: that of the Applicant, set out in the request for arbitral pronouncement (and in subsequent written submissions) and that of the AT in its reply (and in subsequent written submissions).

To support his request, the Applicant argues that he did not meet any legal criterion capable of determining his tax residence in Portuguese territory, namely, because none of the requirements or conditions provided for in article 16, paragraphs 1, 2 or 5 of the IRS Code, or any others from a conventional source that might determine it, were met.

According to the Applicant, in the year 2013, he did not remain in Portuguese territory for more than 183 days, having remained habitually and paid his taxes in the United States of America (USA) from 2008 to 2013, inclusive.

The Applicant further argues that only from 2014 onwards were the conditions provided for in article 16, paragraphs 1, 2 or 5 of the IRS Code, and in article 4, paragraph 2 of the Convention concluded between Portugal and the USA to avoid double taxation, met.

The Applicant proceeds to state that, being a national of the USA and of the Portuguese Republic, between 2009 and 2013, inclusive, he remained habitually in the USA and not in Portugal.

For that reason, between 2009 and 2013, inclusive, the Applicant considers himself to be regarded, in light of internal and international law, as a tax resident in the USA.

The Applicant thus concludes that the IRS assessment in question is contrary to internal law and international law, and therefore should be annulled on the grounds of its illegality.

As for the AT, it contends that it is not credible that the Applicant himself should allege that in that year he was not a resident in Portugal, but rather in the USA.

According to the AT, the Applicant's employer reported information relating to the monthly declaration of remuneration in which it included the Applicant as a tax resident in Portugal from June 2013.

On the other hand, the Applicant did not present, in the procedural or judicial phase, the tax residence certificate from the USA.

The AT further argues that none of the documents attached to the arbitral record allows proof that in 2013 the Applicant was a worker and resided in Portugal only from November.

For the AT, there is no other way to prove tax residence and taxation of income obtained in a given State other than through a tax residence certificate issued by the competent authority in that same State.

The AT further argues that none of the witnesses examined deserved credibility and impartiality, as they gave testimony with the clear intention of supporting the Applicant's version.

Therefore, the AT concludes, in the absence of a tax residence certificate from the USA in the year 2013, combined with the employment contract which stipulates that the Applicant commenced functions in Portugal in June 2013 and, likewise, with the information provided by the employer which demonstrates the obtaining of dependent work income in Portugal from that date, it is possible to conclude that the Applicant is regarded, for tax purposes, as a resident in Portugal from June 2013 and that the assessment effected by the AT is legal.

  1.  FACTS

4.1. FACTS DEEMED PROVEN

In light of the documents introduced into the record, the following is deemed proven:

4.1.1. The Applicant is a citizen of the USA and of the Portuguese Republic;

4.1.2. The Applicant (then a minor) and his parents, B... and C... established their residence in Portugal in 1989;

4.1.3. In 1997, the Applicant went to live with his father in the United Kingdom, where he attended secondary school at ..., in Oxfordshire;

4.1.4. In 2002, after completing secondary school in England, the Applicant went to live in Florida, in the USA, where he completed his degree at the University of..., in May 2006;

4.1.5. In June 2008, the Applicant established his residence in..., having been hired in August 2008 by company D... Inc. as an information technology consultant in the area of information technologies, data processing, information hosting and related activities;

4.1.6. In June 2013, the Applicant was offered the opportunity to join the team of D... Portugal, Sociedade Unipessoal, Limitada (D...Portugal);

4.1.7. In November 2013, the Applicant relocated his residence to Portugal, having established his residence at Rua do..., in Lisbon;

4.1.8. Notwithstanding, the Applicant declared himself resident for tax purposes in Portugal, and in that capacity submitted his income declaration in June 2013;

4.1.9. In 2013, the Applicant paid his taxes in two different jurisdictions on the same income;

4.1.10. The Applicant did not present the tax residence certificate from the USA.

4.2. FACTS NOT DEEMED PROVEN

There are no facts relevant to the decision that have not been deemed proven.

  1.  THE LAW

The question to be decided is whether the Applicant should, or should not, be regarded as a tax resident in Portugal in the year 2013.

That is, it is necessary to determine whether the Applicant met, or did not meet, any legal criterion capable of determining his tax residence in Portugal, as follows.

In light of the provisions of article 4, paragraph 1 of the Convention concluded between Portugal and the USA to avoid double taxation, the expression "resident of a Contracting State" means any person who, by virtue of the legislation of that State, is subject to tax therein due to his domicile, his residence, the place of management, the place of incorporation or any other criterion of a similar nature.

For its part, by virtue of the provisions of article 16, paragraph 1 of the IRS Code, to which the Convention refers, persons resident in Portuguese territory are those who, in the year to which the income relates:

a) Have remained therein for more than 183 days, consecutive or interpolated, in any period of 12 months commencing or ending in the year in question; or

b) Having remained for less time, they have available, on any day of the period referred to in the preceding subparagraph, a dwelling under conditions that suggest current intention to maintain and occupy it as habitual residence;

As appears from the documents introduced into the record, in the year 2013, the Applicant paid his taxes in two different jurisdictions on the same income.

In fact, the entirety of the income earned by the Applicant in 2013, in the amount of USD 94,219.97, was declared in the USA (see 2013 W-2 and Earnings Summary form).

However, the amount of € 39,639.58 was also incorrectly declared in Portugal.

Without prejudice to the above, in light of the testimony of the witnesses examined at the hearing held on 15/03/2016 and further evidence introduced into the record, it is possible to conclude that the Applicant, in the year 2013, did not remain in Portuguese territory for more than 183 days.

In fact, the Applicant did not meet any legal criterion capable of determining his tax residence in Portugal, in so far as none of the requirements or conditions provided for in article 16, paragraphs 1, 2 or 5 of the IRS Code were met.

Although the Applicant was, in 2013, formally registered as a tax resident in Portugal, in that year he did not remain in Portuguese territory for more than 183 days.

In fact, it was only by error that the Applicant declared himself as a tax resident in Portugal in 2013 and in that capacity submitted his income declaration which gave rise to the assessment in question.

The Applicant clarified that in 2013 he was advised to declare his income in Portugal so as not to be subject to the risk of paying interest, fines and other penalties. Only later did he become aware that in that year he was not, in fact, subject to IRS in Portugal.

Notwithstanding, the AT attributes to him the status of tax resident in Portugal based on the fact that he maintained a registered tax domicile here and here also declared his 2013 income in that capacity.

The arbitral tribunal considers that this fact cannot be understood as an insuperable obstacle to reality, on penalty of assuming the nature of an irrebuttable presumption of tax residence.

Even if it were so, the presumptions enshrined in tax assessment norms always admit evidence to the contrary, as follows.

In light of the provisions of article 349 of the Civil Code, "presumptions are the inferences that the law or the court draws from a known fact to establish an unknown fact".

Presumptions constitute, therefore, means of proof, having as their function the demonstration of the reality of facts. [1]

In this measure, whoever has a legal presumption in his favour is excused from proving the fact to which it leads. [2]

Notwithstanding the above, "legal presumptions may, however, be rebutted by evidence to the contrary, except in cases where the law prohibits it". [3]

As stated in the Judgment for uniformization of jurisprudence of the Supreme Court of Justice (STJ), relating to Process no. 002663, "the presumption represents the logical judgment by which, arguing according to the causal link that connects natural and human events with each other, we can infer the existence or manner of being of a certain fact that is unknown to us as a consequence of another fact or facts that are known to us.".

The said Judgment further states that "legal presumptions are juris et de jure, when they do not admit evidence to the contrary; juris tantum, when they can be set aside by evidence opposed to them. In the first case, evidence to the contrary is prevented; in the second, the burden of proof is reversed.".

Now, "presumptions function as a way to overcome the difficulties of proof, as they refer, for example, to facts that are not objectified by their very nature, there being an appearance that deserves protection - opposability to third parties of an action of registered simulation, whether also when it is more difficult to produce for whoever would normally have to bear the burden of proof (relevatio ab onere probandi)." [emphasis in original].

The STJ concludes that "(…) legal presumptions juris tantum constitute the rule, while legal presumptions juris et de jure are the exception. In case of doubt, the legal presumption is juris tantum, as one should not consider, save for a reference in the law, that it was intended to prevent the production of evidence to the contrary, imposing a formal truth to the detriment of proven reality." [emphasis in original].

That is, where tax assessment presumptions are concerned, these are always rebuttable.

In practice, if the Applicant resided during practically the entire year of 2013 in the USA where he was taxed on the entirety of his income, the AT cannot claim that the Portuguese State tax, once more, the same income.

As has been demonstrated, the Applicant was subject to income tax in the USA by having resided, studied and worked there from 2002 to 2013, inclusive.

His income is not, therefore, susceptible to being taxed in Portugal, in so far as Portugal does not have internal or international competence to do so.

In conclusion, for the purposes of application of the Convention concluded between Portugal and the USA to avoid double taxation, the Applicant should be regarded as a resident only in the USA.

Neither does the argument advanced by the AT hold, according to which the Applicant's residence could be determined by the monthly declaration of remuneration.

The AT argues that "It is not by chance that the Applicant's employer began to submit the monthly declaration of remuneration (Form 10) in June 2013, see Doc. 1, attached with the AT's reply.".

"Note that that declaration of income is only applicable to income and withholdings of taxpayers resident in Portugal, as was the case with the present Applicant.".

In fact, not only does the monthly declaration of remuneration not constitute a criterion for determining residence for the purposes of article 16 of the IRS Code, but the submission thereof is not incompatible with the fact that the Applicant only returned to Portugal at the end of 2013.

Now, even though the processing of the Applicant's salary took place from June 2013 onwards [4], it does not necessarily follow therefrom that the Applicant established himself in Portugal from that time.

As appears from the information obtained and the documents introduced into the record, although the Applicant entered into a new employment contract with D... Portugal in June 2013, this does not mean that he immediately began to reside in Portugal.

It was demonstrated that the Applicant had no obligation to present himself for work at the offices of D... Portugal in Lisbon, nor was he required to observe working hours, nor was he subject to the instructions of the Lisbon offices or their respective employees.

Given the multi-locational nature of the functions exercised by the Applicant, the work carried out by him did not require his presence in Portuguese territory.

As described at the hearing by the various witnesses examined and confirmed by the Applicant, after the signing of the contract with D... Portugal in June 2013, the Applicant remained in..., having only arranged his actual move to Portugal after the end of summer.

That is, in 2013, the Applicant remained less than 183 days in Portugal, having resided and declared all of his income in the USA.

The AT further argues that "(…) if the Applicant wished to prove that he had been a resident and his income had been taxed in the United States, he should have attached to the record forms 6166 (which would certify tax residence in the United States) and 8802 which served as proof of having requested the first.".

In this regard, the arbitral tribunal considers that not only does the IRS Code not require that proof of non-resident status be made through a particular type of document (e.g. tax residence certificate), but also, in practice, a tax residence certificate in the USA only attests to residence in the USA, without this necessarily implying non-residence in Portugal.

Regardless of whether the said tax residence certificate from the USA is presented or not, what excludes the Applicant's residence in Portugal is the non-fulfilment of the requirements and conditions provided for in article 16 of the IRS Code, which are naturally susceptible to being proven by any means of proof available to the taxpayer.

As mentioned previously, it is true that the AT enjoys a legal presumption in its favour, but the taxpayer has succeeded in proving to the contrary the presumed fact, namely that in 2013 he remained in Portugal for less than 183 days.

  1.  DECISION

With the grounds set out above, the arbitral tribunal decides to uphold the request for arbitral pronouncement, with all legal consequences.

  1.  VALUE OF THE RECORD

The value of the record is fixed at € 10,124.83 (ten thousand, one hundred and twenty-four euros and eighty-three cents), in accordance with article 97-A of the Code of Tax Procedure and Process (CPPT), applicable by virtue of article 29, paragraph 1, letters (a) and (b) of the RJAT and article 3, paragraph 2 of the Regulation on Costs in Tax Arbitration Proceedings (RCPAT).

  1.  COSTS

Costs to be borne by the AT, in the amount of € 918.00 (nine hundred and eighteen euros), in accordance with Table I of the Regulation on Costs of Tax Arbitration Proceedings, in accordance with article 22, paragraph 2 of the RJAT.

Notify.

Lisbon, 28 April 2016

The Arbitrator,

(Hélder Filipe Faustino)

Text prepared by computer, in accordance with the provisions of article 131, paragraph 5 of the CPC, applicable by reference of article 29, paragraph 1, letter (e) of the RJAT. The drafting of this decision is governed by the spelling prior to the Orthographic Agreement of 1990.

[1] See article 341 of the Civil Code.

[2] See article 350, paragraph 1 of the Civil Code.

[3] See article 350, paragraph 2 of the Civil Code

[4] According to the Applicant's employment contract, "Effective May 1st, 2013 your salary will be $85,000 USD and commencing June 1, 2013, your annual base salary will be 65,000 EUR as described in Employment Agreement date June 1st, 2013.".

Frequently Asked Questions

Automatically Created

What are the legal presumptions for tax residency under Portuguese IRS law?
Under Portuguese IRS law (Article 16 of the IRS Code), tax residency is established through legal presumptions: (1) remaining in Portuguese territory for more than 183 days, whether consecutive or interpolated, in any 12-month period beginning or ending in the year concerned; (2) having a habitual residence in Portugal on any day of the year; or (3) being part of the crew of ships or aircraft whose effective management is in Portuguese territory. Additionally, Article 16(5) establishes that Portuguese nationals who move abroad but do not prove tax residency in another country are presumed to remain Portuguese tax residents. These presumptions can be rebutted with appropriate evidence, particularly tax residence certificates from the claimed country of residence.
How does CAAD arbitration resolve disputes over fiscal domicile for IRS purposes?
CAAD (Centro de Arbitragem Administrativa) resolves IRS fiscal domicile disputes through an arbitral process initiated by the taxpayer's request for arbitration. The procedure involves: (1) submission of the arbitration request within the legal deadline, (2) appointment of an arbitrator by the CAAD President, (3) constitution of the arbitral tribunal, (4) notification to the Tax Authority to submit a reply, (5) evidentiary phase including documentary evidence and witness testimony if necessary, (6) optional written submissions by both parties, and (7) issuance of a final arbitral decision. The tribunal examines whether the taxpayer met the legal criteria for Portuguese tax residency under Article 16 of the IRS Code and applicable double taxation conventions, evaluating all evidence including employment contracts, presence in territory, tax declarations, and tax residence certificates from foreign jurisdictions.
Can a taxpayer challenge an IRS tax assessment based on incorrect residency classification?
Yes, a taxpayer can challenge an IRS assessment based on incorrect residency classification by filing a request for arbitration at CAAD or pursuing administrative and judicial review channels. To successfully challenge the assessment, the taxpayer must demonstrate that the legal presumptions of Portuguese tax residency under Article 16 of the IRS Code were not met. This requires presenting credible evidence such as: proof of physical presence outside Portugal (exceeding 183 days abroad), tax residence certificates from the claimed country of residence (e.g., US forms 6166 or 8802), evidence of habitual residence abroad, proof of tax payments in the other jurisdiction, and documentation contradicting the employer's classification. The challenge must be filed within legal deadlines - typically, the arbitration request must be submitted within 90 days after the rejection (express or implied) of the prior administrative review request.
What evidence is required to rebut the presumption of tax residency in Portugal?
To rebut the presumption of tax residency in Portugal, taxpayers must present robust documentary evidence establishing tax residency in another jurisdiction. Essential evidence includes: (1) official tax residence certificates issued by the competent tax authority of the claimed country of residence (such as US IRS forms 6166 or 8802), (2) proof of physical presence abroad for more than 183 days in the relevant tax year (immigration stamps, travel records, lease agreements), (3) evidence of habitual residence abroad (permanent housing, utility bills, registration with foreign authorities), (4) proof of tax filings and payments in the foreign jurisdiction, (5) employment contracts and payroll records demonstrating work performed abroad, and (6) documentation of family and economic ties to the foreign country. The absence of a tax residence certificate from the claimed country significantly undermines the taxpayer's position, as Portuguese tax authorities and arbitral tribunals consider such certificates the most reliable proof of foreign tax residency status.
What is the procedure for requesting arbitral review of an IRS tax assessment at CAAD?
The procedure for requesting arbitral review of an IRS assessment at CAAD involves: (1) First, submitting a request for ex officio revision or hierarchical appeal to the Tax Authority regarding the contested assessment; (2) Waiting for the Tax Authority's decision or for the implied rejection period to elapse (typically after a certain number of months without response); (3) Submitting the arbitration request to CAAD within 90 days from notification of the Tax Authority's decision or from the implied rejection; (4) The request must identify the contested tax assessment, present the factual and legal grounds for illegality, and include supporting documentation; (5) Payment of the initial arbitration fee; (6) CAAD appoints an arbitrator who constitutes the arbitral tribunal; (7) The Tax Authority is notified and submits a reply; (8) An evidentiary phase occurs with document submission and potentially witness hearings; (9) Both parties may submit written arguments; (10) The arbitral tribunal issues a binding decision that can declare the assessment illegal and order its annulment or reduction.