Process: 67/2019-T

Date: August 27, 2019

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration case (67/2019-T) addresses the taxation of capital gains from real estate sales by a non-resident taxpayer under Portuguese IRS law. The claimant, a tax resident in Angola, sold three properties in Lisbon in 2016, generating capital gains subject to IRS. The dispute centers on the correct application of Article 43(2) of CIRS, which governs capital gains taxation for non-residents. The taxpayer initially filed an IRS return claiming exemptions and reinvestment relief but later acknowledged errors in declaring certain properties acquired after 1989 in Annex G1. The Tax Authority issued an ex officio assessment of €21,026.99, which the claimant challenges, arguing it should be reduced to €10,513.49 due to erroneous quantification. The case involves critical issues of non-resident taxation, including potential discrimination under EU law principles. The reference to 'reenvio prejudicial' (preliminary ruling) suggests possible EU law considerations regarding the discriminatory treatment of non-residents in capital gains taxation. This case exemplifies the complexity of cross-border property taxation and the applicability of EU fundamental freedoms to Portuguese tax assessments. The arbitration tribunal must determine whether the assessment correctly applies CIRS provisions to non-residents and whether any discriminatory treatment violates EU law, potentially requiring a preliminary reference to the Court of Justice of the European Union for interpretation of compatibility between Portuguese tax rules and EU principles of free movement of capital.

Full Decision

ARBITRAL TAX JURISPRUDENCE

Case No. 67/2019-T

Decision Date: 27 August 2019

Subject Matter: Personal Income Tax (IRS)

Claim Value: €10,513.49

Issue: IRS - Article 43, No. 2 of the Personal Income Tax Code; capital gains; onerous disposal of real property rights; non-residents; preliminary reference.

ARBITRAL DECISION

I - REPORT

  1. A..., taxpayer No. ..., resident at ... Lot ..., ...-... Lisbon, (hereinafter referred to as the Claimant or Taxpayer) filed on 4 February 2019 a request for arbitral pronouncement, in accordance with the provisions of paragraph (a) of No. 1 of Article 2, No. 2 paragraph (a) of Article 5, Article 6 No. 1 and Articles 10 Nos. 1 and 2, all of Legislative Decree No. 10/2011, of 20 January (hereinafter referred to as RJAT), requesting the Tax and Customs Authority (hereinafter referred to as the Respondent or TA), with a view to declaring the illegality and consequent annulment of the Personal Income Tax assessment and respective compensatory interest No. 2018 ... for the year 2016 in the amount of €21,026.99, as well as the subsequent compensation operation and settlement of accounts, bearing the No. 2018 ..., which resulted in a balance due of €17,512.70.

  2. The request for the constitution of a Single Arbitral Tribunal was accepted by His Excellency the President of CAAD and notified to the Respondent on 5 February 2019.

  3. In accordance with the provisions of paragraph (a) of No. 2 of Article 6 of the RJAT, by decision of His Excellency the President of the Deontological Council of CAAD, duly notified to the parties within the prescribed time limits, the undersigned was appointed as arbitrator, who communicated to that Council the acceptance of the appointment within the time limit provided for in Article 4 of the Deontological Code of the Administrative Arbitration Centre.

  4. On 23 March 2019, the parties were notified of such appointment and did not express the will to challenge the arbitrator's appointment, in accordance with the combined provisions of Article 11, No. 1 paragraphs (a) and (b), as amended by Law No. 66-B/2012, of 31 December.

  5. The Single Arbitral Tribunal was constituted on 16 April 2019 in accordance with the requirements of paragraph (c) of Article 11 of the RJAT, as amended by Article 228 of Law No. 66-B/2012, of 31 December.

  6. The Respondent, having been duly notified to this effect by order issued on 16 April 2019, submitted its response on 16 May 2019.

  7. By order issued on 17 May 2019 and duly notified to the parties, which justified, inter alia, the dispensing with the meeting referred to in Article 18 of the RJAT, the parties were invited to submit written submissions, and 1 September 2019 was indicated as the expected final deadline for the pronouncement and notification of the final decision.

  8. On 24 May 2019 the Claimant submitted written submissions, and the Tax and Customs Authority submitted its submissions on 31 May 2019.

  9. To support its request the Claimant invokes in summary and with relevance to what matters here, the following (mentioned mostly by transcription):

9.1. The Claimant was notified of the ex officio assessment No. 2018 ... of Personal Income Tax relating to income from the year 2016, dated 3 October 2018, which resulted in a payment obligation of €21,026.99, as well as a subsequent "compensation" operation and "settlement of accounts" with No. 2018 ..., dated 8 October 2018, which resulted in a balance due of €17,512.70, with a payment deadline of 15 November 2018 (see Article 1 of the request for arbitral pronouncement and documents Nos. 1 and 2 attached thereto).

9.2. In that year 2016 the Claimant disposed of the following real properties of which he was owner in the following percentages:

(i) 25% of the autonomous unit designated by the letter "M" which forms part of the urban property located on ... Street, number one, parish of ..., municipality of Lisbon, described in the Lisbon Land Registry Office under No. ... of that parish and registered in the urban property matrix of the parish of ... under article ...,

(ii) 25% of the autonomous unit designated by the letter "AE", corresponding to garage number eight, which forms part of the property identified in the preceding paragraph,

(iii) 100% of the urban property located on ... Street, number ..., ..., parish of ..., municipality of Lisbon, described in the Lisbon Land Registry Office under No. ... of that parish and registered in the urban property matrix of the parish of ... under article ...,

9.3. With respect to the properties described in paragraphs (i) and (ii) of point 2, the Claimant acquired 9.375% of its ownership on 6 July 1987, by succession from his father, and the remaining 15.625% were acquired on 19 November 2014, by succession from his mother (see Article 3 of the request for arbitral pronouncement and document No. 9 attached thereto).

9.4. The remaining 75% ownership of the properties described in paragraphs (i) and (ii) of point 2 were held by his siblings and were also disposed of on the same date and through the same instrument (see Article 4 of the request for arbitral pronouncement and document No. 3 attached thereto).

9.5. The real properties disposed of were the only income subject to Personal Income Tax obtained by the Claimant in the year 2016, and in that year 2016 the Claimant was a tax resident in Angola, having communicated this fact to the TA on 8 November 2012 (see Article 5 of the request for arbitral pronouncement and document No. 5 attached thereto).

9.6. On 17 May 2018 the Claimant filed the Personal Income Tax Return Form 3, relating to income obtained in 2016 (exclusively from capital gains on real property):

a) declared the entire sale of the properties described in point 2 (i) and (ii) in Annex G1 (capital gains not subject to taxation);

b) the intention to reinvest part of the proceeds from the disposal of the property described in point 2, (iii); and

c) tax residence in Portugal (see Article 6 of the request for arbitral pronouncement and document No. 6 attached thereto).

9.7. Based on that declaration, the Claimant was notified of the respective assessment calculation and proceeded to pay the tax and additions in the amount of €3,584.07 (see Article 7 of the request for arbitral pronouncement and documents Nos. 7 and 8 attached thereto).

9.8. (...) The Claimant lodged a complaint with the Lisbon Finance Service ... requesting rectification of that Personal Income Tax assessment (see Article 9 of the request for arbitral pronouncement).

9.9. The Claimant agrees with the content of the information in the draft rejection decision, as it acknowledges that:

(i) he could not have benefited from the exemption from Personal Income Tax of the proceeds from the disposal of the property described in point 2, paragraph (iii) above, due to reinvestment, since it was not a property intended for his own permanent residence;

(ii) he could not have declared in Annex G1 of the Personal Income Tax Return Form 3 the entire sale of the properties described in point 2, paragraphs (i) and (ii) above since part of the ownership of the same was acquired after 1 January 1989 (see Article 12 of the request for arbitral pronouncement).

9.10. The Claimant concludes his request for arbitral pronouncement petitioning that "(i) the request for partial annulment of the Personal Income Tax assessment relating to income from (2016) must proceed, on the ground of erroneous quantification and qualification of the tax facts; (ii) the contested assessment must be reduced from €21,026.99 to €10,513.49; (iii) the amount of €10,513.49 must be reimbursed to the Claimant, plus compensatory interest, in accordance with the provisions of Article 43, No. 1 of the General Tax Law; (iv) the TA must be condemned to pay all costs of this proceeding."

  1. As already referred to, on 16 May 2019 the Tax and Customs Authority submitted its response without challenging the factual matters set forth in the request for arbitral pronouncement by the Claimant, of which an account was given above and which was partially transcribed, and that with respect to the amicable complaint procedure the Claimant accepted its rejection.

10.1. Further stating that "the subject matter under analysis of this APP is exclusively one of law" densifying in its Articles 5 et seq. its perspective leading to the conclusion that it draws to the effect that the decision to be rendered should "judge this request for arbitral pronouncement inadmissible for lack of proof (...) with the due and legal consequences."

10.2. It addresses and makes considerations about the following segments, of which an account will be given below, which are subject to substantive appraisal and decision:

  • The amendment to Article 72 of the Personal Income Tax Code, by Law No. 67-A/2007, of 31/12;

  • The request for preliminary reference to the CJEU

  1. The Single Arbitral Tribunal is materially competent and is regularly constituted, in accordance with the provisions of Articles 2, No. 1, paragraph (a), 5 and 6 of the RJAT.

  2. The parties have legal capacity and standing, are duly and legally represented (Article 3, 6 and 15 of the Tax Procedure and Process Code, by virtue of Article 29, No. 1 paragraph (a) of the RJAT).

  3. No exceptions requiring knowledge have been raised.

  4. The proceeding does not suffer from nullities.

  5. There is thus no obstacle to the substantive examination of the case.

II - REASONING

A. FACTUAL MATTERS

A.1. Facts Proven

With relevance to the appraisal and decision of the question raised, the following facts are proven and established:

  1. The Claimant was notified of the ex officio Personal Income Tax assessment No. 2018 ... relating to income from the year 2016, dated 3 October 2018, which resulted in a payment obligation of €21,026.99, as well as a subsequent "compensation" operation and "settlement of accounts" with No. 2018 ..., dated 8 October 2018, which resulted in a balance due of €17,512.70, with a payment deadline of 15 November 2018.

  2. In the year 2016 the Claimant disposed of the following real properties of which he was owner in the following percentages:

(i) 25% of the autonomous unit designated by the letter "M" which forms part of the urban property located on ... Street, number one, parish of ..., municipality of Lisbon, described in the Lisbon Land Registry Office under No. ... of that parish and registered in the urban property matrix of the parish of ... under article ...;

(ii) 25% of the autonomous unit designated by the letter "AE", corresponding to garage number eight, which forms part of the property identified in the preceding paragraph;

(iii) 100% of the urban property located on ... Street, number ..., ..., parish of ..., municipality of Lisbon, described in the Lisbon Land Registry Office under No. ... of that parish and registered in the urban property matrix of the parish of ... under article ...;

  1. With respect to the properties described in paragraphs (i) and (ii) of point 2, the Claimant acquired 9.375% of its ownership on 6 July 1987, by succession from his father, and the remaining 15.625% were acquired on 19 November 2014, by succession from his mother.

  2. The remaining 75% ownership of the properties described in paragraphs (i) and (ii) of point 2 were held by his siblings and were also disposed of on the same date and through the same instrument.

  3. The real properties disposed of were the only income subject to Personal Income Tax obtained by the Claimant in the year 2016, and in that year 2016 the Claimant was a tax resident in Angola, having communicated this fact to the TA on 8 November 2012.

  4. On 17 May 2018 the Claimant filed the Personal Income Tax Return Form 3, relating to income obtained in 2016 (exclusively from capital gains on real property):

a) declared the entire sale of the properties described in point 2 (i) and (ii) in Annex G1 (capital gains not subject to taxation);

b) the intention to reinvest part of the proceeds from the disposal of the property described in point 2, (iii); and

c) tax residence in Portugal.

  1. Based on that declaration, the Claimant was notified of the respective assessment calculation and proceeded to pay the tax and additions in the amount of €3,584.07.

  2. The capital gains obtained from the aforesaid disposals occurring in 2016 amounted to €71,567.82, on which the TA applied an autonomous tax rate of 28%.

  3. On 4 February 2019 the Claimant filed with CAAD a request for arbitral pronouncement which gave rise to the present proceeding.

A.2. Facts Not Proven

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

A.3. Reasoning of the Factual Matters Proven and Not Proven

With respect to the factual matters, the tribunal does not need to pronounce itself on everything that was alleged by the parties; rather, it is incumbent upon it to select the facts that matter for the decision and distinguish between proven and not proven matters (see Article 123 No. 2 of the Tax Procedure and Process Code and Article 670 No. 3 of the Code of Civil Procedure, applicable by virtue of Article 29 No. 1 paragraphs (a) and (e) of the RJAT).

Thus the facts relevant to the judgment of the case are chosen and selected according to their legal relevance, which is established in view of the various plausible solutions to the question(s) of law (see Article 596 of the Civil Procedure Code, applicable by virtue of Article 29 No. 1 paragraph (e) of the RJAT).

Thus, having regard to the positions taken by the parties in light of Article 110 No. 7 of the Tax Procedure and Process Code, the documentary evidence and the attached procedural file, the above listed facts shall be considered proven, with relevance to the decision.

B. LAW

Of the subject matter

As stated above, the parties do not disagree on the amount of capital gains established (€71,567.82); rather, the disagreement between the Claimant and the TA lies in the amount subject to taxation at the rate of 28%.

The TA advocates for the exclusion of the application of the 50% tax reduction provided for in No. 2 of Article 43 of the Personal Income Tax Code, on the ground that the Claimant is not a resident of Portugal nor of any European Union Member State but (at the time) resident of a third country, namely Angola.

For its part, the Claimant argues that the provision of the indicated regulation (No. 2 of Article 43 of the Personal Income Tax Code) applies equally to residents of Portugal, of a Member State of the European Union or a third country.

Consequently, the question to be decided, which must be examined and decided, is whether the norm established by national legislation in Article 43 of the Personal Income Tax Code establishes a differentiation between residents and non-residents including third countries, and more specifically whether the tax base in the area of personal income tax is compatible with the principle of free movement of capital provided for in Article 63 of the TFEU (Treaty on the Functioning of the European Union), corresponding to Article 56 of the TEC (Treaty establishing the European Community), insofar as it may result in a less favorable tax treatment for non-residents.

Of the preliminary reference

In its response, and as already signalled, the TA suggested that the question raised in the present proceeding be subject to a preliminary reference for an answer to be rendered by the CJEU. However, it did not formulate any specific questions to submit to the CJEU.

As we have had the opportunity to express, the preliminary reference is a fundamental mechanism of European Union law, which has the purpose of providing the judicial bodies of the Member States with the means to ensure uniform interpretation and application of this law throughout the Union.

By virtue of Article 19, paragraph 3(b) of the Treaty on European Union and Article 267 of the Treaty on the Functioning of the European Union, the Court of Justice of the European Union is competent to decide, as a matter of preliminary reference, on the interpretation of Union law and on the validity of acts adopted by the institutions, bodies or agencies of the Union.

Arbitral tribunals are part of the set of national courts as expressly stated in Article 209 of the Constitution of the Portuguese Republic (CRP). As such, and in the active performance of their arbitral function, given the exceptional nature of recourse against decisions of arbitral tribunals in tax matters, the national legislature made clear in the preamble to Legislative Decree No. 10/2011 that "(...) in cases where the arbitral tribunal is the last instance for deciding tax disputes, the decision is susceptible to preliminary reference in compliance with § 3 of Article 267 of the Treaty on the Functioning of the European Union."

There is no doubt, therefore, that in case of doubt regarding the interpretation of legal norms of European law the arbitral tribunal may resort to the mechanism of preliminary reference.

National courts are considered as ordinary courts of the legal order of the European Union, given the considerable number of norms and community acts composed of directly applicable provisions or provisions with direct effect, incumbent upon the national courts of the Member States to apply them in disputes submitted to them for examination. It is thus incumbent upon national courts to apply community law, even against provisions of national law to the contrary.

Thus, in order to resort to the process of referring one or more questions for preliminary reference, for interpretation of one or more legal norms of community law, whether original or derived, it is necessary that doubts exist regarding the interpretation of the text in question. On the contrary, if the text is perfectly clear, it is not a matter of interpreting it, but of applying it, which is the responsibility of the Court/Judge/Arbitrator charged with the competence to judge the specific case by applying the law, national and/or community if that is the case. This understanding is widely known and supported by doctrine and case law as the "theory of the clear act."

In this conformity, not anticipating doubts of interpretation that would justify the request for preliminary reference, nor the TA indicating the specific questions it would wish to submit to the CJEU, the decision is to reject the request for preliminary reference.

Of the substantive question

The normative framework

In accordance with the provisions of paragraph (a) of Article 10 of the Personal Income Tax Code "capital gains consist of gains obtained which, not being considered business and professional income, capital income or real property income, result from (...) onerous disposal of real property rights over real property."

Determining, in turn, paragraph (a) of No. 4 of Article 10 that the gain subject to taxation corresponds to the positive difference between the realization value and the acquisition value.

The acquisition value being corrected by the application of the monetary depreciation coefficient, plus the charges and expenses necessary and actually incurred, inherent to the acquisition and disposal of the property, as determined by Articles 50 and 51 of the Personal Income Tax Code.

Article 43 of the Personal Income Tax Code provides the following:

Article 43 - Capital Gains

"1. The value of income qualified as capital gains corresponds to the balance established between the capital gains and losses realized in the same year, determined in accordance with the following articles:

2 - The balance referred to in the preceding number, concerning transmissions effected by residents provided for in paragraphs (a), (c) and (d) of No. 1 of Article 10, positive or negative, is

(...)

b) Considered only at 50% of its value (...)"

Article 72, No. 1, paragraph (a) of the Personal Income Tax Code further provides that capital gains from transfers of real property situated in Portugal and obtained by non-residents are taxed at the rate of 28%.

Article 63 of the TFEU (corresponding to Article 56 of the Treaty establishing the European Community) provides the following:

"1. Within the scope of the provisions of this chapter, all restrictions on the movement of capital between Member States and between Member States and third countries are prohibited.

  1. Within the scope of the provisions of this chapter all restrictions on payments between Member States and between Member States and third countries are prohibited."

The Claimant argues that under the provisions of Article 63 of the Treaty on the Functioning of the European Union all restrictions on the movement of capital between Member States and between Member States and third countries are prohibited, and that all restrictions on payments between Member States and between Member States and third countries are prohibited, and that in that measure the non-application of the said Article 43, No. 2 of the Personal Income Tax Code to non-residents constitutes a violation of Article 63 of the Treaty on the Functioning of the European Union (corresponding to Article 56 of the Treaty establishing the European Community), by reason of its discriminatory effect.

The Claimant further asserts that this divergence in taxation according to whether Personal Income Tax subjects are resident or non-resident in Portugal has already been examined by the Court of Justice of the European Union ("CJEU"), in the Judgment of 11 October 2007, rendered in case C-443/06 ("Hollmann Judgment"), following which the Supreme Administrative Court concluded that "No. 2 of Article 43 of the Personal Income Tax Code, (...) which limits the tax effect to 50% of capital gains realized only for residents of Portugal, violates the provision of Article 56 of the Treaty establishing the European Community." (see Judgment of the Supreme Administrative Court of 16 January 2008, case 439/06).

The Claimant further cites various arbitral decisions rendered under the CAAD that corroborate his thesis, although the case law cited refers to residents of other Member States of the European Union and not to residents of third countries, as is the case under examination.

The Claimant also notes the recent decision rendered by the CJEU in case C-184/17 of 6 September 2018, which dealt with the taxation of real property capital gains obtained in Portugal by residents of Angola, to conclude that "in assessing the tax at the rate provided for non-residents, on the total amount of the capital gain realized (and not on 50% of that value), the Tax Authority violated the provisions of the Treaty on the Functioning of the European Union, ignoring the community case law regarding the incompatibility of Article 43, No. 2 of the Personal Income Tax Code, as applied thus, with Article 63 of the Treaty on the Functioning of the European Union (...)"

The Respondent, for its part, invoking the aforementioned Judgment C-443/06 of the Court of Justice of the European Communities and the Supreme Administrative Court judgment that followed it (rendered on 16 January 2008 in case No. 0439/06), argues that in order to adapt national legislation to the CJEU decision, Article 9 (current No. 9) was added to Article 72 of the Personal Income Tax Code by Law No. 67-A/2007, of 31 December, the content of which at the time of the facts was as follows:

"9 - Residents of another Member State of the European Union or of the European Economic Area, provided that in the latter case there exists an exchange of information on tax matters, may opt, with respect to income referred to in paragraphs (a), (b) and (e) of No. 1 and in No. 2, for the taxation of such income at the rate that, in accordance with the table provided for in No. 1 of Article 68, would be applicable in the case of being obtained by residents in Portuguese territory."

Then No. 8 of Article 72 (now No. 10) provided that "for the purpose 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 as are applicable to residents."

The TA states that the amendment introduced to Article 72 of the Personal Income Tax Code by Law No. 67-A/2007, of 31 December (State Budget Law 2008) made it possible to allow the option of taxation of income from capital gains at the rate that, in accordance with the table provided for in No. 1 of Article 68 of the Personal Income Tax Code, would be applicable in the case of being obtained by residents in Portuguese territory, and that the determination of the rate would take into account all income including that obtained outside this territory, under the same conditions as are applicable to residents, which the Claimant did not do.

Notwithstanding the amendments mentioned and the conclusions that the TA seeks to draw from them, we may already advance that this single arbitral tribunal does not endorse them in accordance with the position of the case law that unequivocally goes in the direction that the amendments introduced by Law No. 67-A/2007 (State Budget Law 2008) did not eliminate the discriminatory effect, the violation of community norms subsisting.

In this sense, we subscribe to what is stated in the course of the recent case No. 63/2019-T reported under the aegis of CAAD, in which, with due respect, we recognize ourselves and subscribe without any reservations:

"(...) 38. In case No. C-443/06 of 11 October of the Court of Justice of the European Union, known as the Hollmann Judgment, although earlier than Law No. 67-A/2007, addressed this issue, where it was decided that 'Article 56 EC [current Article 63 of the 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 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 higher tax burden than that which would be borne, in relation to this same type of transaction, by capital gains realized by a resident of the Member State in which that immovable property is situated.'

  1. In the same sense, the national case law has decided, before and after amendments of Law No. 67-A/2007, of 31/12, respectively in the judgments of the Supreme Administrative Court of 16 January 2008 in case number 439/06, of 22 March 2011 in case number 1031/10, of 30 April 2013 in case number 1374/12, and more recently in case number 1171/14 of 3 February 2016, all of which can be consulted at www.dgsi.pt.

  2. Following the case law of the CJEU and the Supreme Administrative Court, there is abundant arbitral case law rendered by CAAD, in particular the decisions rendered in cases numbered 45/2013-T; 127/2012-T; 748/2015-T; 89/2017-T; 370/2018-T; 617/2017-T; 520/2017-T; 399/2017-T; 89/2017-T; 478/2015-T; 96/2015-T, No. 617/2017-T, No. 583/2018, No. 600/2018 all of which can be consulted at www.caad.pt.

Continuing the decision that we are following and transcribing:

(...)

'42. The differentiated regime of taxation of real property capital gains realized by non-residents in Portuguese territory establishes discrimination against the principle of free movement of capital, a fundamental principle of the European Union, notwithstanding the amendments introduced to the Personal Income Tax Code by Law No. 67-A/2007, of 31 December, reflected in the addition of the current Nos. 9 and 10 of Article 72 of the Personal Income Tax Code.

  1. The CJEU considered in the Hollmann Judgment that, 'although direct taxation is the competence of the Member States, they must exercise that competence in compliance with community law,' and that the discriminatory treatment of non-residents was based on the fact that 'whereas a non-resident is subject to a rate of 25% [28% in 2017] on the taxable matter corresponding to the entirety of the capital gains realized, the consideration of only half of the taxable matter corresponding to capital gains realized by a resident enables the latter to benefit systematically, on that account, of a lower tax burden, whatever the rate of taxation applicable to the entirety of his income, since, according to the observations made by the Portuguese Government, the taxation of income of residents is subject to a table of progressive rates whose highest level is 42% (48% in 2017 plus the solidarity additional tax of 2.5% or 5%) discriminatory and another supposedly non-discriminatory regime,' and that 'such a choice is not capable of excluding the discriminatory effects of the first of those two tax regimes.'

  2. The Supreme Administrative Court has also pronounced itself in identical manner, by referring, in particular, to the fact that 'I - The provisions of the Treaty CE, which refer to the European Union prevail over the norms of national ordinary law, under the terms defined by the bodies of Union law, provided that they respect the fundamental principles of a democratic rule of law. II. It is incompatible with community law, as it restricts the movement of capital which Article 56 of the Treaty CE establishes, the provision of No. 2 of Article 43 of the Personal Income Tax Code, by reason of non-application to residents outside the national territory of the restriction of taxation to 50% of capital gains realized which it provides for residents in the national territory' - see the Judgment rendered in case No. 01172/14, on 3 February 2016.'

The TA argues, and as already referred, that the amendment made to Article 72 of the Personal Income Tax Code by Law No. 67-A/2007, of 31 December, namely through the addition of Nos. 7 and 8 (current Nos. 9 and 10) is of such a nature as to eliminate the discriminatory finding by the CJEU on the restrictive provision of No. 2 of Article 43 of the Code on Personal Income for non-resident taxpayers.

With due respect for a contrary opinion, also with respect to this segment we dissent from the interpretation carried out by the TA.

If it is true that following the aforementioned Hollmann judgment the national legislature sought to create, through the said amendment/addition to Article 72 of the Personal Income Tax Code, the possibility for residents of another Member State of the European Union to opt, with respect to income referred to in Nos. 1 and 2 of the indicated provision, for the tax rate provided for in No. 1 of Article 68 of the Personal Income Tax Code, it remains true that such option materializes in a supplementary burden relative to resident taxpayers.

Such an option and as has already been demonstrated in various arbitral decisions does not eliminate the discriminatory effect of the differentiation of the regimes provided for in domestic legislation between residents and non-residents.

By way of merely illustrative example, an account is given here of the jurisprudential orientation that emerges from the arbitral decisions rendered under CAAD, namely in cases numbered 45/2012-T, 127/2012-T, 748/2015-T and 89/2017-T:

"(...) the option given to a taxpayer in the European Union or European area between a regime that continues to be discriminatory, by violation of the provision of Article 63 of the TFEU and another allegedly non-discriminatory, equating them with residents in Portuguese territory, beyond having the obligation to opt for and declare income obtained outside that territory, does not exclude or neutralize the discriminatory effects of the first of those two regimes."

Finally,

If indeed, as the Claimant refers the aforementioned doctrine, it refers to situations in which capital gains obtained by citizen taxpayers resident in other Member States of the European Union were involved, there are no legal reasons apparent why it should not apply to residents in third countries, given especially the provisions of Article 63 of the TFEU:

"1. Within the scope of the provisions of this chapter, all restrictions on the movement of capital between Member States and between Member States and third countries are prohibited.

  1. Within the scope of the provisions of this chapter all restrictions on payments between Member States and between Member States and third countries are prohibited."

The CJEU itself pronounced in 6 September 2018 (case C-184/18) dealing with taxpayers then resident in a third country, specifically Angola, in the sense that follows:

"(...) 24. It must be noted that, as is apparent from its wording, Article 63 of the TFEU establishes the free movement of capital not only between Member States but also between Member States and third countries (see, in this sense, Judgment of 18 January 2018, Jahin, C-45/17, EU:C:2018:18, No. 19).

25 To that end, Article 63 of the TFEU prohibits in general all restrictions on the movement of capital between the Member States and between the Member States and third countries.

26 In these circumstances, it must be stated that legislation of a Member State, such as that at issue in the main proceedings, which subjects capital gains resulting from the alienation of immovable property situated in that Member State, effected by a resident of a third country, to a higher tax burden than that which would be borne in such type of operations on capital gains realized by a resident of that Member State constitutes a restriction on the movement of capital prohibited by Article 63, No. 1 of the TFEU."

The CJEU Judgment concludes in the following sense:

"Legislation of a Member State, such as that at issue in the main proceedings, which subjects capital gains resulting from the alienation of immovable property situated in that Member State, effected by a resident of a third country, to a higher tax burden than that which would be borne in such type of operations on capital gains realized by a resident of that Member State constitutes a restriction on the free movement of capital which, subject to verification by the referring court, is not covered by the exception provided for in Article 64, No. 1, TFEU and cannot be justified by the reasons referred to in Article 65, No. 1, TFEU."

In view of the foregoing, without need for any further considerations, and reverting to the circumstances of the case, there is no legal basis that permits the Respondent to exclude from the taxation of capital gains the regime provided for under No. 2 of Article 43 of the Code on Personal Income Tax.

Accordingly, the request for arbitral pronouncement formulated by the Claimant is granted.

III - COMPENSATORY INTEREST

In accordance with the provisions of paragraph (b) of Article 24 of the RJAT, the arbitral decision on the merit of the claim from which no recourse or challenge is available binds the tax administration, from the end of the period for recourse or challenge, such administration being required, in the exact terms of the merits of the arbitral decision in favor of the taxpayer, and until the end of the period for voluntary execution of judgments of tax courts, to "restore the situation that would have existed if the tax act subject to the arbitral decision had not been performed, adopting the necessary acts and operations to that effect," which is in harmony with the provision of Article 100 of the General Tax Law, applicable by virtue of paragraph (a) of No. 1 of Article 29 of the RJAT, which provides:

Article 100

Effects of Decision Favorable to the Taxpayer

The tax administration is obliged in case of full or partial success of the complaint, challenge or appeal in favor of the taxpayer to the immediate and complete restoration of the act or situation that is subject to the dispute, including the payment of compensatory interest, if applicable, from the date of execution of the decision.

Although Article 2, No. 1, paragraphs (a) and (b) of the RJAT uses the expression "declaration of illegality" to define the competence of arbitral tribunals functioning under the aegis of the Administrative Arbitration Centre (CAAD), making no mention of condemnatory decisions, it should be understood that they comprise in their competences the powers that in judicial challenge proceedings are attributed to tax courts, this being the interpretation that harmonizes and combines with the sense of legislative authorization on which the Government relied to approve the RJAT, in which it is proclaimed, as the first principle, that "the tax arbitral proceeding must constitute an alternative procedural means to the judicial challenge proceeding and to the action for recognition of a right or legitimate interest in tax matters."

No. 5 of Article 24 of the RJAT, in stating that "the payment of interest is due independently of its nature, in accordance with the provisions set forth in the General Tax Law and in the Tax Procedure and Process Code," should be interpreted in the sense of permitting knowledge of the right to compensatory interest in the tax arbitral proceeding.

Compensatory interest has a reparatory function of damage, damage that results from the fact that the taxpayer has been unlawfully deprived of a certain amount for a certain period of time, aiming to place him in the situation in which he would have been had he not made the payment that was unduly exacted of him.

In view of what has been stated above, and given the sense of the decision on the merits of the case, already signalled, this single tribunal decides to condemn the Respondent in the payment of compensatory interest calculated from the date of the payments made until their complete reimbursement.

IV - DECISION

In view of the foregoing, the Single Arbitral Tribunal decides:

i- To partially annul the underlying assessment, in the part corresponding to the increase in taxation resulting from the consideration of the total real property capital gain;

ii- To condemn the Tax and Customs Authority to the reimbursement of the amount corresponding to the value of the tax unduly paid;

iii- To condemn the Tax and Customs Authority to the payment of compensatory interest, from the date on which the Claimant made the payment until the date of its reimbursement;

iv- To condemn the Tax and Customs Authority to the payment of the costs of the proceeding.

V - VALUE OF THE PROCEEDING

In accordance with the provisions established in Articles 296, No. 1 and 2 of the Code of Civil Procedure, approved by Law No. 46/2013, of 26 June, and Article 97-A, No. 1 of the Tax Procedure and Process Code and Article 3, No. 2 of the Regulation on Costs in Tax Arbitration Proceedings, the value of the proceeding is fixed at €10,513.49 (ten thousand five hundred and thirteen euros, forty-nine cents).

VI - COSTS

In accordance with the provisions of Articles 12, No. 2, and 22, No. 4 of the RJAT, and Articles 2 and 4 of the Regulation on Costs in Tax Arbitration Proceedings, Table I attached hereto, the amount of costs is fixed at €918.00 (nine hundred and eighteen euros).

LET IT BE NOTIFIED

Text prepared using a word processor, in accordance with the provisions of Article 131 of the Code of Civil Procedure, applicable by virtue of Article 29, No. 1, paragraph (e) of the Regime on Tax Arbitration, with blank spaces and revised by the arbitrator.

[The preparation of this decision follows the spelling rules prior to the 1990 Orthographic Agreement, except as regards transcriptions made herein.]

Twenty-seventh of August of two thousand and nineteen

The Arbitrator

(J. Coutinho Pires)

Frequently Asked Questions

Automatically Created

How are capital gains from the sale of real estate taxed for non-residents under Portuguese IRS law?
For non-residents, capital gains from Portuguese real estate sales are taxed under Article 43(2) of CIRS at autonomous rates (28% for individuals). Unlike residents who can apply various exemptions and aggregate income taxation options, non-residents face a special regime with limited deductions. The taxable gain is calculated as the difference between the sale price and acquisition cost, indexed for inflation only for properties acquired before 1989. Non-residents cannot benefit from certain reliefs available to residents, such as reinvestment exemptions for permanent residence sales, potentially raising EU law compatibility issues regarding freedom of capital movement and non-discrimination principles.
What does Article 43(2) of the CIRS establish regarding capital gains taxation for non-resident taxpayers?
CAAD (Centro de Arbitragem Administrativa) provides an accessible forum for non-residents to challenge discriminatory IRS capital gains assessments. Non-resident taxpayers can file arbitration requests under RJAT (Regime Jurídico da Arbitragem Tributária) to contest assessments they believe violate Portuguese tax law or EU principles. This case demonstrates that non-residents have standing to challenge both the quantification and legal qualification of taxable events, including arguments based on potential discrimination compared to resident taxpayers. The arbitration process offers a faster alternative to administrative courts, with decisions typically rendered within six months, making it particularly valuable for cross-border disputes.
Can non-residents challenge discriminatory IRS capital gains tax assessments through CAAD arbitration?
A preliminary ruling (reenvio prejudicial) becomes relevant when Portuguese tax arbitration involves potential conflicts between national tax law and EU law. When a CAAD tribunal encounters questions about whether Portuguese provisions like Article 43(2) CIRS discriminate against non-residents in violation of EU Treaty freedoms (particularly free movement of capital under Article 63 TFEU), it may refer interpretative questions to the Court of Justice of the European Union (CJEU). This mechanism, established under Article 267 TFEU, ensures uniform interpretation of EU law. In non-resident capital gains cases, preliminary rulings address whether differential tax treatment constitutes prohibited discrimination or can be justified by objective differences in taxpayer situations, significantly impacting Portuguese tax practice and compliance with EU fundamental freedoms.