IRS Capital Gains Tax Dispute: Article 10(5)(a) Annulment and Guarantee Damages

ARBITRAL DECISION

Parties

Claimant: A…, NF …, resident at Street …, no. …, …-…, São ....

Respondent: Tax and Customs Authority (AT).

I. REPORT

a) On 23-11-2015, the Claimant filed with the CAAD a request seeking, pursuant to the Legal Regime for Arbitration in Tax Matters (RJAT), the establishment of a singular arbitral tribunal (TAS).

THE REQUEST

b) The Claimant requests the annulment of the decision dismissing the informal complaint …2014… notified to him by official communication no. …, dated 24.08.2015 from the Tax Office of ...-…, a proceeding he initiated against the assessment of IRS no. 2014 … and assessment of compensatory interest no. 2014 …, relating to the year 2010, totaling 31,618.77 euros, the annulment of which he also seeks and likewise the conviction of the Respondent to pay damages for undue provision of guarantee, in addition to the reimbursement of part of the tax paid by compensation, plus compensatory interest for the amount of 5,560.60 euros which he bore through compensation movements (as per document no. 2 – page 2 attached with the request for pronouncement).

THE SINGULAR ARBITRAL TRIBUNAL (TAS)

c) The request for establishment of the TAS was accepted by the President of the CAAD and automatically notified to the AT on 30-11-2015.

d) The arbitrator who signs this decision was appointed by the CAAD Deontological Board, and the parties were notified thereof on 10-02-2016. The parties did not manifest any intention to refuse the appointment, in accordance with article 11.º no. 1 subsections a) and b) of the RJAT and articles 6.º and 7.º of the Deontological Code.

e) The Singular Arbitral Tribunal (TAS) has been regularly constituted since 16-02-2016 to examine and decide the subject matter of this dispute (articles 2.º, no. 1, subsection a) and 30.º, no. 1, of the RJAT).

f) All of these acts are documented in the communication of constitution of the Singular Arbitral Tribunal dated 16-02-2016, which is hereby reproduced.

g) On 16-02-2016 the AT was notified in accordance with article 17º-1 of the RJAT. It responded on 16.03.2016. It also attached the PA, composed of 3 computer files designated as PA - with 114 pages, PA1 with 52 pages and PA2 – with 2 pages.

h) Following a TAS order of 08.04.2016 regarding the waiver of holding the meeting of parties provided for in article 18º of the RJAT and regarding the hearing of witnesses, the Claimant argued that he had not been notified of the order of 16.02.2016 referred to in the previous subsection, expressed interest in hearing the two witnesses called and indicated the facts they should testify about (those contained in articles 48º to 50º, 54º to 59º, 75º to 82º and 85º of the request for pronouncement).

i) Given the merits of what was alleged by the Claimant, 25-05-2016 was scheduled, at 14:30 hours, for the hearing of the witnesses followed by the holding of the meeting of parties referred to in article 18º of the RJAT.

j) On 25-05-2016 testimony was collected from witnesses B… and C… on the matters indicated. A deadline of 10 days was set for written and successive submissions, in accordance with the minutes attached to the SGP.

k) The Claimant filed his submissions on 06.06.2016. The Respondent filed its counter-submissions on 07.06.2016. The parties essentially maintained what they had stated in their request and response.

PROCEDURAL REQUIREMENTS

l) Legitimacy, capacity and representation – The parties enjoy legal personality, judicial capacity, are legitimate parties and are represented (articles 4.º and 10.º, no. 2, of the RJAT and article 1.º of Ordinance no. 112-A/2011, of 22 March).

m) Principle of contradiction - The Respondent was notified in accordance with subsection g) of this Report. All procedural documents and all documents attached to the case were made available to the respective counterparty in the CAAD Case Management System. Their attachment was always notified to both parties.

n) Dilatory exceptions - The arbitral procedure is not subject to nullities and the request for arbitral pronouncement is timely since it was filed within the prescribed period in subsection a) of no. 1 of article 10.º of the RJAT. In fact, the Respondent did not challenge the timeliness of the submission of the request, since notification of the decision on the informal complaint procedure occurred by official communication no. …, dated 24.08.2015 and the request for pronouncement was received at the CAAD on 23.11.2015.

SUMMARY OF THE CLAIMANT'S POSITION

o) The Claimant alleges, first, the lack of substantiation, in fact and in law, of the contested assessment acts, since from the respective documents that constitute them "the grounds are not properly explained … that determined their issuance, with only a set of values being indicated, without any identification as to their nature and origin, imperceptible to a normal recipient". He invokes non-conformity with the content of no. 2 of article 77º of the LGT.

p) Second, he invokes the omission of an essential legal formality – the lack of prior hearing before the issuance of the IRS and interest assessment acts, invoking the legal provisions contained in subsection a) of no. 1 of article 60º of the LGT, article 135º of the CPA as per article 2º subsection d) of the CPPT; in no. 5 of article 267º of the CRP and article 45º of the CPPT.

q) Finally, he invokes the illegality of the assessments in that he believes he meets the requirements provided for in subsection a) of no. 5 of article 10º of the IRS Code, benefiting from the exclusion of taxation on gains from the transmission of the real property located on Street …, no. … in ..., in 2010, for the price of 292,500.00 euros, which he had acquired for 74,819.68 euros, generating a gain of 207,850.00 euros.

r) Since he acquired on 12.10.2011 the real property located on Street …, no. …, …, where he reinvested the gain obtained from the sale of the first property.

s) And because, regardless of his tax domicile, both properties were or are intended for his own permanent residence (the one sold and the one acquired where the gain was applied).

t) He contests the dismissal of the informal complaint on the ground that the alienated property, according to the AT, as of the date of alienation on 12.05.2010 "did not constitute his tax domicile" and that the acquired property "was already his tax domicile" (see dismissal order of the RG at pages 3/6).

u) In his submissions, the Claimant contends that it was proven through witness testimony, together with documentary evidence, that the real property located on Street …, no. … in ... was his own permanent residence and until nearly the date of its alienation was also his tax domicile, with the change of tax domicile before this alienation having resulted from the expiration of the validity of his citizen card, so as not to have the inconvenience of, in the near future, again altering it, given the foreseeable acquisition of another own permanent residence.

v) He invokes in his favor the decision adopted at the CAAD – Process 103/2013-T which examined an identical dispute.

SUMMARY OF THE RESPONDENT'S POSITION

w) Disagreeing with the Claimant's view, it defends regarding the alleged lack of substantiation that only in cases of acts of "fixing" or "alteration" of income declared by the taxpayer should the notification be accompanied by substantiation, and that the provisions of no. 2 of article 77º of the LGT do not apply to the present case, since the assessment act did not result from a procedure but from the facts declared by the Claimant in the context of the Model 3 tax return.

x) Regarding the alleged defect of lack of prior hearing, it invokes that pursuant to subsection a) of no. 2 of article 60º of the LGT the hearing is dispensed with in the case where the assessment is made on the basis of the taxpayer's declaration, as was the case.

y) Regarding the invoked illegality of the assessment act, it states that the Claimant did not discharge the burden of proof that the alienated property constituted his own permanent residence, since the demonstration of the alienation of the property "was effected through a draft promise-to-exchange contract through which the R. promised to sell and the other party to the exchange promised to buy the property that generated the capital gains declared in Model 3 of 2010, located on Street … no. …, in ...",

z) Recognizing that "…although the promise-to-exchange contract validly executed constitutes sufficient legal title for any amount delivered in its performance to be credited to reinvestment, for the purposes of subsection a) of no. 5 of article 10º of the CIRS", it concludes that "only with the execution of the final contract, executed in accordance with legal form, is consolidated in the legal sphere of the taxpayer the right to the exclusion of taxation".

aa) And it adds "until the finality of the legal transaction, the tax exclusion assumes a precarious character and is conditional on the subsequent verification of that condition". And it concludes: "it transpires that the R. did not attach to the proceedings proof of the execution of the final contract and, by itself alone, this fact is sufficient to conclude that the presuppositions for exclusion of taxation of capital gains, provided for in no. 5 of article 10º of the CIRS, are not met"

bb) Regarding the promise of contract, it further states "moreover, from that promise contract it does not appear that the house he promised to sell constituted, at the time, his own permanent residence, especially because at the time of execution of that same exchange contract, on 21/7/2010, the R. already had his tax domicile at the address of the house that he would only acquire on 12/10/2011".

cc) It also invokes "some ambiguity" which the Claimant was unable to dispel, due to the fact that the alienated property is the registered office of the company D… – …, Lda., of which at the time of the facts he would be a managing partner.

dd) It states that it is not plausible that there would be possession of the property with only a down payment of 5,000.00 euros, it being "inexplicable and inconsistent" the reason why he maintained, at the same address, the registered office of the aforementioned company, at least until late 2011.

ee) It considers that Document no. 4 attached by the Claimant (a green highway document issued on 31.07.2010, a document from Z… issued 22.07.2010 and 3 documents issued by E… on 06.05.2010, 30.06.2010 and 27.11.2011) do not demonstrate, by themselves alone, that the Claimant made that address his own permanent residence.

ff) In its submissions, the Respondent reaffirmed that: "1 - The argument presented by the R. is fragile and unreasonable, taking into consideration the passage of time and the delay between the date of change of domicile and the acquisition of the property where the realization value was applied; 2 - And if the R. failed to prove that the alienated property constituted his own permanent residence, he also failed to prove that the property he acquired from D… – … Lda. (of which he is a managing partner) was intended for that purpose. 3 - In fact, and above all, nothing appears in that regard in the deed of sale of the aforementioned property and no other documentary evidence was presented that would point to that purpose. 4 - The R. did not present any evidence demonstrating that it was in that property that he lived and that the center of his personal life was located, corroborating the testimony of the witnesses to the effect that, even before the exchange of the house in ..., the property in … (where he applied the realization value) was always for sale".

gg) It concludes by seeking the dismissal of the request for pronouncement, with absolution of the claim.

II - QUESTIONS FOR THE TRIBUNAL TO RESOLVE

Attention must be paid to what is at issue in this proceeding. That is, which specific act, with which specific substantiation, is under review.

At issue, on a first line of approach, is the assessment of the legality of the AT's decision that dismissed the informal complaint and which constitutes Document no. 1 attached with the request for pronouncement and pages 82 to 87 of PA1.

It is this act - reproduced in 10) of the proven facts – with the specific substantiation set forth therein that is under scrutiny.

The legality or illegality of the IRS assessments will be a consequence of the annulment (or not) of the decision that resulted from the RG proceeding, especially since, in this case, as the AT refers to in point 10 of the Response: "on 31/10/2014 a hierarchical appeal of the aforementioned act of 29/9/2014 was filed, which decided, by order of 24/03/2015, to return the proceedings so that "the deciding body may pronounce itself on the need (or not) for witnesses to be heard, with a new order being issued (and the subsequent procedures being carried out, namely, notification of the decision to the taxpayer and the forms and periods for contesting that decision)".

In this arbitral proceeding, the witnesses were heard, so this evidence, not collected during the informal complaint procedure, may lead the TAS to alter the direction of the decision adopted in relation to what was decided by the AT.

Everything that constitutes an alteration of the substantiation of the appealed act cannot be accepted here, e.g. what is stated in y), z), aa), cc), dd), ee) and ff) of the Report, insofar as these are new arguments or facts in relation to what appears in the substantiation of the decision that resulted from the request for RG.

The substantiation a posteriori will be irrelevant, the acts whose legality is questioned having to be assessed as they were performed, the tribunal not being able, upon finding the invocation of an illegal ground as support for the administrative decision, to assess whether its action could have been based on other grounds.

It is in this essential sense that the following decisions of the Supreme Administrative Court may be seen, regarding a parallel situation that arises in contentious review proceedings:

· of 10-11-98, of the Plenary, rendered in appeal no. 32702, published in Appendix to the Official Gazette of 12-4-2001, page 1207.

· of 19/06/2002, proceeding no. 47787, published in Appendix to the Official Gazette of 10-2-2004, page 4289.

· of 09/10/2002, proceeding no. 600/02.

· of 12/03/2003, proceeding no. 1661/02.

In the same sense, the following may be seen:

· MARCELLO CAETANO, Manual of Administrative Law, volume I, 10th edition, page 479, in which he states that it is "irrelevant that the Administration may, during the pendency of the contentious review, invoke as determining reasons other reasons not set forth in the act", and volume II, 9th edition, page 1329, in which he writes that "the appealed authority cannot, … in its response to the appeal, justify the performance of the appealed act by reasons different from those contained in its express motivation".

· MÁRIO ESTEVES DE OLIVEIRA, Administrative Law, Volume I, page 472, where he writes that "the objectively existing reasons that are not expressly adduced as grounds of the act cannot be taken into account in assessing its legality".

Wherefore, what must first be assessed is whether the order that dismissed the request for RG, with the specific grounds set forth therein, should remain in the legal order or not, naturally in light of the witness testimony produced in this proceeding, since the remaining evidence (documentary) is the same as was produced in the informal complaint procedure, being competent in this respect its re-examination and assessment, in terms of the whole.

Should the decision dismissing the RG be annulled, with consequent annulment of the IRS assessments, it must then be verified whether the Claimant is entitled to damages for undue provision of guarantee and whether he is entitled to receive compensatory interest for the amount of 5,560.60 euros which he bore through compensation movements (as per document no. 2 – page 2 attached with the request for pronouncement).

III. PROVEN AND UNPROVEN FACTUAL MATTERS AND SUBSTANTIATION

With relevance for the decision, these are the facts that are considered proven, with an indication of the respective documents (proof by documents). The facts whose proof resulted from witness testimony are also specifically noted.

Proven Facts

1. On 10 August 2011, the Claimant delivered the IRS tax return Model A for the year 2010 and entered in Annex G, in field 401 - alienation of a property, in August 2010, for the value of 292,500.00€, acquired in May 1995, for the value of 74,819.68€, identification of the property - article U …, parish …, and in field 506 - value of the realization he intends to reinvest (without recourse to credit) 207,850.00€ - in accordance with document no. 2 – pages 4 attached with the request for pronouncement, no. 5 of the AT's response and articles 47º and 48º of the request for pronouncement.

2. In the Model 3 tax returns for the following years, the Claimant did not declare that he had reinvested the value of the realization indicated in field 506 mentioned above – point 10.3 of Document no. 1 - pages 5/6 - attached with the request for pronouncement, point 6 of the AT's response and the Claimant's overall position within the scope of the request for pronouncement and in the submissions.

3. On 21 July 2010 the Claimant alienated, according to the promise-to-exchange contract of 21 July 2010, the real property located on Street … no. …, in the parish of ..., and registered in the urban property register under art. …, of the parish of ..., municipality of ..., for the value of 292,500.00 euros (two hundred ninety-two thousand five hundred euros and zero cents) - in accordance with point 4-2 of Document no. 1 - pages 3/6 - attached with the request for pronouncement, article 49º of the request for pronouncement and page 92 of PA1 attached by the AT.

4. On 12 October 2011 the Claimant acquired by deed of sale, executed on 12 October 2011, executed after authentication proceedings by the solicitor F…, with professional certificate no. …, and professional domicile at Av. …, Building …, …, Office …, in ..., for the value of 207,850.00 euros (two hundred seven thousand, eight hundred and fifty euros and zero cents), the real property located on Street … no. …, in the place of …, parish of São ..., and registered in the urban property register under art. …, of the parish of São ..., municipality of ... - in accordance with point 4-1 of Document no. 1 - pages 3/6 - attached with the request for pronouncement, article 50º of the request for pronouncement and page 92 of PA1 attached by the AT.

5. The Claimant paid invoice 127/2010 in the amount of 17,696.25 euros, to the company that brokered the alienation referred to in 3) issued by G… - in accordance with point 4-4 of Document no. 1 - pages 3/6 - attached with the request for pronouncement, article 87º of the request for pronouncement and pages 06 and 07 of PA attached by the AT.

6. On an unspecified date in 2014, the Claimant was notified by mail with registrations RY…PT and RY…PT, of the assessment act no. 2014… of 17/07/2014, relating to 2010 IRS, from which results a value to be paid of 28,862.75€, plus compensatory interest in the amount of 2,792.02€, for a total of 31,618.77€ - in accordance with document no. 2 – pages 1 and 2 - attached with the request for pronouncement, articles 1º and 7º of the request for pronouncement and point 7 of the AT's response.

7. On 31/08/2014 the Claimant filed an informal complaint against the assessment act, which was dismissed by order of 29/09/2014, from the Head of the SF of ... … – points 8 and 9 of the AT's response and pages 71 to 80 of PA1.

8. On 31/10/2014 a hierarchical appeal of the aforementioned act of 29/9/2014 was filed, which decided, by order of 24/03/2015, to return the proceedings so that "the deciding body may pronounce itself on the need (or not) for witnesses to be heard, with a new order being issued (and the subsequent procedures being carried out, namely, notification of the decision to the taxpayer and the forms and periods for contesting that decision)" – point 10 of the AT's response, pages 3 to 19 of PA and PA2.

9. Upon re-examination, a draft decision of dismissal and substantiation was prepared, sent to the Claimant's representative, by official communication of 17.07.2015 under registration RD…PT, for prior hearing, which right was not exercised – in accordance with pages 82 to 89 of PA1 and points 11 and 12 of the AT's response.

10. The Claimant was notified of the dismissal decision under official communication no. … of 24/08/2015, registration RD…PT, decision that has the following substantiation: "INFORMATION - In light of the order from the Director of IRS Services, of 24-03-2015, rendered in the hierarchical appeal proceeding no. …2014…, in which it was determined that the deciding body pronounce itself on the need (or not) for witnesses to be heard, with a new order being issued (and the subsequent procedures being carried out, namely, notification of the decision to the taxpayer and the forms and periods for contesting that decision), it is appropriate to inform: The taxpayer identified on the previous page comes to lodge a complaint in accordance with art. 140º of the Individual Income Tax Code (CIRS) and art. 70º of the Tax Procedure and Process Code (CPPT), against assessment no. 2014…., of 17-07-2014, relating to 2010 IRS, from which resulted a value to be paid of 28,826.75 euros, plus compensatory interest in the amount of 2,792.02 euros, for a total of 31,618.77 euros, alleging that:

1 – By oversight he did not declare, in Annex G of Model 3 of the IRS, the reinvestment in the acquisition of own permanent residence.

In these terms and for the purposes of no. 1 of art. 75º of the CPPT, I am to inform that:

1 – The proceeding is the proper means, the complaint is timely (cf. No. 1 of art 70º of the CPPT) and the complainant has legitimacy for the act (cf. No. 1 of art. 68º of the CPPT);

2 – The complainant delivered the Model 3 tax return of IRS, for the year 2010, thereby complying with what is provided for in art. 57º of the CIRS, within the period provided for in art. 60º of the same statute;

3 – In light of what was declared by the complainant in field 506, of table 5, of Annex H, of Model 3 of IRS, the Tax and Customs Authority (AT), in accordance with what is provided for in art 10º, no. 5, subsection A) of the CIRS, awaited that the complainant would declare the reinvestment. Upon the expiration of the deadline, and the complainant not having declared the reinvestment, the AT proceeded with an ex officio assessment, the subject of the present complaint;

4 – From an analysis of the documents presented by the complainant and from a consultation of the computer system it is verified that:

4.1 – The complainant acquired, in the marital status of widower, by deed of sale, executed on 12 October 2011, executed after authentication proceedings by the solicitor F…, with professional certificate no. …, and professional domicile at Av. …, Building …, …floor, Office …, in ..., for the value of 207,850.00 euros (two hundred seven thousand, eight hundred and fifty euros and zero cents), the real property located on Street … no. …, in the place of …, parish of São ..., and registered in the urban property register under art. …, of the parish of São ..., municipality of ...;

4.2 – The complainant alienated, according to the promise-to-exchange contract of 21 July 2010, the real property located on Street … no. …, in the parish of ..., and registered in the urban property register under art. …, of the parish of ..., municipality of ..., for the value of 292,500.00 euros (two hundred ninety-two thousand five hundred euros and zero cents);

4.3 – Also according to the promise-to-exchange contract, the complainant became owner of the real property registered in the urban property register under art. …, of the parish of São Pedro de Penaferrim, municipality of Sintra;

4.4 – He paid the real estate broker the amount of 17,696.25 euros, relating to the alienation of the property referred to and better identified in point 4.2, in accordance with pages 06 and 07 of the proceedings;

4.5 – The tax domicile of the complainant is on Street … no. …, …, since 12-05-2010;

5 – Thus, in light of what has been reported, it is verified that:

5.1 – The exchanged property and better identified in point 4.2 did not constitute the tax domicile of the complainant;

5.2 – He did not attach to the proceedings the exchange contract, but rather a promise-to-exchange contract;

5.3 – The acquired property and better identified in point 4.1 was already the tax domicile of the complainant since 12 May 2010;

6 – It is thus verified that the complainant does not meet the presuppositions provided for in art 10º no. 5, of the CIRS, in order to be excluded from taxation of capital gains.

7 – By Official Communication no. … of 03-09-2014, the complainant was notified of the draft decision and, if he wished, to pronounce himself on its content, by virtue of what is provided for in art. 60º no. 1, subsection a) and no. 5, of the LGT;

9 – On 23-09-2014 the complainant came, represented by his representative, H…, with NIF …, to exercise that right, in the following terms, summarized:

9.1 – What is at issue in the present proceedings is the legality, or rather the recognition of the illegality of the IRS assessment act in question;

9.2 – The assessment act is not properly substantiated;

9.3 – In the same manner, the complainant was not, at a moment prior to the performance of the assessment act, notified to exercise the right of prior hearing on the same;

9.4 – As appears from the proceedings, the complainant was owner of a property located on Street … no. …, in ..., which corresponded to his own permanent residence;

9.5 – The Promisees-Buyers expressed the intention of carrying out works on the house and therefore requested that the complainant allow possession of the property to occur immediately, to which the complainant agreed;

9.6 – In accordance with what is provided for in art. 10º, no. 3, subsection a) of the CIRS, the taxable gain is presumed to be obtained as soon as possession or control of the goods is verified;

9.7 – In this manner, since at the moment possession was verified and the promisee-buyer consequently took control of the transmitted property, the property transmitted was the usual and permanent residence of the complainant, there is no doubt that, the presuppositions for exclusion of taxation in IRS of gains resulting from the alienation of real property being verified, which were entirely reinvested in the acquisition of another property for the same purpose;

9.8 – On the other hand, without conceding, the assessment act would always be illegal by virtue of the AT not having taken into consideration the expenses incurred with the sale of the property, duly substantiated;

9.9 – Furthermore, the complainant cannot fail to also contest the assessment of compensatory interest;

9.10 – Beyond the annulment of the assessment in question implying the annulment of compensatory interest, he does not consider that the delay in the assessment is due to a fact attributable to the taxpayer;

9.11 – Always without conceding and merely as a matter of professional caution, if the complainant were not to be vindicated regarding the tax, it should always be recognized that his behavior was not blameworthy and resulted from a plausible and good faith interpretation of the Law;

9.12 – He finally requests that, for the demonstration of facts, the following witnesses be heard:

9.12.1 – B…, to be presented;

9.12.2 – C…, to be presented;

10 – In light of the submissions produced in this procedural phase by the complainant, it is appropriate to inform that:

10.1 – Article 66º of the CIRS provides that only acts of fixing the net income subject to tax or alteration of the values declared by the taxpayer, provided for in article 65º of the same statute, should be subject to notification accompanied by the respective substantiation;

10.2 – In the present case the assessment acts result from the elements provided by the complainant through his respective tax return presented;

10.3 – It is provided in no. 4 of article 59º of the CIRS, that for the purposes of what is provided for in nos. 5 to 7 of article 10º of the CIRS, the complainant in addition to expressing the intention to reinvest, even if partial, should have mentioned in the same return, or in those of the two following years, the investments made;

10.4 – Upon expressing the intention to reinvest the value realized from the alienation of the property intended for own permanent residence, in his respective tax return, the taxpayer unilaterally suspends the inclusion of the corresponding income, which is excluded from taxation (or is included) if the conditions to which nos. 5 and 6 of article 10º of the CIRS refer are satisfied (or not);

10.5 – In light of what has been stated in the previous paragraphs, it is concluded that the responsibility for the delay in the assessment of the corresponding tax can only be attributed to the complainant, which justifies the assessment of compensatory interest included in the additional assessment in question in the present proceeding;

10.6 – It is also noted that article 60º, no. 2, subsection a) of the LGT provides that the hearing is dispensed with in the case where the assessment is made on the basis of the taxpayer's declaration;

10.7 – The complainant alleges that possession or control of the property generating the capital gains income in question occurred on a date prior to the execution of the respective acquisition title, but did not attach any evidence to support such allegation;

10.8 – It is reaffirmed that, at the time of execution of the exchange contract, through which the complainant alienated the property generating capital gains in question, namely 23 August 2010, the property no longer constituted his tax domicile since 12 May 2010;

11 – Thus, it is verified that no new elements were introduced susceptible of giving rise to a re-examination of the complaint;

12 – Finally, taking into account the documents presented by the complainant as well as from a consultation of the AT's computer system, the hearing of the witnesses called by the complainant should be dispensed with, considering that the objective elements in the proceedings are not susceptible to any subjective alteration that may be adduced.

In this conformity, a proposal for a dismissal decision was made.

PRIOR HEARING

1 – Thus, and taking into account that the draft decision is in the sense of dismissal, the complainant was notified, in the person of his representative, by Official Communication no. … of 17-07-2015, of this Tax Office, in accordance with art. 60º, no. 4 of the LGT, to exercise the right of hearing in accordance with art. 60º, no. 1, subsection b) and no. 5, of the LGT;

2 – On 27 July 2015, the complainant was considered notified, in accordance with no. 1 of art. 39º of the CPPT, to, within a period of 15 (fifteen) days, pronounce himself on the decision proposal rendered at page 82, of the present complaint proceeding, in accordance with what is established in art. 60º of the LGT;

3 – Upon the expiration of that period the complainant did not exercise that right;

4 – With no new elements being introduced for a re-examination of the complaint, the conversion of the decision proposal into a final decision is proposed.

For higher consideration" – pages 90 to 97 of PA1, document no. 1 attached with the request for pronouncement and point 13 of the AT's response.

1. The Claimant, while owner of the real property located on Street …, no. …, ..., before its delivery to the then promisee-buyers I… and J…, for carrying out works, lived therein and centered his personal and family life there, receiving mail, sleeping, taking meals and spending his leisure time – articles 55º to 58, 75º and 78º of the request for pronouncement combined with the testimony of the two witnesses B… and C… and with Document no. 4 attached with the request for pronouncement.

2. The Claimant maintained his tax domicile in the property referred to in the previous subsection until the expiration of his citizen card, having proceeded to alter it to the property referred to in 4) even before its acquisition, for convenience – articles 79º and 80º of the request for pronouncement, combined with the testimony of the two witnesses B… and C….

3. The Claimant began to live in the property referred to in 4) even before its acquisition on 12.10.2011, there having his tax domicile since 12.05.2010 – article 50º of the request for pronouncement, points 4.5 and 5.3 of Document no. 1 attached with the request for pronouncement, combined with the testimony of the two witnesses B… and C….

4. The Claimant did not pay the amount stated in subsection 6) above, as a result of which the Tax Office of ...-… initiated the tax enforcement proceeding no. …2014… – Article 119º of the request for pronouncement and Document no. 5 attached with the request for pronouncement.

5. To suspend the tax enforcement proceeding, the Claimant provided, on 22.10.2014, the bank guarantee …-…-…, issued on 13.10.2014, in favor of the AT, by K…, in the amount of 33,304.83 euros - Article 120º of the request for pronouncement and Document no. 6 attached with the request for pronouncement.

6. From the statement of account of the assessment referred to in 6) it results that the Claimant bore 5,560.00 euros relating to "cancellation liq. 2010" "liq. 2011 …" – article 122º of the request for pronouncement and document no. 2 – page 2 attached to the request for pronouncement.

7. On 23-11-2015, the Claimant delivered to the CAAD the present request for pronouncement – receipt of entry in the SGP of the request for pronouncement.

The facts brought to the matter of the established facts contained in subsections 11), 12) and 13) above result from the conviction of the TAS based on what the two witnesses stated about the matter they were heard on. They demonstrated to have personal knowledge of the matter and their testimony is credible, with no issue being discerned that could call it into question.

It is noted that these two witnesses could have been heard during the informal complaint procedure, indeed, as suggested in the decision that resulted from the hierarchical appeal (see subsection 8) of the established facts), where certainly their testimony could have been valued.

Unproven Facts

There is no other factual matter alleged that was not considered proven and that is relevant to the resolution of the procedural dispute.

Regarding the substantiation of the factual matters considered proven

Regarding factual matters, the Tribunal is not required to pronounce itself on everything alleged by the parties; rather, it is incumbent upon it to select the facts that matter for the decision and to discriminate between the proven and unproven matters (see art. 123.º, no. 2, of the CPPT and article 607.º, no. 3 of the CPC, applicable as per article 29.º, no. 1, subsections a) and e), of the RJAT).

Thus, the facts relevant to the judgment of the case are selected and delimited in function of their legal relevance, which is established in consideration of the various plausible solutions of the question(s) of law (see previous article 511.º, no. 1, of the CPC, corresponding to the current article 596.º, applicable as per article 29.º, no. 1, subsection e), of the RJAT).

Thus, taking into consideration the positions assumed by the parties, the documentary evidence and the PA attached to the proceedings, the facts listed above were considered proven, as being not contested by the parties insofar as documents are concerned. As for the evaluation of witness testimony, we have already pronounced ourselves above.

IV. ASSESSMENT OF THE QUESTIONS FOR THE TAS TO RESOLVE

In light of the facts considered established, it is now appropriate to assess the substantiation of the decision that dismissed the informal complaint.

As can be seen from points 5.1, 5.3 and 10.08 of the substantiation of the dismissal order, the underlying reason invoked by the AT concerns the fact that the exchanged property (alienated), located on Street …, no. …, ..., did not constitute, at the date of its alienation on 21 July 2010, the tax domicile of the Claimant and the property acquired on 12 October 2011 was already the tax domicile of the taxpayer, as of the date of its acquisition, that is, since 12.05.2010.

In the substantiation of the dismissal decision, it is considered that "alienation" of the property referred to in 4.2 occurred and "acquisition" of the one referred to in 4.1 occurred, so the discussion regarding the non-attachment of the exchange contract, given that the promise-to-exchange contract was attached, seems unnecessary, since, accepting that the "alienation" occurred, it would not make sense to later argue that the same may not have occurred.

Subsection a) of no. 1 of article 10º of the CIRS provides that "capital gains are the gains obtained which, not being considered entrepreneurial and professional income, income from capital or real property, result from the onerous alienation of real rights over real property and assignment of any assets of an individual's private property to entrepreneurial and professional activity exercised in an individual's name by its owner".

No. 5 of article 10º of the IRS Code states: Excluded from taxation are gains from the onerous transmission of real property intended for the own permanent residence of the taxpayer or his family unit, provided the following conditions are cumulatively verified:

a) The value of the realization, less any depreciation of a loan contracted for the acquisition of the property, is reinvested in the acquisition of ownership of another property, land for construction of property and or its respective construction, or in the enlargement or improvement of another property exclusively with the same purpose located in Portuguese territory or in the territory of 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 on tax matters;

b) The reinvestment provided for in the previous subsection is made between 24 months before and 36 months after counted from the date of realization;

c) The taxpayer expresses the intention to reinvest, even if partial, mentioning the respective amount in the tax return for the year of the alienation;

For its part, subsection a) of no. 6 of article 10º of the IRS Code states that "There will be no place for the benefit referred to in the previous number when: where reinvestment is in the acquisition of another property, the buyer does not dedicate it to his residence or that of his family unit, until twelve months after the reinvestment are completed".

Now, in light of the established factual matters it appears to us that the requirements upon which the law makes the exclusion of taxation of the gains obtained by the Claimant dependent are met:

• The alienated property constituted the Claimant's own permanent residence having regard to the facts contained in 11) of the established facts;

• The acquisition of a new property where the Claimant began to live occurred before the expiration of the 36 months following the date of realization – subsections 4) and 13) of the established facts;

• The Claimant expressed the intention to reinvest the value of realization and the respective amount, in the tax return for the year of the alienation (2010) – subsection 1) of the established facts.

• The Claimant had already dedicated the acquired residence to his residence, even before formalizing its acquisition – subsection 13) of the established facts.

But, as stated above, the underlying reason why the AT dismissed the informal complaint was another. It had to do, it is perceived, with the fact that the exchanged property (alienated), located on Street …, no. …, ..., did not constitute, at the date of its alienation on 21 July 2010, the tax domicile of the Claimant and the property acquired on 12 October 2011 was already the tax domicile of the taxpayer, as of the date of its acquisition, that is, since 12.05.2010.

That is, for the AT what was relevant was the "tax domicile" and not the determination as to whether the alienated property and the acquired property were in fact, in real and effective terms, beyond the right of ownership, used by the Claimant as his own permanent residence (one before the alienation, the other dedicated to residence, even before the acquisition).

We do not see that the AT's understanding finds support in the law which calls for the concept of "residence" and "own permanent residence" and not the concept of "tax domicile".

In this regard, for simplification and harmonization of the reading of the law which we deem more assertive, we will reproduce, adhering to, the decision already adopted at the CAAD, reproduced by the Claimant.

It was written in the collective arbitral decision rendered in CAAD proceeding 103/2013-T to which we adhere: "Article 10.º/5 refers to 'the own permanent residence of the taxpayer or his family unit'. This alternative only makes sense, as will be seen below, from the perspective that 'own permanent residence' may not coincide with tax domicile.

Let us see.

Article 13.º/6 of the CIRS provides that 'The persons referred to in the previous numbers cannot, simultaneously, be part of more than one family unit nor, integrating a family unit, be considered autonomous taxpayers.' That is, if there is a family unit, there will be a tax domicile of the family unit itself, which will be relevant for IRS purposes, and the family unit cannot, at least for the purposes of this tax, have two tax domiciles.

In this context, the aforementioned reference in article 10.º/5 of the CIRS to 'the own permanent residence of the taxpayer or his family unit' can only be understood as having the meaning that the own permanent residence may differ from the tax domicile.

Indeed, and to be specific, it may actually occur (even more in these times of high geographical mobility, potentiated by the crisis being globally experienced) that one of the members responsible for the direction of a family unit fixes his 'own permanent residence' in a place different from that of the family unit he integrates. It is enough to think, for example, of a spouse who, due to economic difficulties, is forced to leave the family home on the mainland, to go work in an Autonomous Region (or vice versa), or in the territory of another Member State of the European Union or of the European economic area, where there is an exchange of information on tax matters, there spending most of the year, and only visiting the family twice a year. In this case, the own permanent residence of the migrant spouse will be different from that of his family unit, which will be what is relevant for tax domicile purposes, at least under IRS.

Now, the expression used in article 10.º/5 of the CIRS evidences, precisely, such divergence. Indeed, the reference to 'the own permanent residence of the taxpayer or his family unit', leaves no room for doubt. The legislator did not mean to say 'the own permanent residence of the taxpayer or of the family unit', he meant to say 'or of his', making clear that the own permanent residence of a taxpayer, which is what is relevant for that article, may be different from 'that of his' family unit, when the tax domicile, for IRS purposes, at least, cannot!

On the other hand, no. 6 itself of the same article, …, which provides that 'There will be no place for the benefit referred to in the previous number when: a) Where reinvestment is in the acquisition of another property, the buyer does not dedicate it to his residence or that of his family unit, until twelve months after the end of the period in which the reinvestment must be made;', points to the direction indicated, insofar as, once more, and reinforces the need for 'dedication to residence', and not for 'fixation of tax domicile', which could and should be stated, if that were truly the legislator's intention.

In short, it is thus considered that it sufficiently results, and from the outset, from article 10.º/5 itself of the CIRS the legislator's intention not to equate the concepts of 'own permanent residence' and 'tax domicile'.

If one understands that the legislator's intention was the one that has just been pointed out, one could, nevertheless, detect systematic inconsistencies, …, which would not, however, shake that intention, properly expressed, as was seen, being called into question.

That will not, however, and not even, be the case.

Indeed, and above all, as far as article 19.º/1/a) of the LGT is concerned, the same does not state that the place of habitual residence is the tax domicile, but, precisely, the opposite, that is, that the tax domicile should correspond to the place of habitual residence.

That is, 'tax domicile' is a concept of law, which has its factual substrate in the situation of reality qualifiable as 'habitual residence'. In other words: what is, demonstrably, in reality, the habitual residence of a taxpayer is what should determine what should be his tax domicile, and not the opposite, which appears to be what the AT understands, in that what is formally correctly stated as 'tax domicile' determines what the 'habitual residence' of a taxpayer is.

In short: it is understood that the circumstance that a certain place is stated as the 'tax domicile' of a taxpayer will not mean that his 'habitual residence' is that place.

Thus, the discrepancy between what formally is stated as 'tax domicile' of a taxpayer and what is effectively his 'habitual residence' should be resolved by altering the former and making it coincide with the latter, and not the opposite, that is, to consider that the latter corresponds to the former, applying, insofar as the respective presuppositions are verified, the sanctions that may apply in the case to those responsible.

Regarding the discussion at issue in the proceedings, it is to be noted that the LGT, in the matter that has just been addressed, refers to 'habitual residence', and not to 'own permanent residence', so there is not even at the terminological level a systematic coherence that could satisfactorily support a relationship between the matter of tax domicile, regulated in the LGT, and the matter of 'own permanent residence', to which article 10.º/5 of the CIRS refers".

…

"In any case, and even if it were concluded that 'own permanent residence' of the taxpayer should be considered to be his tax domicile, it could only be understood as a mere presumption, that is, as the establishment of an unknown fact (the place of 'own permanent residence') based on a known fact (the place declared as tax domicile).

Now, thus being, and no ground being perceived to support that the presumption in question would have de iure et de iuris nature, which would not, besides, be consistent with the possibility of the AT knowing it ex officio, in these matters of residence and domicile, it would necessarily follow that the same would admit proof to the contrary.

In this sense, moreover, the Decision of the STA of 23-11-2011, rendered in proceeding 0590/11, available at www.dgsi.pt, can be consulted, in whose summary the following can be read:

'II - The fact that the taxpayers did not communicate the change of domicile to the property for which they requested IMI exemption, by itself, does not indicate that they do not have own permanent residence in that property.

III - The abode in a certain place, the habitatio, can be demonstrated through 'demonstrative facts' that the beneficiary fixed the center of his personal life in the property.'"

In light of the above, the request for annulment of the decision that resulted from the informal complaint can only proceed, since it is not in accordance with the norms contained in nos. 5 and 6 of article 10º of the IRS Code, in the reading that is above advocated.

Consequently, the request for annulment of the IRS and interest assessment contested also proceeds, by non-conformity with the same legal provisions, in the reading of the law that is advocated as more assertive.

Questions of Prejudicial Knowledge

The request for arbitral pronouncement proceeding regarding the illegality defect referred to, which ensures effective protection of the Claimant's rights, renders prejudicial, as being futile, the knowledge of the defect of lack of substantiation of the assessment act and that of alleged violation of the right of prior hearing.

Damages for Undue Guarantee

The fixing of damages for undue provision of guarantee does not correspond to the amount of compensatory interest, and can only not exceed it, as can be inferred from article 53.º, nos. 1 and 3, of the LGT.

An explicit request for damages for undue guarantee was not formulated, that is, the damages suffered by the Claimant from the provision of guarantee were not indicated, so there was no necessary exercise of contradiction by the Tax and Customs Authority regarding such a request, so it cannot take knowledge of it, without prejudice to the compensatory rights that the Claimant may have, to be assessed in the context of execution of judgment, in accordance with article 24.º, no. 1, of the RJAT.

Compensatory Interest

It was not proven that the Claimant had paid the assessed amount. It was proven, however, in no. 16 of the established facts that "16) From the statement of account of the assessment referred to in 6) it results that the Claimant bore 5,560.00 euros relating to 'cancellation liq. 2010' 'liq. 2011 …'"

Article 43.º, no. 1, of the LGT provides that "compensatory interest is due when it is determined, in an informal complaint or judicial challenge, that there was an error attributable to the services from which results payment of the tax debt in an amount higher than that legally due".

As results from the literal wording of this norm, the right to compensatory interest depends on "payment of the tax debt in an amount higher than that legally due".

In the case, as regards the amount of 5,560.00 euros relating to "cancellation liq. 2010" "liq. 2011 …", the Claimant bore this value, which was credited to him, so the assessment in this part may be subject, in addition to the duty of reimbursement, to compensatory interest, if there was an error attributable to the AT's services in the assessment.

No. 2 of article 43º of the LGT provides that it is considered that there is an error attributable to the services in the cases in which, although the assessment is made on the basis of the taxpayer's declaration, the latter has followed, in its completion, the generic guidelines of the tax authority, duly published.

What occurred in this case was that the assessment in question occurred, according to subsection 2) of the established facts, because the taxpayer "did not declare in Annex G of Model 3 of the IRS, the reinvestment in the acquisition of own permanent residence" (using the expression contained in Document no. 1 attached to the request for pronouncement – page 2/6).

In this conformity we cannot conclude that there has been "error attributable" to the AT's services, at least exclusively attributable to them, which does not invalidate the right to reimbursement of the amount of 5,560.00 euros credited, nor the right to default interest in accordance with no. 5 of article 43º of the LGT.

In this conformity, the request for pronouncement regarding the conviction of the AT to pay compensatory interest on the amount credited in the statement of account is dismissed.

V. DISPOSITIF

Based on the grounds set forth above:

• The request for annulment of the decision that resulted from the informal complaint which was notified to the Claimant under official communication no. … of 24/08/2015 is judged to be well-founded, and likewise the request for annulment of the assessment act no. 2014… of 17/07/2014, relating to 2010 IRS, from which results a value to be paid of 28,862.75€, plus compensatory interest in the amount of 2,792.02€, for a total of 31,618.77€.

• The assessment and order are hereby annulled;

• The request for conviction of the AT to reimburse the amount of 5,560.00 euros, relating to the cancellation of IRS of 2010, in accordance with the statement of account, is judged to be well-founded, and the Respondent is condemned to proceed with the respective reimbursement.

• The request for conviction of the AT to pay compensatory interest for the amount of 5,560.00 euros is judged to be without merit, without prejudice to the Claimant's right to default interest in accordance with no. 5 of article 43º of the LGT.

• No knowledge is taken of the possible right of the Claimant to damages for undue guarantee, without prejudice to the compensatory rights which the Claimant may have, to be assessed in the context of execution of judgment, in accordance with article 24.º, no. 1, of the RJAT.

Case Value: In accordance with what is provided in article 3.º, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings (and subsection a) of no. 1 of article 97ºA of the CPPT), the case is assigned the value of 31,618.77 euros.

Costs: In accordance with what is provided in article 22.º, no. 4, of the RJAT, the amount of costs is fixed at 1,836.00 Euros according to Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, at the charge of the Respondent.

Notify.

Lisbon, 30 June 2016

Singular Arbitral Tribunal (TAS)

Augusto Vieira

Text prepared by computer in accordance with what is provided in article 131.º, no. 5, of the CPC, applicable by referral of article 29.º of the RJAT.

The drafting of this decision is governed by the orthography prior to the Orthographic Agreement of 1990.