IRS Capital Gains Tax Exclusion: Fiscal Domicile Change & Burden of Proof – CAAD Case 709/2018-T

ARBITRAL DECISION

The arbitrators Dr. Alexandra Coelho Martins (arbitrator-president), Dr. Sílvia Oliveira and Dr. João Marques Pinto (arbitrator members), appointed by the Deontological Council of the Administrative Arbitration Centre ("CAAD") to form the Collective Arbitral Tribunal, constituted on 7 March 2019, agree as follows:

1.        REPORT
   

1.1. A..., taxpayer no. ..., resident at Rua ..., no. ..., ..., in Lisbon, hereinafter referred to as the "Claimant", filed a request for arbitral ruling and constitution of a Collective Arbitral Tribunal on 31 December 2018, pursuant to articles 2, paragraph 1, subparagraph a) and 10, both of Decree-Law no. 10/2011, of 20 January ("RJAT"), with the Tax and Customs Authority being the respondent, hereinafter referred to as the "Respondent" or "AT".

1.2. According to the Claimant, the "request for arbitral ruling aims at the declaration of illegality of the IRS assessment no. 2017..., relating to the tax period 2016, which was appealed, and whose Administrative Appeal (…) was subject to a dismissal order (…)".

1.3. In this context, the Claimant petitions:

"– the annulment of the dismissal order of the administrative appeal REC ..., issued in process no. ...2018...;

– the annulment of the IRS assessment no. 2017... relating to the tax period 2016 and the inherent assessment of compensatory interest, assessment 2017...;

– the reimbursement to the Claimant of the amount of € 265,352.61, paid unduly, plus compensatory interest at the legal rate".

1.4. The request for constitution of the Collective Arbitral Tribunal was accepted by the Esteemed President of CAAD on 31 December 2018 and subsequently notified to the Respondent.

1.5. The President of the Deontological Council of CAAD appointed the undersigned as arbitrators on 15 February 2019, pursuant to articles 6, paragraph 2, subparagraph a) and 11, paragraph 1, subparagraphs a) and b) of RJAT, with the appointment being accepted within the legally prescribed timeframe and conditions.

1.6. On the same date the Parties were duly notified of such appointment and did not object, in accordance with articles 11, paragraph 1 of RJAT and articles 6 and 7 of CAAD's Code of Ethics.

1.7. In accordance with article 11, paragraph 1, subparagraph c) and paragraph 7 of RJAT, the Arbitral Tribunal was constituted on 7 March 2019, notifying the Respondent by arbitral order of 8 March 2019 to file a Response and attach the administrative case file ("PA") within 30 days, in accordance with paragraph 1 of article 17 of RJAT.

1.8. On 8 April 2019, the Respondent attached a copy of the PA to the case file and filed its Response, in which it defends itself by contestation and concludes for the total lack of merit of the claim due to lack of legal support.

1.9. In its Response, the Respondent requests additional procedural steps to evidence: (i) the residence of the Claimant's household in the alienated property that generated the capital gains in question in this case, with reference to the years 2015 and 2016; (ii) the age of the dependants and (iii) the educational institution attended by them.

1.10. It considers, however, witness testimony to be unnecessary, as it believes it should be conducted through documents, and therefore requested a waiver thereof, indicating, ad cautelam, a witness.

1.11. By order of 16 April 2019, the Arbitral Tribunal determined the holding, on 20 May 2019, of the meeting provided for in article 18 of RJAT and of witness examination, given the potential contribution to the establishment of facts, rejecting the request for waiver formulated by the Respondent in its Response.

1.12. The Respondent filed a motion on 22 April 2019 for the witness it had listed to be notified by the Arbitral Tribunal, which was granted.

1.13. The Claimant filed a motion on 6 May 2019 to indicate the facts regarding which it intended for the witnesses it had presented to be examined.

1.14. On 16 May 2019, the witness listed by the Respondent informed the Arbitral Tribunal that, for professional reasons, it could not attend on the scheduled date. The Tribunal maintained the procedural step, notifying the parties that, if necessary, a new date would be set specifically for the examination of the witness listed by the Respondent.

1.15. On 20 May 2019, the arbitral meeting was held at CAAD, at which three witnesses were heard, with audio recording of the statements made, of which the corresponding minutes were drawn up, which form an integral part of the present case.

1.16. In the course of the said meeting, the Respondent's representative declared to waive the witness listed by it in the Response and the additional evidence requested therein.

1.17. The Tribunal notified the Parties to file written submissions successively, beginning with the Claimant, within 10 days. Finally, it set as the deadline for the decision that provided for in article 21, paragraph 1 of RJAT and warned the Claimant that, by the end of the deadline, it should proceed to pay the subsequent arbitral fee, in accordance with article 4, paragraph 3 of the Costs Regulation for Tax Arbitration Proceedings ("RCPAT") and communicate such payment to CAAD.

1.18. On 31 May 2019 the Claimant filed its written submissions, concluding as in the claim.

1.19. The Respondent filed written submissions on 14 June 2019, maintaining the tenor of the Response.

1.        CAUSE OF ACTION – CLAIMANT'S POSITION
   

The Claimant bases its claim on the following arguments:

2.1. She changed her residence in January 2015 from ..., in Lisbon, to the house at ..., in ... ("..."), which she and her sister had inherited from their father in 2010.

2.2. Through an oversight, she failed to notify the Tax Authority of this change of fiscal address.

2.3. The apartment at ... was immediately leased on 13 March 2015.

2.4. She subsequently acquired, on 15 April 2015, for own and permanent housing, the property located at Rua ... ("..."), no. ..., fraction M, in Lisbon, where she currently resides, for the amount of € 1,950,000.00.

2.5. She declares that she resided at the house at ... from January 2015 to the beginning of 2016, as attested by the Parish Board of ... and ..., with the same being sold on 11 February 2016 for the value of € 2,250,000.00, of which her corresponding share of 50% was € 1,125,000.00, as the realization value. On that date – 11 February – she moved her residence to Rua ..., having contracted a specialized moving company for this purpose.

2.6. Thus, she asserts that when she sold the house ..., it was effectively her own and permanent residence, despite having failed to notify the AT of the change of her fiscal address.

2.7. Therefore, she considers correct the IRS Form 3 that she filed on 29 May 2017, relating to 2016 income, in which she indicated that she had reinvested the realization value (of her 50% share) of the property that was her own and permanent residence [House ...] in the acquisition of a new property, also intended for own and permanent residence [House ...], completing Schedule 5 A of Annex G.

2.8. She qualifies as illegal and unconstitutional the position of the AT that the exclusion from taxation of capital gains provided for in the IRS Code does not apply, either due to the omission of the change of fiscal address, or due to the fact that the alienated property was part of the undivided estate opened by the death of the father, and cannot be considered the Claimant's own residence.

2.9. She concludes that evidence has been presented demonstrating that the property at ... was her own and permanent residence from January 2015 to the date it was sold, and therefore it was incumbent upon the AT, in accordance with the rules of burden of proof, to demonstrate the lack of truthfulness of the evidence presented or the information contained therein, which did not occur.

1.        RESPONDENT'S RESPONSE
   

3.1. For the Respondent, what is at issue is the acceptance or non-acceptance as reinvestment of the proceeds of capital gains realized from the alienation of a real property.

3.2. In this context, it first notes that the situation in the case does not constitute an onerous transfer of property by the taxpayer itself, because the alienated real property belongs to the inherited estate of B..., the Claimant's father, and therefore it does not consider applicable the exclusion from taxation of gains obtained from its alienation provided for in article 10, paragraph 5 of the IRS Code.

3.3. According to the Respondent, the transfer of ownership rights of inherited estate assets occurs only upon partition and not with mere acceptance of the inheritance, which merely confers upon the heir possession and control of the estate assets. Thus, the Claimant's thesis that she held (partial) ownership of the property does not hold.

3.4. On the other hand, the Respondent argues that it also remained undemonstrated that the alienated property was the place of permanent residence of the Claimant. The Claimant's domicile, until 20 May 2015, was established in Lisbon and then was changed on that date to a property located in ... and not to the ..., where the Claimant alleges to have moved residence in January 2015.

3.5. The award of a moving service to a transport company does not demonstrate that the location from which the moved objects came was where the Claimant's permanent own residence was established.

3.6. The Respondent understands that the Claimant provides no proof of what she alleges, namely that the address in question was the center of her life, and therefore her assertion that it was incumbent upon the AT to demonstrate the lack of truthfulness of the evidence presented is not well founded.

3.7. It argues, finally, that no defect can be attributed to the act in dispute, and the total lack of merit of the claim should be declared.

1.        PURIFICATION OF PLEADINGS
   

4.1. The Tribunal is materially competent and is properly constituted, in accordance with articles 2, paragraph 1, subparagraph a), 5 and 6, all of RJAT.

4.2. The request for arbitral ruling is timely, as it was filed within the timeframe provided for in article 10, paragraph 1, subparagraph a) of RJAT.

4.3. The parties have legal standing and capacity, are legitimate as to the request for arbitral ruling and are duly represented, in accordance with articles 4 and 10 of RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

4.4. No exceptions worthy of consideration were raised, nor were any procedural nullities identified.

1.        FINDINGS OF FACT
   

FACTS PROVEN

5.1. The Claimant and her sister, in their capacity as sole and universal heirs in ideal shares of ½ of the undivided estate opened by the death of her father, B..., which occurred on 19 May 2010, received, among other movable and immovable property, a dwelling located at Avenida ..., ... and ..., in ... ("House ..."), registered in the property registry of the union of parishes of ... and ... under article ... [...] and described in the Second Land Registry Office of ... under no. ..., with the acquisition of the property being registered jointly and without determination of part or right – cf. pages 31 to 36 and 98 to 102 of PA and document 11 attached with the claim.

5.2. The Claimant is the owner of the autonomous fraction designated by the letter E, located at ..., RL, ..., in Lisbon, in which she resided, and, on 13 March 2015, entered into a contract by which she leased this fraction to a French national for a period of 3 years, renewable automatically for periods of one year, effective from 15 July 2015 – cf. Document no. 1 – attached with the request for arbitral ruling ("claim").

5.3. The Claimant acquired, on 15 April 2015, for the value of € 1,950,000.00, the autonomous fraction designated by the letter M, corresponding to the ..., located at Rua ..., no. ..., in Lisbon, registered in the property registry of the Parish of ..., Municipality of Lisbon, under article ... [...], and described in the Land Registry Office of Lisbon under no. ... ("House ..."), in which she currently resides, having obtained financing for this purpose from Bank C..., in the amount of € 1,550,000.00, for the period of three hundred and eighty-four months, under the General Regime of Housing Credit, regulated by Decree-Law no. 349/98, of 11 November – cf. Document no. 2 – purchase and sale contract and loan with mortgage – attached with the claim and PA, pages 18-23 and 111.

5.4. In the purchase and sale contract with mortgage of the ..., executed at the Ready House Counter of the Land Registry Office of Lisbon, the Claimant declared that "the property hereby acquired is intended exclusively for her own and permanent residence" – cf. Document no. 2 attached with the claim and PA.

5.5. The Claimant proceeded, on 20 May 2015, at the Tax Authority, to change her fiscal domicile, which changed from the autonomous fraction located in ... in Lisbon to the ..., properties identified respectively in points 5.2 and 5.3 above – cf. PA, pages 107 to 110.

5.6. During the month of January 2016, the Claimant contacted the moving company D... in order to obtain a quote for a moving service, a "Turnkey" solution, with the said quote being presented on 25 January 2016 and awarded by the Claimant, with origin address at House ... and destination address at House ... – cf. document no. 4 attached with the claim.

5.7. The company D... provided the moving service contracted by the Claimant, from House ... to House ..., which took place on 8 to 11 February 2016, given the scheduled execution of the purchase and sale contract for House ... without furniture on 11 February – cf. document no. 5 attached with the claim.

5.8. On 11 February 2016 the Claimant and her sister sold House ..., identified in point 5.1 above, for the total price of € 2,250,000.00, corresponding to the Claimant's share (of 50%) the realization value of € 1,125,000.00 – cf. document no. 3 attached with the claim and PA, pages 31-36.

5.9. The Claimant filed, on 29 May 2017, her IRS Form 3 return for the 2016 tax year, of which Annexes A, F and G were part, having indicated in Schedule 5 A of Annex G that she had reinvested in the acquisition of a new property intended for own and permanent residence (above identified as House ..., point 5.3) the realization value of her share in the alienated property referred to in the preceding point (House ..., points 5.1 and 5.8) – cf. PA, pages 66 and 74 to 77.

5.10. On 5 June 2017 the IRS assessment note no. 2017..., relating to the year 2016, was issued, from which resulted tax payable in the amount of € 28,974.40 – cf. PA, pages 91, 92 and 125 verso, reasoning for the dismissal of the Administrative Appeal.

5.11. The Claimant filed, on 20 June 2017, a replacement IRS Form 3 return, for the tax year 2016, accompanied by Annexes A, F and G, in which she proceeded, in the respective Annex G, to correct the property acquisition value declared therein (House ...), from € 151,436.58 to € 75,718.29 – cf. PA, pages 81 to 84.

5.12. The Claimant maintained in the replacement IRS Form 3 return the reference to the reinvestment made (see point 5.9) – cf. PA, pages 81 to 84.

5.13. On 30 June 2017 the IRS assessment note no. 2017..., relating to the year 2016, was issued, from which resulted the same IRS amount payable (namely € 28,974.40), so that, following reversal of the previous assessment (identified in point 5.10 above), the amount payable was nil – cf. PA, pages 91, 92 and 125 verso, reasoning for the dismissal of the Administrative Appeal.

5.14. The AT initiated a discrepancy procedure, with reference to the Claimant's IRS return for the year 2016, as it understood that the prerequisites for the reinvestment regime supporting the non-taxation of real property capital gains were not met, with respect to the realization value generated from the alienation of House ..., on the ground that the Claimant "(…) does not have her fiscal domicile located at the site of the alienated property" – cf. PA, pages 125 verso, reasoning for the dismissal of the Administrative Appeal.

5.15. The Claimant was notified by Office no. ..., of 11 August 2017, to replace the IRS return for the year 2016 and, if she wished, to exercise the right to prior hearing regarding the draft correction of Annex G of the replacement IRS Form 3 return for the year 2016, in order to remove the reinvestment values indicated in fields 5006 and 5007 of Annex G – cf. PA, page 55.

5.16. The Claimant exercised the right to prior hearing on 29 August 2017, arguing for the truthfulness of her returns and, consequently, for the closure of the procedure without any additional assessment – cf. PA, pages 56 and 57.

5.17. On 22 August 2017, the Parish Board of ... and ... issued a certificate attesting that the Claimant resided in that parish "from January 2015 to February 2016 inclusive, according to declarations [of the Claimant] made before this Parish Board, in accordance with paragraph 4 of article 34 of Decree-Law no. 135/99, of 22 April." – cf. document no. 7 attached with the claim.

5.18. Because the Respondent understood that at the prior hearing the Claimant failed to prove that the alienated property was intended for her own and permanent residence, not bringing new elements that would allow the AT to change its position, the Respondent proceeded to the official alteration of Annex G of the Claimant's IRS return for the year 2016, purging it of the reinvestment and, consequently, subjecting the capital gain to taxation, having notified the Claimant of this fact through Office no. ..., of 20 October 2010 – cf. PA, pages 67 to 71.

5.19. In this context it refers to the information on which the decree of agreement fell, from the Finance Manager of the Finance Service of Lisbon ... which determined the correction of Annex G of the Claimant's IRS return for the year 2016, the following grounds:

            "[…] It is necessary to investigate the prerequisites:

            The alienated property is located in the parish of ..., located at Av. ..., ... and ... at no. ... .

The taxpayer had until mid-2015 her fiscal domicile at Tv. ... in Lisbon and in 2015 changed it to Rua ... .../..., block 3, floor 1, letter M in Lisbon, address which still appears currently as her fiscal domicile.

In the AT's taxpayer management and registration system, the claimant never had the address at the alienated property.

The meaning given to paragraph 5 of article 10 of CIRS, when it refers to own and permanent residence, must be that which is fiscally relevant, that is, the fiscal domicile, as per article 19 of LGT, as otherwise it would make no sense for this concept to be expressed in the law.

For natural persons, the relevant factor for fiscal domicile is their habitual residence communicated by the taxpayer, and it is through this communication that the AT has the possibility of controlling tax obligations and enables access to fiscal advantages.

There is, for these purposes, no difference between the concepts of own and permanent residence and fiscal domicile.

Having failed to update his fiscal domicile, that is, having failed to comply with what is determined, he cannot now enjoy the exclusion from taxation.

Given the foregoing, the requirements provided for in paragraph 5 of article 10 of CIRS are not met, and therefore the gains obtained from the transfer of the property cannot be considered as reinvestment in the purchase of the property, as the claimant wishes.

For all the above, the taxpayer was notified to correct Annex G of the filed return, with regard to the intention to reinvest.

The documents presented in the case do not constitute necessary proof that the property was intended for the taxpayer's own and permanent residence.

Considering that under article 74 paragraph 1 of the General Tax Law and paragraph 1 of article 342 of the Civil Code, the burden of proof of facts constituting rights rests with those who invoke them, proof should have been made that the requirements for being entitled to reinvestment of the alienation value were met, making for such proof of the connection to the alienated property, which could have been materialized namely by the delivery of contracts entered into for supplies of water, gas, telephone, TV or others, which he did not do […]" – cf. PA, pages 67 to 71.

5.20. On 31 October 2017 the AT issued the IRS assessment note no. 2017..., relating to the year 2016, in which it disregarded the reinvestment of the proceeds from the sale generated by the Claimant's alienation of House ..., and which resulted in the amount payable for IRS and compensatory interest of € 294,327.01 (with € 290,260.97 of IRS and € 4,066.04 of compensatory interest [assessment no. ...]), which, after reversal of the IRS amount previously paid of € 28,974.40, resulted in a total IRS payable of € 265,352.61, with the payment deadline set for 11 December 2017 – cf. PA, pages 50 and 51.

5.21. The Claimant, in disagreement with the AT's position of inclusion in the 2016 IRS calculation of the gain generated by the alienation of House ..., filed on 9 April 2018, an Administrative Appeal against the IRS assessment act no. 2017..., including compensatory interest, relating to the year 2016, which was filed under no. ...2018 ... – cf. Document no. 8 attached with the claim and PA, pages 5-10 and 121-124.

5.22. The Claimant was notified on 17 August 2018 of the draft decision to dismiss the Administrative Appeal for the exercise of the corresponding right to prior hearing – cf. Document no. 9 attached with the claim and PA, pages 113-117.

5.23. As the ground for the dismissal decision, the draft states that the property was part of an undivided estate, of which the Claimant had a share of ½, and therefore it was not the property of the latter, and therefore, "(…) not being in the presence of an onerous transfer of property by the taxpayer himself, now appellant, we are therefore not in the presence of gains from the onerous transfer of property intended for his own residence, and therefore the exclusion from taxation of such gains is not applicable in accordance with article 10 paragraph 5 of CIRS. Not being own residence, the assessment of other prerequisites such as permanent residence is affected, however, it is noted that this prerequisite was also not met, given that the appellant does not have her fiscal domicile at the site of the alienated urban property […]. The elements and documents attached to the case do not constitute proof of what is alleged" – cf. Document no. 9 attached with the claim and PA, pages 113-117.

5.24. The Claimant exercised the right to prior hearing on 7 September 2018, to the effect that the administrative appeal filed be considered well-founded, as the actual residence of the Appellant in the alienated property is also proven, in accordance with the documentation attached to the appeal – cf. Document no. 10 attached with the claim and PA, pages 121-123.

5.25. By order of 26 September 2018 of the Deputy Finance Director of the Finance Directorate of Lisbon, by delegation, the draft dismissal of the Administrative Appeal was made final, with the following grounds:

            "VII – ASSESSMENT

[…]

The appellant seeks the exclusion from taxation of such gains in accordance with article 10 paragraph 5 subparagraph a) of CIRS, that is, gains from the onerous transfer of property intended for the own and permanent residence of the taxpayer or his household, provided that, within 24 months prior, counted from the date of realization, the realization value less …, is reinvested in the acquisition of ownership of another property exclusively with the same purpose.

However, the appellant proceeded within that period on 15/04/2015 to the acquisition for the value of 1,950,000.00 of the urban property registered in the property registry of the parish of ..., municipality of Lisbon, under article ... [...], as per purchase deed and form 11, pages 18 to 23 and 111.

And on 20/05/2015 proceeded to change her fiscal domicile to the location of the urban property acquired on 15/04/2015, pages 109 to 119.

However, according to declaration Form 1 of stamp duty, the alienated property and which generated capital gains subject to taxation, is a property that constitutes item 18 of the undivided estate with NIF –..., opened by the death of her father – B... with NIF- ... on 19/05/2010, pages 99 verso.

That is, the appellant proceeds to alienate her share of ½ of the assets of the undivided estate –B...– head of the estate of –..., in her capacity as heir of the undivided estate (descendant pages 98), under articles 2031, 2032 and 2133 subparagraph a) of the Civil Code (CC), the said property not being assets of the claimant herself, the same is not registered in the property registry and in the land registry office in the name of the appellant, but rather in the name of the undivided estate itself, as per the elements of the notarial deed and stamp duty Form 1, pages 31 to 38 and 98 to 103.

In these terms, not being in the presence of an onerous transfer of property by the taxpayer herself now appellant, we are therefore not in the presence of gains from the onerous transfer of property intended for her own residence, and therefore the exclusion from taxation of such gains is not applicable in accordance with article 10 paragraph 5 of CIRS.

Not being own residence, the assessment of other prerequisites such as permanent residence is affected, however, it is noted that this prerequisite was also not met, given that the appellant does not have her fiscal domicile at the site of the alienated urban property.

[…]

Concluding that the quantification of the capital gains from the said onerous alienation is subject to taxation within category G in the context of IRS in accordance with article 9 paragraph 1 subparagraph a) and article 10 paragraph 1 subparagraph a) of CIRS.

Thus, the IRS assessment for the year 2016, now being appealed, is not subject to any illegality.

Under article 74 paragraph 1 of LGT, the burden of proof rests with the taxpayer, now appellant.

REGARDING COMPENSATORY INTEREST

It is also important to note that as the prerequisites of paragraph 1 of article 43 of LGT are not verified in this case, the assessment of the right to compensatory interest is affected.

VIII – CONCLUSION AND PROPOSED DECISION

In these terms, we are of the opinion that the present appeal should be DISMISSED.

IX – HEARING / CONCLUSION

Notified for the exercise of right to prior hearing prior to the decision of the procedure, under articles 60 paragraph 1 subparagraph b) of LGT and article 45 of CPPT, the appellant came forward in the person of her representative to exercise said right, transcribing the draft decision and arguing that the property in question belongs to the inherited estate of her father – B..., and that the appellant became owner of the same on the day of her father's death and that the appellant's residence was not assessed and that the administrative appeal be well-founded as the appellant's residence is proven according to the documentation attached to the case.

The decision is duly reasoned in the draft decision, to which reference is made, contrary to what is alleged, not only was the property of the property in question duly analyzed, from which it is reported that the appellant proceeds to alienate her share of ½ of the assets of the undivided estate –B...– head of the estate of –..., in her capacity as heir of the undivided estate (descendant pages 98), under articles 2031, 2032 and 2133 subparagraph a) of the Civil Code (CC), the said property not being assets of the claimant herself, the same is not registered in the property registry and in the land registry office in the name of the appellant, but rather in the name of the undivided estate itself, as per the elements of the notarial deed and stamp duty Form 1, pages 31 to 38 and 98 to 103.

In these terms, not being in the presence of an onerous transfer of property by the taxpayer herself now appellant, we are therefore not in the presence of gains from the onerous transfer of property intended for her own residence, and therefore the exclusion from taxation of such gains is not applicable in accordance with article 10 paragraph 5 of CIRS.

As was also duly analyzed that the prerequisite of the appellant's residence was not met, given that all the documents attached to the case do not constitute proof to the contrary of the analysis duly carried out, that is, the alienated property is located in Avª ... ... and..., ... –... ... and the taxpayer's fiscal domicile was located at ... ...– ... Lisbon, information obtained from the AT's taxpayer management and registration system, pages 107, 108 and 109.

Under article 74 paragraph 1 of LGT, the burden of proof rests with the taxpayer, now appellant" – cf. PA, pages 124-127.

5.26. The Claimant was notified of the dismissal order of the Administrative Appeal by Office no. ..., dated 28 September 2018 – cf. PA, pages 128-130.

5.27. In disagreement with the decision to dismiss the Administrative Appeal, on 31 December 2018 the Claimant filed with CAAD the request for arbitral ruling that gave rise to the present case.

REASONING REGARDING FINDINGS OF FACT

5.28. With respect to findings of fact, the Tribunal does not have to rule on all the matters alleged, and should select that which is relevant to the decision, taking into account the cause of action that supports the claim filed [cf. articles 596, paragraph 1 and 607, paragraphs 2 to 4 of the Code of Civil Procedure ("CPC"), applicable ex vi article 29, paragraph 1, subparagraphs a) and e) of RJAT], and state whether it considers it proven or unproven [cf. article 123, paragraph 2 of the Tax Procedure Code ("CPPT")].

5.29. According to the principle of free appraisal of evidence, the Tribunal bases its decision, in relation to the evidence produced, on its intimate conviction, formed from the examination and evaluation it makes of the means of proof brought to the case and in accordance with its life experience and knowledge of people (cf. article 607, paragraph 5 of CPC).

5.30. Only when the probative force of certain means is pre-established in law (as in the case of the full probative force of authentic documents, provided for in article 371 of the Civil Code) does the principle of free appraisal of evidence produced not dominate the appraisal thereof.

5.31. Regarding the findings of fact, the conviction of this Arbitral Tribunal was based on the critical analysis of the documents above discriminated and not contested by the parties and on the position assumed by them in relation to the facts.

5.32. With regard to the testimony of the three witnesses examined – E..., the Claimant's partner at the time of the facts, F..., as a friend, and G..., the Claimant's driver – given the personal relationships existing and the lack of distance from the Claimant's interests, the Tribunal relativized their contribution. In any case, the statements made are not capable of undermining the facts established which result from the documents. In fact, the witnesses stated that the Claimant used House ... during a certain period, referring to the occurrence of parties and social gatherings and stays with her partner and children. However, not only was the period during which such stays lasted not established, nor its own character of permanence, the Tribunal formed the conviction that the use of that house had a secondary, transitory and circumstantial nature.

5.33. Furthermore, the Claimant, when she purchased House ... on 15 April 2015, declared in the contract that she intended that property for her own and permanent residence, and consistently, a month later, on 20 May 2015, changed her fiscal domicile to that same address at ... . These facts, documentarily proven, are not compatible with the simultaneous and contradictory assertion that in the period from January 2015 to February 2016 (which includes the months of April and following of 2015) the Claimant had own and permanent residence in another house, House ... . They are also not compatible with the Claimant's assertion that, through an omission lapse, she had not proceeded to change her fiscal domicile from House ... in Lisbon to House ... . Because the Claimant did not forget to change her fiscal domicile from ... in Lisbon. She changed it, expressly and on her own initiative in May 2015. She did so, however, for the house she had just purchased (in April 2015) and which she declared in an authentic document to be intended for (her) own and permanent residence, House ... . In this context, it is implausible the thesis that the Claimant now sustains that during that period she resided permanently in another house, at ... .

5.34. Similarly, the moving service of furnishings from House ..., provided by a specialized transport company, motivated by the transfer thereof to a third party, does not have the capacity to demonstrate that that house was the permanent residence of the Claimant and her household, but only that the Claimant proceeded to remove the movable property to deliver House ... to the buyer under the agreed conditions, that is, without furnishings.

FACTS NOT PROVEN

5.35. The Claimant failed to prove, through documentary evidence or by the testimony of the witnesses, the following alleged facts, the burden of proof for which rests upon her, and which are judged unproven:

            (a) That during the month of January 2015 she changed her residence to House ... and resided there until 11 February 2016 (articles 6, 17 and 22 of the claim); and

            (b) That through an oversight she failed to notify the AT of the alleged change of fiscal address (article 7 of the claim).

5.36. In this context, it is worth noting that the residence certificate issued by the Parish Board of ... has no relevance whatsoever in determining or even suggesting the change of residence to ... that the Claimant invokes. Because that certificate was issued "[…] according to declarations made before this Parish Board […]", as it merely reproduces what was declared by the Claimant herself, not containing any material evidence of an external source that could prove anything whatsoever.

5.37. Moreover, the Claimant brought nothing to the case that could cause this Arbitral Tribunal to consider as proven that her center of vital interests, that is, her own permanent residence was, as she alleges, at House ... during the period from January 2015 to February 2016. She could, for this purpose, have, for example, proven consumption of water, electricity and communications as the Respondent points out. However, she did not.

5.38. On the contrary, the Claimant's conduct evidences circumstances opposed to those she seeks to demonstrate. Because following the acquisition of House ... in April 2015, and as noted above, she considered that address as her own permanent residence, having declared this expressly in the purchase contract for that property and proceeding to change her fiscal domicile to the same shortly thereafter, in May 2015, residence where she still lives today.

5.39. Added to this is the incongruence of the witnesses' testimony regarding the [Claimant's] intention to live at House ... . Indeed, if on one hand it was stated that "the intention was to live there" (F... and E...), on the other hand it was also stated that "the property had been for sale for a long time (since 2010)" and that "the sisters had a price objective for the house", so it appears that, had the alleged move with a character of permanence occurred at House ... the property would not have continued to be for sale.

5.40. With relevance to the decision no other alleged facts were verified that should be judged unproven.

1.        LEGAL GROUNDS
   

DELIMITATION OF THE SUBJECT MATTER IN DISPUTE

6.1. The question to be decided consists of determining whether the property here designated as House ... alienated in February 2016, is classifiable under the designation of own and permanent residence of the Claimant, as required by article 10, paragraph 5 of the IRS Code, for purposes of exclusion from taxation. In fact, such question breaks down into the assessment of two distinct prerequisites. The first relates to the concept of "own" residence, which the AT questioned on the ground that the property formed part of the inherited estate of an undivided estate opened by the death of the Claimant's father, in which she had an ideal share of ½, understanding that she held a right over the estate, but not a right over the immovable property. The second concerns the requirement of permanent residence which, according to the Respondent, the Claimant failed to demonstrate despite this burden resting upon her [the Claimant].

LEGAL FRAMEWORK – REQUIREMENTS FOR DELIMITATION OF NEGATIVE INCIDENCE

6.2. Real property capital gains are subject to IRS in category G - Patrimonial increments, in accordance with the provisions of articles 1, paragraph 1 and 10, paragraph 1, subparagraph a) of the IRS Code. The latter provision states, in the wording applicable at the time of the facts, the following:

"Article 10

Capital Gains

1 – Capital gains consist of gains obtained which, not being considered business and professional income, income from capital or real property income, result from:

a) Onerous transfer of real rights over immovable property and allocation of any property from private assets to business and professional activity exercised in his own name by its owner;

[…];"

6.3. Furthermore, according to the cited provision, "the gains are considered obtained at the time of the" act of onerous alienation (paragraph 3) and the income subject to IRS consists of "the difference between the realization value and the acquisition value, net of the part qualified as income from capital, as applicable" (paragraph 4).

6.4. However, at the same time, provision is made for the exclusion from IRS taxation of gains from the onerous transfer of property intended for the own and permanent residence of the taxpayer, motivated by social reasons and the promotion and realization of the right to housing. The provision governing this matter is paragraph 5 of article 10 of the IRS Code:

"5 - Excluded from taxation are gains from the onerous transfer of property intended for the own and permanent residence of the taxpayer or his household, provided that the following conditions are cumulatively verified:

a) The realization value, net of the amortization of any 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 respective construction, or in the expansion 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 the European Economic Area, provided that, in the latter case, there is exchange of information on tax matters;

b) The reinvestment provided for in the preceding subparagraph is carried out between 24 months prior and 36 months following counted from the date of realization;

c) The taxpayer expresses the intention to proceed with the reinvestment, even if partial, mentioning the respective amount in the income return for the year of alienation; […]"

6.5. This tax exclusion is grounded in the protection and fiscal promotion of the acquisition of own and permanent residence. As RUI MORAIS emphasizes, the "aim of the law is clear: to eliminate fiscal obstacles to the change of residence, in own property, by families" – cf. On IRS, Almedina, 2016, 3rd edition (reprint), p. 138 – provided that the other requirements also specified therein are met.

6.6. First and foremost, and with relevance for the case under analysis, the gain must derive from the onerous transfer of property intended for the own and permanent residence of the taxpayer or his household. In this sense, XAVIER DE BASTO states that "the 'departure' property and the 'arrival' property must be intended for own and permanent residence. Any other purpose of either or both destroys the conditions for application of the exclusion from incidence – and the capital gain realized on the 'departure' property will be taxable." – cf. IRS: Real Incidence and Determination of Net Income, Coimbra Editora, 2007, pp. 412-420 (the excerpt is from pp. 413-414). On the matter, in the same sense, see Paula Rosado Pereira, Studies on IRS: Income from Capital and Capital Gains, Almedina, 2005, pp. 99-101.

6.7. It should be noted that the wording given to article 10, paragraph 5 of the IRS Code by Law no. 109-B/2001, of 27 December, came to require, for purposes of exclusion from taxation of capital gains generated by the alienation of property, that not only the acquired property be used for own permanent residence (of the taxpayer or his household), but that the alienated property had been the own permanent residence of the taxpayer or his household – cf. Decision of the Supreme Administrative Court ("STA"), of 25 March 2015, case no. 158/13.

6.8. Thus, the nature [residential] and allocation of the properties involved [to the own and permanent residence of the taxpayer or his household] are essential conditions of the reinvestment, and of the respective regime of non-taxation in IRS, although they are not the only conditions that the law provides for the said regime of exclusion from taxation to be applied.

6.9. In the case under analysis, it was the fulfillment of the requirements relating to the "departure" property (i.e., the alienated property and generator of the capital gain) that was questioned by the Respondent, no issues being raised regarding the "arrival" property, House ... .

THE CONCEPT OF OWN AND PERMANENT RESIDENCE

6.10. The IRS Code does not define the concept of "own permanent residence", with established case law excluding the possibility of equating this concept, for purposes of applying the rule of delimitation of negative incidence under analysis [article 10, paragraph 5 of the IRS Code], with that of "fiscal domicile" provided for in article 19 of the General Tax Law ("LGT"), which corresponds, in the case of natural persons, to "the place of habitual residence" (paragraph 1, subparagraph a)). It should also be noted that article 19 of LGT establishes in paragraph 3 the obligation for taxpayers to notify their fiscal domicile to the tax administration, and provides in paragraph 4 the ineffectiveness of such change until it is communicated to the tax administration.

6.11. Fiscal domicile is not, therefore, a necessary condition for fulfillment of the normative provision of article 10, paragraph 5 of the IRS compendium, it being admitted that the taxpayer prove his permanent residence at a different address, presenting "justifying facts" showing that he has established the center of his personal life there habitually and permanently.

6.12. Notwithstanding the foregoing, with the reform of the IRS Code by Law no. 82-E/2014, of 31 December, article 13 of that Code now provides that "fiscal domicile presumes the own and permanent residence of the taxpayer who may, at any time, present proof to the contrary" (current paragraph 12, formerly paragraph 10), namely that his own and permanent residence is located in another property. The burden of proof of any of the facts invoked rests, in accordance with said rule, with the taxpayer, and any means admitted by law are admissible, reserving to the AT the possibility of demonstrating the lack of truthfulness of the means of proof presented by taxpayers or the information contained therein (cf. articles 73 and 74 of LGT).

6.13. Consequently, the IRS Code now provides for the possibility that taxpayers can exclude from taxation gains from the onerous transfer of property intended for own and permanent residence, even if they have not updated their fiscal domicile to the alienated residence.

6.14. The STA Decision of 14 November 2018, case no. 01077/11.9BESNT 01448/17, recommends that for purposes of article 10, paragraph 5 of the IRS Code: "the concept of own permanent residence is not equivalent to the concept of fiscal domicile. Indeed, differently from what occurs in this realm of income subject to IRS, for purposes of IMI and exemption (which cannot be equated with the tax exclusion at issue here) provided therein, being a benefit objective tax ('propter rem'), the law expressly provides (no. 9 of article 46 of EBF) that 'for purposes of that article' it is considered to have occurred 'allocation of the properties or parts of properties to the own and permanent residence of the taxpayer or his household if the respective fiscal domicile is established therein'. But, even so, we would still be in the presence of a rebuttable presumption, in the consideration that the circumstance of the taxpayer not having notified the change of domicile to the property regarding which he requested the exemption (of IMI), by itself, does not suggest that they do not have own and permanent residence in that property (cfr. the decision of the STA of 23/11/2011 in case no. 0590/11). (This was, moreover, the legal solution that came to be adopted in paragraphs 10 et seq. of article 13 of CIRS (added by Law no. 82-E/2014, of 31/12, in which a reform of the taxation of natural persons was carried out): only a presumption was established to the effect that fiscal domicile presumes the own and permanent residence of the taxpayer, but the taxpayer may, at any time, present proof to the contrary.)"

6.15. In a similar sense the TCAS pronounces itself in the Decision of 8 May 2019, case no. 396/08.6BECTB: "[…] on the conceptual level, habitual residence does not identify with permanent residence, nor does domicile coincide with address, that is, the place where the person has his residence, as can be inferred from the two paragraphs of article 82 of the Civil Code (see Antunes Varela and Pires de Lima, Annotated Civil Code, Vol. I, p. 98), however in tax matters there is need to give stability to the concept having been introduced in the LGT the notion of fiscal domicile, making this coincide, in the case of natural persons, with the place of his permanent residence (article 19 no. 1 subparagraph a) of LGT) with the creation of mandatory declaration of notification of the taxpayer's domicile to the tax administration (article 19 no. 2 also of LTG, at the time of the facts, now no. 3)".

6.16. A position that Arbitral Decision no. 146/2015, of 16 December 2015, had already adopted, in the following manner: "On the conceptual level we can verify the divergence between habitual residence and own and permanent residence, such as fiscal domicile does not always coincide with residence in the sense of the place where the person has his residence, and such conclusion can even be inferred from the wording of article 82 of the Civil Code, which admits the possibility of residence or domicile in different places.

[…]

From this it follows that, for purposes of exclusion from taxation of capital gains, it is not sufficient to demonstrate notification of fiscal domicile to prove that the property – the sold one ('departure' property) and the one acquired with reinvestment of gains obtained ('arrival' property) – were both permanent residences of the taxpayer and his household".

6.17. Similarly, case law has understood that the omission of the duty to notify the change of domicile does not prevent taxpayers from demonstrating the prerequisites of permanent residence, as stated in the Decision of the Central Administrative Court of the South ("TCAS") of 8 October 2015, case no. 6685/13: "in cases where the taxpayer failed to comply with its obligation to notify the change of fiscal domicile provided for in article 19 of LGT the residence of the taxpayer in a certain place can be demonstrated through justifying facts and, consequently, does not prevent the fulfillment of the prerequisites of permanent residence" because, and we quote, "(…) the fiscal domicile of natural persons is the place where they habitually reside", in line with what had already been decided regarding IMI exemption, in the STA Decision of 23 November 2011, case no. 590/11: "II - The fact that taxpayers have not notified the change of domicile to the property regarding which they requested IMI exemption, by itself, does not suggest that they do not have own and permanent residence in that property. III - The address in a certain place, the habitatio, can be demonstrated through 'justifying facts' that the beneficiary established in the property the center of his personal life".

6.18. In this context, it is to be concluded, in consonance with the understanding set forth, that fiscal domicile constitutes mere presumption of the taxpayer's permanent residence, and can be rebutted by the latter and that failure to notify the domicile or its change does not constitute an obstacle to proving the prerequisites of permanent residence through suitable justifying facts.

6.19. Finally, it should be noted regarding the concept of own residence that it cannot but be traced back to the ownership of the property which must be within the sphere of the taxpayer who derives the taxable income generated by its transfer.

CONCRETE ANALYSIS: OWN RESIDENCE

6.20. The Respondent, supported by the reasoning of the decision to dismiss the Administrative Appeal, sustains the thesis that the alienated property cannot be considered the Claimant's own residence because it forms part of the patrimony of the undivided estate opened by the death of the latter's father, being, for that reason, under the ownership of the estate and not that of the Claimant, who holds an ideal share of ½ thereof.

6.21. First of all, it is important to note that this is a posteriori reasoning which does not appear in the IRS assessment act in question, which is silent regarding any argument that excludes the exclusion from incidence based on the fact that the property formed part of the patrimony of the undivided estate opened by the death of the Claimant's father. This argument appears for the first time in the draft decision to dismiss the Administrative Appeal which was made final thereafter and cannot be taken into account for purposes of assessing the legality of the assessment act.

6.22. In any case, it should also be noted that the Respondent's thesis would not be supported, having regard to the provisions of article 2050 of the Civil Code, relating to the effects of acceptance of an inheritance, according to which:

"1. The ownership and possession of the assets of the inheritance are acquired by acceptance, independent of their physical apprehension.

1. The effects of acceptance are retroactive to the moment of opening of the succession."

6.23. The Claimant is therefore correct on this point, she and her sister being the owners of the alienated property, in their capacity as sole and universal heirs, and not the undivided estate which constitutes an autonomous patrimony devoid of legal personality and, therefore, incapable of subjective attribution of the right of ownership.

6.24. Nevertheless, beyond "own" residence the rule of exclusion from IRS taxation requires that it be permanent, and therefore the cumulative verification of this second prerequisite is necessary.

CONCRETE ANALYSIS: PERMANENT RESIDENCE

6.25. As results from the legal framework and case law above stated, the concepts of own and permanent residence are notions distinct from fiscal domicile, contrary to what the AT contends. However, fiscal domicile allows one to infer, by presumption, the own and permanent residence of taxpayers, the legislator implicitly recognizing that, in typical cases, both coincide, although this need not necessarily be the case.

6.26. In the situation at hand, the Claimant's fiscal domicile [House ...] did not correspond to the alienated property, generator of the capital gains which she sought to see excluded from IRS incidence [House ...], and therefore it was incumbent upon her to demonstrate that the presumed fact did not correspond to reality.

6.27. In this manner, once the presumption was established, it was incumbent upon the Claimant, in accordance with the rules of burden of proof, to bring elements of proof that would allow affirmation of the deduction (of the unknown fact) which it contains, demonstrating concrete facts that showed that her permanent residence was, as she alleges, House ... until the date of its alienation.

6.28. However, not only was this proof not provided, but the procedures adopted by the Claimant upon acquisition on 15 April 2015 of House ... manifest that that house was purchased for her to reside therein permanently with her family.

6.29. Indeed, the Claimant declared in the deed of acquisition of the property on Rua ... that the same was intended "exclusively for her own permanent residence" and immediately in the following month, in May 2015, she took steps to change her fiscal domicile to that property, submitting the corresponding notification of change of domicile which, until then, was located in ..., in Lisbon.

6.30. Thus, the Claimant failed to prove that when she sold House ... in February 2016, it corresponded to her permanent residence, a burden which rested upon her. In these terms, an essential condition for the exclusion from taxation of gains generated by the alienation of this property is not met, and therefore such gains are subject to IRS in accordance with the general terms of article 10, paragraph 1, subparagraph a) of the IRS Code.

6.31. The Claimant also raises the violation of articles 62, 65 and 67 of the Constitution ("CRP"), relating to the right to private property, the right to housing and the right to family, respectively, without however explicitly explaining in what the non-conformity with constitutional parameters consists, which would always have to be assessed in relation to the legal norms applied [article 10, paragraph 5 of the IRS Code] and not to the second-degree act embodied in the dismissal order of the Administrative Appeal.

6.32. It should also be noted that it is undeniable that article 10, paragraph 5 of the IRS Code concretizes a constitutional dimension of the right to housing, integrating itself, however, within the legislator's margin of discretion to establish the limits and requirements of the exclusion from taxation, with greater or lesser breadth, without this representing the violation of a constitutional norm or principle, which this Arbitral Tribunal does not perceive. Furthermore, that regime does not constitute a "tax benefit", but a delimitation of negative subjection to IRS. The Claimant's assertion therefore fails on these points.

6.33. In light of the foregoing, the Arbitral Tribunal finds that the Claimant lacks grounds with respect to the request for arbitral ruling filed, of declaration of illegality and consequent annulment of the acts of IRS assessment and compensatory interest relating to the year 2016. An identical conclusion applies to the dismissal order of the Administrative Appeal which confirmed the assessments subject to the same, with their maintenance in the legal order.

AS TO THE REIMBURSEMENT OF THE AMOUNT PAID, PLUS COMPENSATORY INTEREST

6.34. Having regard to the conclusions that precede, the request for reimbursement of the amount paid by the Claimant is equally judged unmerited, as it is supported by valid assessment acts, and likewise the claim for compensation for failure to meet the respective prerequisites, in particular due to the non-existence of error attributable to the Services from which resulted a payment of tax debt in an amount greater than that legally due (cf. article 43, paragraph 1 of LGT).

AS TO RESPONSIBILITY FOR PAYMENT OF ARBITRAL COSTS

6.35. In accordance with article 22, paragraph 4 of RJAT, "the arbitral decision issued by the arbitral tribunal includes the determination of the amount and allocation among the parties of the costs directly resulting from the arbitral proceedings".

6.36. In accordance with article 527, paragraph 1 of CPC (ex vi article 29, paragraph 1, subparagraph e) of RJAT), the party which gave rise to costs shall be condemned therein, and in this context paragraph 2 of the same article clarifies the principle of apportionment, understanding that the losing party, in proportion to the extent of its loss, gives rise to the costs of the proceedings, and therefore, in accordance with article 12, paragraph 2 of RJAT and article 4, paragraph 4 of the Costs Regulation for Tax Arbitration Proceedings ("RCPAT"), the Claimant is assigned responsibility for the entire procedural costs.

1.        DECISION
   

In light of the foregoing, this Collective Arbitral Tribunal decides to judge the request for arbitral ruling wholly unmerited and, in consequence:

(a) Maintain the acts of IRS assessment and compensatory interest contested relating to the year 2016;

(b) Maintain the decision to dismiss the Administrative Appeal filed against those assessment acts;

(c) Judge unmerited the request for reimbursement of the amount paid plus compensatory interest;

(d) Condemn the Claimant to payment of the costs of the present proceedings.

Value of the case: Having regard to articles 3, paragraph 2 of RCPAT, 97-A, paragraph 1, subparagraph a) of CPPT and 306, paragraphs 1 and 2 of CPC, the latter ex vi article 29, paragraph 1, subparagraph e) of RJAT, the value of the case is fixed at € 265,352.61.

Costs of the case: In accordance with Table I attached to RCPAT and articles 12, paragraph 2 and 22, paragraph 4 of RJAT, 4, paragraph 5 of RCPAT and 527, paragraphs 1 and 2 of CPC, ex vi article 29, paragraph 1, subparagraph e) of RJAT, the costs are fixed at € 4,896.00, to be borne by the Claimant.

Notify the parties.

Lisbon, 11 July 2019

The Arbitrators,

Alexandra Coelho Martins

Sílvia Oliveira

João Marques Pinto