Process: 721/2015-T

Date: April 26, 2016

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 721/2015-T) addresses whether a taxpayer qualifies for IRS capital gains tax exemption under Article 10(5) CIRS when selling a primary residence and reinvesting in a new one. The taxpayer sold property in July 2011 for €265,000, declared the capital gain and intention to reinvest in his 2011 IRS return, and purchased a new residence in May 2012 for €227,500. However, he failed to identify the reinvestment in his 2012 tax return due to oversight. The Tax Authority issued an additional assessment, rejecting the exemption claim because: (1) the taxpayer changed his fiscal domicile to the sold property only two days before the sale (25.07.2011), and (2) his spouse maintained a different fiscal domicile. The taxpayer argued that actual residence and fiscal domicile are distinct legal concepts, that he genuinely lived in the property as his primary and permanent residence, and that Portuguese law imposes no minimum period for fiscal domicile at a residence. The case centers on whether 'habitação própria e permanente' (primary and permanent residence) requires fiscal domicile to coincide with actual habitation, or whether factual residence is sufficient. The taxpayer demonstrated through witness testimony that the property was indeed his actual residence, despite the late fiscal domicile change. This dispute illustrates the importance of properly declaring reinvestments in subsequent tax years and maintaining consistent fiscal domicile records to avoid challenges to capital gains exemptions on residential property sales.

Full Decision

ARBITRAL DECISION

I. REPORT

A…, taxpayer no.…, resident at Rua …, no.…, …-… …, in ..., came, under Article 2, Section 1, paragraph a), and Articles 10 et seq. of the Legal Regime for Tax Arbitration, provided for in Decree-Law no. 10/2011, of 20 January, as amended by Article 228 of Law no. 66-B/2012, of 31 December (hereinafter abbreviated as "LRTA") and Articles 1 and 2 of Ordinance no. 112-A/2011, of 22 March, to request an arbitral decision on the legality of the Personal Income Tax (IRS) assessment notice no. 2015…, relating to the year 2011, as well as the dismissal of the administrative review petition (…2015…) submitted thereto.

The Tax and Customs Authority is the respondent.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 11-12-2015.

The claimant did not appoint an arbitrator, therefore, pursuant to Article 6, Section 2, paragraph a) and Article 11, Section 1, paragraph b) of the LRTA, the President of the Deontological Council of CAAD designated the undersigned as arbitrator of the sole arbitral tribunal, who communicated acceptance of the appointment within the applicable period.

On 27-01-2016, the parties were duly notified of this appointment and did not manifest any intention to challenge the arbitrator's appointment, in accordance with Article 11, Section 1, paragraphs a) and b) of the LRTA and Articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provision of Article 11, Section 1, paragraph c) of the LRTA, the Arbitral Tribunal was constituted on 11-02-2016.

Duly notified, the Tax and Customs Authority submitted a response in which it defended the inadmissibility of the claim, defending itself solely by way of challenge to the facts.

On 05-04-2016, the hearing referred to in Article 18 of the LRTA took place, during which the witnesses brought by the claimant, B…, C…, D… and E…, were examined, followed by oral arguments by the parties, commenting on the evidence produced and reiterating and developing their respective legal positions.

A period of 30 days was set for the rendering of the final decision.

The claimant seeks that the illegality and consequent annulment of IRS assessment no. 2015…, relating to the year 2011, be declared, as well as the dismissal of the administrative review petition (…2015…) that it submitted, alleging in summary:

a) The claimant acquired on 12.10.1990, for the sum of € 12,831.58, on a date omitted from the property registry, a plot of land for construction located in…, parish of…, municipality of ..., which was subsequently registered in the registry under article… .

b) On this property, a dwelling was constructed, registered in the property registry in 1994 under urban article …of the parish of…, to which was attributed the patrimonial value of € 50,278.83.

c) This property was transferred by the claimant on 27.07.2011, for the amount of € 265,000.00.

d) The claimant filed income tax return form 3, concerning IRS for 2011, indicating in the respective annex G the onerous transfer which he carried out, in 07/2011, of the property registered in the urban property registry under art…., of…, municipality of ..., for the amount of € 265,000.00, therein manifesting the intention to reinvest the entire proceeds in the acquisition of a new primary and permanent residence.

e) Such reinvestment did not, however, and by mere oversight, come to be duly identified in annex G of the IRS return for the year 2012.

f) The Tax Authority's Taxpayer Management and Registry System reveals that until 03.04.2008 the claimant had his tax domicile at…, … -…, …-… Lisbon; from 03.04.2008 to 25.07.2011 he had tax domicile at Rua…, no.…, 5º Esq, …-… Lisbon; and after 25.07.2011, he was domiciled for tax purposes at Urbanization…, …, …- … Ericeira.

g) The same system indicates that the claimant's wife has her tax domicile at Rua …no.…, 5º Esq, …-… Lisbon.

h) Both always jointly filed IRS returns as married persons.

i) The Tax Authority proceeded to make an ex officio correction of the income tax return filed by the claimant because the latter, in the income tax returns for the years following 2011, did not proceed to identify the reinvestment of the capital gains generated from the transfer of the property declared for IRS purposes in 2011 (article … of the parish of…, ...).

j) From this ex officio assessment, the claimant filed an administrative review petition on 31.08.2015 sustaining that:

  • He transferred in July 2011, for the sum of € 265,000.00, the property that generated the capital gains, where he had his primary and permanent residence;

  • He reinvested the proceeds from the sale of that property in the acquisition, in May 2012, for the sum of €227,500.00, of another property located at Rua…, no.…, parish of…, municipality of ..., also for primary and permanent residence;

  • In the income tax return form 3 for the year 2011, the claimant manifested the intention to reinvest the proceeds from the sale of the property transferred in 2011;

  • By mere oversight, due to lack of knowledge of this requirement, the claimant did not declare, when completing the IRS return for the year 2012, the reinvestment made in the acquisition of property for primary and permanent residence, a fact of which the Tax and Customs Authority was aware.

k) The administrative review petition was ultimately dismissed by the Tax Authority, in error of analysis and interpretation of law, considering that the claimant did not have a primary and permanent residence in the property transferred in 2011, due to the fact that he had not therein had, until two days before the respective transfer, his tax domicile and because his spouse did not have tax domicile in the acquired property.

l) The error of the Tax Authority, which constitutes a violation of law, is thus to consider the concepts of primary and permanent residence and tax domicile as necessarily coinciding.

m) It is indisputable that the claimant had his own and permanent residence in the property transferred in 2011 – and there had his tax domicile on the date of transfer of the property – and subsequently came to have his primary and permanent residence in the property acquired in 2012 with the proceeds of sale of that one, and to which he subsequently changed his tax domicile, thereby fulfilling the requirements upon which the application of Section 5 of art. 10 of the CIRS depends.

n) The claimant only changed his tax domicile to the transferred property on 25.07.2011 because he was alerted to this need in the context of the bureaucratic procedures inherent to the sale of the property, believing until then that it was merely a bureaucratic and formal change and that was not justified nor did it need to be made.

o) Furthermore, the law does not establish any minimum period of existence of tax domicile in the property whose transfer generates capital gains, nor does it impose any minimum period during which any citizen has the obligation to inhabit in his own and permanent manner the same property.

For its part, the respondent came in response to allege, in summary:

a) Although the claimant declared the capital gains obtained in 2011, with the onerous transfer of a property in the corresponding income tax return form 3, manifesting the intention of reinvestment for purposes of Section 5 of art. 10 of the CIRS, he did not communicate the same, within the legal period, which is why the Tax Authority issued an additional IRS assessment in default, corresponding to capital gains whose taxation had been suspended, increased by interest charges.

b) In the administrative proceedings, in the course of the administrative review petition submitted, the claimant did not provide evidence, namely in the context of a prior hearing, that on the date of transfer of the property located in the parish of…, municipality of ..., the same was allocated to the primary and permanent residence of his family unit.

c) With respect to the property acquired in 2012, he also did not demonstrate the allocation of the same to the primary and permanent residence of the family unit, and, as stated in the information that served as the basis for the dismissal of the review, "the claimant's spouse is to this day domiciled for tax purposes at Rua…, no.…, 5º esq., …-… Lisbon (...)".

d) The alleged reinvestment, whose intention was manifested by the claimant in his income tax return form 3 for 2011, was not known to the Tax Authority.

e) The data that the claimant says are revealed by the Tax Authority's Taxpayer Management and Registry System are, precisely, the addresses that the claimant communicated to the Services as being his tax domicile, communications made on the dates indicated therein, for purposes of art. 19 of the General Tax Law.

f) It is therefore a communication made by the claimants of their tax domicile, and the corresponding declarations of change of tax domicile are presumed true, by virtue of Section 1 of art. 75 of the General Tax Law.

g) The change of tax domicile on 25/07/2011 is not capable of generating the presumption sought by the claimant, on penalty of falling into a formalism that does not safeguard the legislator's intention and which the claimant himself has already stated he does not support.

h) The concept of tax domicile is, in accordance with the provision of al. a) of art. 19 of the General Tax Law, in conjunction with arts. 82 and 88 of the Civil Code, "the place of habitual residence".

i) Because this is so, it is not understood how the claimant intends to derive from the change of tax domicile which he made two days before the deed of transfer a presumption of habituality, which must presuppose either a greater effective period of time or, at a minimum, the intention to come to inhabit with habituality, and that this intention could not exist since the sale of the property was already scheduled for two days later.

j) From the articulation of Section 9 of art. 46 of the Tax Benefits Statute, with art. 19 of the General Tax Law, it follows that for purposes of Section 5 of art. 10 of the CIRS, it is presumed that the taxpayer has his place of habitual residence at the place of his tax domicile, unless proof to the contrary is made.

k) Since the claimant alleges that the place of habitual residence of his family unit does not coincide with the tax domicile, and because the burden of proving the requirements upon which the tax benefit to which he claims entitlement depends falls upon the claimant, it is the claimant who must provide such proof, which he fails to do with the documents he presents.

l) It maintains that the disputed assessment should be upheld, and the arbitral request should be judged inadmissible.

The Arbitral Tribunal is materially competent and was regularly constituted.

The parties possess legal personality and capacity, are legitimate and are legally represented (Articles 4 and 10, Section 2, of the same statute and Article 1 of Ordinance no. 112-A/2011, of 22 March).

The proceedings do not suffer from any defects and no exceptions were raised.

Thus, there is no obstacle to the examination of the merits of the case.

II. DECISION

1. Matter of Fact

1.1. Facts Established as Proven

The following facts are considered proven:

a) The claimant acquired on 12.10.1990, for the sum of € 12,831.58, a plot of land for construction located in…, parish of…, municipality of ..., omitted from the property registry, which was subsequently registered in the registry under urban article… .

b) On this property, a dwelling was constructed, registered in the urban property registry in 1994, under article …of the parish of…, municipality of ..., to which was attributed the patrimonial value of € 50,278.83.

c) The claimant allocated this property to his primary and permanent residence as well as that of his family unit (wife), making it the center of his family life, as results both from the statements made by the witnesses presented by the claimant and from the documentation attached, in particular from EDP (electricity company) invoices which show the constancy of monthly consumption throughout the year.

d) This property was transferred by the claimant on 27.07.2011, for the amount of € 265,000.00.

e) The claimant filed income tax return form 3, concerning IRS for 2011, indicating in the respective annex G the onerous transfer, in 07/2011, of the property registered in the urban property registry under art…., of…, municipality of ..., for the amount of € 265,000.00, therein manifesting the intention to reinvest the entire proceeds.

f) As a result of the submission of that income tax return form 3, assessment no. 2012…, relating to IRS for 2011, was issued, which did not consider the capital gains obtained with that transfer because the claimant had declared the intention of reinvestment.

g) On 18.05.2012, the claimant acquired another property, located at Rua…, no.…, …, …, for the sum of € 227,500.00, which he allocated to his primary and permanent residence and that of his family unit, as resulted from the witness testimony and as is stated in the respective public deed of acquisition attached to the court file;

h) Until 03.04.2008, the claimant had his tax domicile at…, … - 8º, …-… Lisbon;

i) From 03.04.2008 to 25.07.2011 he had tax domicile at Rua…, no.…, 5º Esq, …-…Lisbon;

j) After 25.07.2011, he was domiciled for tax purposes at Urbanization…, …, …- … Ericeira;

k) Currently he has tax domicile at Rua…, no.…, …, ....

l) The claimant's wife maintains her tax domicile at Rua…, no.…, 5º Esq, in Lisbon.

m) On 08.07.2015, assessment no. 2015…, relating to IRS for 2011, was issued, with additional tax and interest charges, as a consequence of the failure to file any subsequent IRS return, with reference to the years 2012, 2013 and 2014, with indication of the said reinvestment.

n) On 31/08/2015 the claimant filed an administrative review petition against that assessment with the Tax Office of … (…2015…), where he alleged that he had made the aforementioned reinvestment in 2012 but, by oversight, omitted it in the corresponding return, without, however, presenting any proof of the allegation.

o) In the administrative proceedings, in the course of the administrative review petition submitted, the claimant did not present evidence, namely in the context of a prior hearing, that on the date of transfer of the property located at Urbanization…, parish of…, municipality of ..., the same was allocated to his primary and permanent residence and that of his family unit.

p) On 22/09/2015, the claimant was notified of the decision dismissing the administrative review petition filed (RD…PT), issued by order of 17/09/2015 of the Head of the Tax Office of…, on the following grounds:

"Pursuant to Section 1, paragraph a) of art. 10 of the CIRS, capital gains are the profits obtained from the onerous transfer of real property, and these profits are subject to taxation by virtue of art. 1 and in accordance with Section 3 of art. 43, both of the CIRS. (…)

According to the grounds of the present administrative review petition, the petitioner considers that there is no place for taxation of capital gains given that there was reinvestment of the same. (…)

From a consultation of the Tax Authority's Taxpayer Management and Registry System, (…), it appears that until 2008/04/03 the petitioner maintained his tax residence at … … – 8, …-… Lisbon. From that date until 2011/07/25 he maintained his tax domicile at Rua…, no … – 5º Esq …-… Lisbon, having changed, on the aforementioned date, his tax domicile to Urbanization…, no … …-… Ericeira, corresponding to the property (real estate) sold on 2011/07/27.

The petitioner's spouse is, to this day, domiciled for tax purposes at Rua…, no …- 5º Esq. …-… Lisbon (…).

Consulting the IRS returns, it appears that over the years, the petitioner and respective spouse always jointly filed income tax returns as married persons (…), and the declared items are presumed true, pursuant to art. 75 of the General Tax Law. Article 13 of the CIRS (current Section 4, paragraph a)) provides that the family unit is constituted by spouses not separated by judgment of persons and assets and their dependents. Thus, "we must understand that the notion of family unit (…) embodies in itself the notion of family, which from a narrow perspective and as resulting from marriage is given by civil law". (Judgment of the Court of Administrative Appeal South, of 18/12/2008, case 01877/07). From this perspective, see art. 1673 of the Civil Code (C.C.), where in Section 2 it explicitly states that except for weighty reasons, spouses should adopt the family residence.

Thus, we should presume based on the legislation indicated that, given the existence of a family unit, this should have a family residence to be chosen first by common agreement. Under art. 19 of the General Tax Law, the taxpayer's tax domicile is his place of habitual residence.

The exclusion from taxation pursuant to Section 5 of art. 10 of the CIRS, depends on the destination given to the property that generated the capital gain, being a fundamental requirement that this constituted the primary and permanent residence of the family unit, which must coincide with the tax domicile of the family unit.

(…)

In view of the facts mentioned above, it appears that:

1st - The petitioner did not allocate the property now sold to his primary and permanent residence;

2nd - Given that the sale of the property results in the transfer of the thing, which occurred, as mentioned, on 2011/07/27, it is not understood how that change of address two days before the sale;

3rd - The petitioner's spouse was never domiciled for tax purposes in the property in question.

It thus appears that the conditions laid down in Section 5 of art. 10 of the CIRS are not met, so that the reinvestment of the capital gain is considered."

q) This decision resulted in additional assessment no. 2015 … of 19/10/2015, relating to the year 2011, which taxed the capital gains obtained from said onerous transfer in the amount of € 45,658.00 and whose voluntary payment period ended on 07.12.2015.

r) This request for arbitral decision was submitted on 01.12.2015.

1.2. Facts Established as Not Proven

There are no facts relevant to the determination of the case that have not been proven.

1.3. Rationale for the Establishment of the Matter of Fact

The facts established as proven are based on the documentation filed by the parties in the court record and deemed suitable by the Tribunal and on the witness testimony produced, which proved to be reliable, coherent and credible. The witnesses examined appeared to testify with impartiality and with direct knowledge of the facts to which they referred.

The witnesses C…, D… and E…, long-time friends of the claimant and his spouse, stated unequivocally and without any hesitation that they inhabited in the municipality of ..., in Urbanization…, no.…, in Ericeira until the sale of the property.

2. Law

The claimant acquired on 12.10.1990 a plot of land for construction located at Urbanization…, no.…, in…, in ..., on which he constructed a dwelling (a two-story property) which he transferred in 2011. In 2012, he acquired another property, located at Rua…, …, …, also in ....

He seeks to benefit from the provision of art. 10, Section 5 of the CIRS.

The disputed question raised in the present proceedings is whether the claimant complied with the requirement set forth in Section 5 of art. 10 of the CIRS, that is, that the property which he transferred for a valuable consideration was allocated to his primary and permanent residence or that of his family unit, in order to thus obtain the benefit of the exclusion from taxation of the capital gain obtained as income for IRS purposes.

Article 10, Section 5 of the CIRS provides that:

"Excluded from taxation are gains derived from the onerous transfer of real property allocated to the taxpayer's primary and permanent residence or that of his family unit, provided that the following conditions are cumulatively satisfied:

a) The proceeds from the transfer, deducted from the amortization of any loan contracted for the acquisition of the property, be reinvested in the acquisition of the ownership of another property, land for construction of a property and or the construction thereof, or in the expansion or improvement of another property exclusively for 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 preceding paragraph be made between the 24 months prior and the 36 months following the date of the transfer;

c) The taxpayer manifests the intention to proceed with the reinvestment, even if partial, mentioning the respective amount in the income tax return relating to the year of the transfer."

The question then arises, in the case at hand, what is the meaning of the requirement that the transferred property be allocated to the "primary and permanent residence of the taxpayer or his family unit" and the verification of such requirement.

The Tax and Customs Authority contends that the concept of primary and permanent residence coincides with that of tax domicile of the taxpayer. For this purpose, it invokes art. 19 of the General Tax Law, which provides in Section 1, paragraph a) thereof that "tax domicile is, for natural persons, the place of their habitual residence". Now, analyzing the provision literally, we can only conclude that tax domicile is what must correspond to the place of the taxpayer's residence and not the reverse.

In fact, contrary to what is argued by the Tax and Customs Authority, the fact that a certain address is registered as the tax domicile of a taxpayer does not mean that such taxpayer has at that address his habitual residence.

In this regard, the Decision of CAAD of 25.11.2013 – Proc. 103/2013-T[1], held that "the discrepancy between what formally appears as the tax domicile of a taxpayer and what is actually his habitual residence should be resolved by altering the former and making it coincide with the latter and not the opposite, (…) applying, to the extent that the respective requirements are met, the sanctions that may apply to the responsible parties."

Furthermore, the invoked Article 19 of the General Tax Law refers to "habitual residence" while art. 10, Section 5 of the CIRS uses the expression "primary and permanent residence," and there is thus not even systematic coherence, as a matter of tax domicile, that might satisfactorily support a relationship between the said provisions.

The Tax and Customs Authority further invokes, to reinforce its position, art. 46, in particular its Section 9, of the Tax Benefits Statute relating to the exemption from Property Transfer Tax.

It does not appear to us that such an argument should be accepted because if the legislator intended that the requirement for obtaining the benefit of Section 5 of art. 10 of the CIRS be the establishment of tax domicile in the transferred property, it would have explicitly provided for it, as it did in that provision of the Tax Benefits Statute[2].

Furthermore, in light of the cited CAAD decision, referring Article 10, Section 5 of the CIRS to "primary and permanent residence of the taxpayer or his family unit," this alternative will only make sense from the perspective that "primary and permanent residence" may not coincide with tax domicile.

As explained there, "Article 13/6 of the CIRS provides that 'The persons referred to in the above sections cannot, simultaneously, be part of more than one family unit, nor, being part of a family unit, be considered autonomous taxpayers.' In other words, given the existence of a family unit, there will be a tax domicile of the family unit itself, which will be the relevant one for IRS purposes, and the family unit cannot, at least for purposes of this tax, have two tax domiciles. In this context, the aforementioned reference of art. 10/5, al. a), of the CIRS to 'primary and permanent residence of the taxpayer or his family unit, can only be understood as meaning that the primary and permanent residence may differ from tax domicile. (…) the primary and permanent residence of a taxpayer, which is what is relevant for this article, may be distinct from that of his family unit, when tax domicile, for purposes of IRS, at least cannot be!'"

Even if one were to admit the possibility of considering the "primary and permanent residence" of the taxpayer to be his respective tax domicile, this would have to be viewed as a rebuttable presumption, which admits proof to the contrary, a presumption that the claimant would have rebutted in the present proceedings, with the evidence offered. This is because, under the terms of art. 73 of the General Tax Law, all presumptions established in tax matters are rebuttable.

In fact, the claimant managed to overcome such presumption by demonstrating that he actually had his primary and permanent residence as well as that of his family unit, constituted by his wife, in the property located at no. … of Urbanization…, in Ericeira.

Also, in the sense that we defend, there is established case law of the Supreme Administrative Court, regarding similar situations, according to which the concept of tax domicile does not necessarily have to coincide with that of primary and permanent residence.

This is the case of the Judgment of the Supreme Administrative Court of 23 November 2011 – case no. 0590/11, rendered in the context of Property Transfer Tax.

As stated in the summary of this judgment:

"II - The fact that taxpayers have not communicated the change of domicile to the real estate property for which they requested the Property Transfer Tax exemption, by itself, does not indicate that they do not have primary and permanent residence in that property.

III – The residence in a certain place, the habitatio, can be demonstrated through "justifying facts" that the beneficiary established the center of his personal life in the property."

Here a clear distinction is made between the concept of primary and permanent residence and that of tax domicile, the former being verified, in relation to a given property, when the taxpayer therein organizes "the conditions of normal life and of his family unit, in such a way that the place of his residence is seen therein".[3]

Thus, "the taxation of capital gains derived from the transfer of primary and permanent residence of the taxpayer or his family unit should be based on the actual non-verification of the requirements of the exclusion from taxation, and not on the non-fulfillment of mere declarative duties, and even less when it is a matter of declaring situations that do not even form part of the legal factual pattern.

To understand otherwise (…) would only be to confuse the fulfillment of principal duties (the fulfillment of the legal type) with the fulfillment of ancillary duties (facilitating the administration of the tax relationship); it would be, much more seriously, much more dangerously, to convert a tax into a penalty, confusing the tax function with the penalty function – two functions which, because they normally have the same active subject, must be strictly, constantly separated in the context of the rule of law."

Having clarified the content of the concept of "primary and permanent residence," it remains to decide whether this requirement was satisfied, for purposes of applying Section 5 of art. 10 of the CIRS.

We understand that the claimant managed to prove by the documents attached to the court record and by the unequivocal testimony of the witnesses presented by him what was alleged in his arbitral request.

In fact, it resulted from the evidence produced, with certainty, that the claimant and his spouse actually developed in the property located at Urbanization … no.…, Ericeira, the center of their life. They regularly slept there, took their meals, spent their days when not working, frequenting local establishments, socializing with friends whom they frequently received at home. It was also proven that, after the transfer of said property and while awaiting the completion of works on the one they acquired in 2012, located at Rua…, no.…, …, they temporarily inhabited a house that the witnesses, D… and E…, also own in Ericeira. It is in that property of … that they currently reside.

It is therefore considered that the establishment of primary and permanent residence by the claimant has been demonstrated not only in the property transferred in 2011, but also in the property acquired for reinvestment in 2012; the intention to reinvest was communicated; and the reinvestment was made within the legal period.

All the conditions required by art. 10, Section 5 of the CIRS having been satisfied, it is deemed appropriate to exclude from taxation the gains derived from the onerous transfer carried out by the claimant, and thus the request made by the claimant in these proceedings shall be upheld.

3. Decision

In view of the foregoing, this Arbitral Tribunal decides:

a) To judge the request for arbitral decision entirely well-founded and, in consequence, to declare illegal the additional IRS assessment no. 2015…, relating to the year 2011, which resulted in a total balance due of € 45,658.00, annulling it;

b) To condemn the respondent to pay the costs of the proceedings.

4. Value of the Proceedings

The value of the proceedings is fixed at € 45,658.00, pursuant to Article 305, Section 2 of the Code of Civil Procedure and Article 97-A, Section 1, a), of the Code of Tax Procedure and Process, applicable by virtue of paragraphs a) and b) of Section 1 of Article 29 of the LRTA and Section 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

5. Costs

The value of the arbitration fee payable by the respondent is fixed at € 2,142.00, pursuant to Articles 12, Section 2, and 22, Section 4, both of the LRTA, and Article 4, Section 4, of the Regulation of Costs in Tax Arbitration Proceedings and Table I attached thereto.

Let notification be made.

Lisbon, 26 April 2016

The Sole Arbitrator,

(Cristina Aragão Seia)

[1] The Arbitral Tribunal, in this case, was constituted by Dr. José Pedro Carvalho (principal arbitrator) by Professor Doctor Fernando Borges de Araújo and by Dr. José Rodrigo de Castro.

[2] Article 46, Section 9 of the Tax Benefits Statute provides that: "(…) 9 – For purposes of the provision herein, it is considered that there has been allocation of real properties or parts of real properties to the primary and permanent residence of the taxpayer or his family unit, if his tax domicile is established therein. (…) ".

[3] It is further explained that "it is evident that, being habitual residence the place where a person normally lives and has the center of his life, there are no great differences between 'tax domicile' and 'permanent residence': between the two figures there is an intimate relationship, which is translated in both presupposing a place with which a certain person is in connection, the place where he has his organized existence and which, as such, serves him as the basis of his life. But, at the conceptual level, neither does habitual residence identify with permanent residence, nor does domicile coincide with address, that is, the place where a person has his residence, as can be inferred from the two sections of Article 82 of the Civil Code (cf. Antunes Varela and Pires de Lima, Annotated Civil Code, Vol. I, p. 98 and Luís Carvalho Fernandes, General Theory of Civil Law, Vol. I, p. 380 and 381). The presupposition of 'primary and permanent residence' is the factual situation that conditions the exemption from Property Transfer Tax. The requirement of permanence in the 'residence' (the law does not use the term 'habitual residence'), should be understood in the sense of habituality and normality and not strictly in the absolute chronological sense of stay without any break in continuity. To ensure the purpose underlying the granting of the tax benefit, which consists in encouraging and promoting access to primary residences (cf. Section 2, al. c) of art. 65 of the Constitution of the Portuguese Republic), it is sufficient that the beneficiary organize in the property the conditions of his normal life and of his family unit, in such a way that it is seen therein the place of his residence." Judgment of the Supreme Administrative Court of 23 November 2011 – case 590/11, Reporting Councilor Lino Ribeiro.

Frequently Asked Questions

Automatically Created

What are the tax implications of capital gains (mais-valias) on the sale of a permanent residence under Portuguese IRS?
Under Portuguese IRS law, capital gains (mais-valias) from selling real estate are generally taxable at 50% of the gain (metade do saldo entre as mais-valias e as menos-valias). However, Article 10(5) of the CIRS provides an important exemption: if the taxpayer sells their primary and permanent residence (habitação própria e permanente) and reinvests the proceeds in acquiring, constructing, or improving another primary residence within specific timeframes (36 months before or 24 months after the sale), the capital gain can be partially or fully exempt from taxation. The taxpayer must declare the intention to reinvest in Annex G of the IRS return for the year of sale, and subsequently identify the actual reinvestment in the tax return for the year it occurs. Failure to properly declare the reinvestment can result in the Tax Authority issuing an additional assessment for the previously suspended taxation, plus interest charges.
How does fiscal domicile (domicílio fiscal) affect the IRS capital gains tax exemption for owner-occupied housing?
Fiscal domicile (domicílio fiscal) is a critical but contested factor in qualifying for the IRS capital gains exemption on owner-occupied housing. The Tax Authority often interprets 'habitação própria e permanente' (primary and permanent residence) as requiring the taxpayer's fiscal domicile to be registered at the property address, preferably for a substantial period before the sale. In Process 721/2015-T, the Tax Authority rejected the exemption claim because the taxpayer only changed his fiscal domicile to the sold property two days before the sale, and his spouse maintained a different fiscal domicile. However, taxpayers argue that fiscal domicile (a formal administrative registration) and actual permanent residence (factual habitation) are distinct legal concepts under Portuguese law. Courts and arbitral tribunals have increasingly recognized that the CIRS does not explicitly require a minimum period of fiscal domicile registration, and that evidence of actual habitation—through utility bills, witness testimony, and other factual proof—can establish primary and permanent residence even when fiscal domicile records are imperfect or recently updated.
What conditions must be met to qualify for the permanent residence (habitação própria e permanente) exemption from IRS capital gains tax?
To qualify for the permanent residence (habitação própria e permanente) exemption from IRS capital gains tax under Article 10(5) CIRS, several conditions must be met: (1) The sold property must have been the taxpayer's actual primary and permanent residence—where they habitually lived, not a secondary residence or investment property; (2) The taxpayer must declare the capital gain and manifest the intention to reinvest in Annex G of the IRS return for the year of sale; (3) The taxpayer must reinvest the sale proceeds (fully or partially) in acquiring, constructing, or improving another property for use as primary and permanent residence; (4) The reinvestment must occur within the legal timeframe—generally 36 months before or 24 months after the sale date; (5) The actual reinvestment must be properly identified in Annex G of the IRS return for the year when the reinvestment occurs; (6) The new property must also be allocated to primary and permanent residence. While the law does not explicitly mandate a minimum period of fiscal domicile registration or occupation, taxpayers should maintain evidence of actual habitation (utility contracts, correspondence, witness statements) and ensure fiscal domicile records align with actual residence to avoid disputes with the Tax Authority.
Can a taxpayer challenge an IRS capital gains tax assessment through arbitration at CAAD?
Yes, taxpayers can challenge IRS capital gains tax assessments through arbitration at CAAD (Centro de Arbitragem Administrativa). Process 721/2015-T exemplifies this procedure. Under the Legal Regime for Tax Arbitration (LRTA - Decree-Law 10/2011), taxpayers have the right to request arbitral decisions on the legality of tax assessments, including IRS liquidation notices and dismissals of administrative review petitions (reclamações graciosas). Tax arbitration provides an alternative to judicial courts, offering faster resolution of tax disputes. Taxpayers can challenge assessments involving capital gains taxation, including disputes over whether properties qualify as primary residences, whether reinvestment requirements were met, and whether the Tax Authority correctly applied exemptions under Article 10(5) CIRS. The arbitration process allows taxpayers to present evidence (including witness testimony), submit legal arguments, and obtain binding decisions on the legality of tax assessments. CAAD arbitration has become increasingly popular for resolving IRS disputes, particularly complex issues involving interpretation of tax domicile, permanent residence requirements, and reinvestment compliance.
What is the procedure for filing a tax arbitration request (pedido de pronúncia arbitral) against an IRS liquidation decision?
The procedure for filing a tax arbitration request (pedido de pronúncia arbitral) against an IRS liquidation decision at CAAD involves several steps, as illustrated in Process 721/2015-T: (1) Submit the arbitration request under Article 2(1)(a) and Articles 10 et seq. of the LRTA (Decree-Law 10/2011) and Ordinance 112-A/2011, identifying the contested tax assessment and legal grounds; (2) The CAAD President accepts the request and automatically notifies the Tax and Customs Authority, which becomes the respondent; (3) If the claimant doesn't appoint an arbitrator, the CAAD Deontological Council President designates one for the sole arbitral tribunal; (4) Parties are notified of the arbitrator appointment and may challenge it within the legal period (typically 7 days); (5) The arbitral tribunal is formally constituted; (6) The Tax Authority submits a written response defending its position; (7) A hearing is scheduled under Article 18 LRTA where witnesses may be examined and parties present oral arguments; (8) The arbitrator issues a final decision within 30 days after the hearing. Throughout the process, taxpayers can submit documentary evidence, witness testimony, and legal arguments to support their challenge to the assessment's legality.