CAAD 739/2014-T: Emigrant Capital Gains Reinvestment IRS Tax Exemption Ruling

ARBITRAL AWARD

I – REPORT

1. On 24 October 2014, A…, taxpayer no. …, hereinafter referred to as the Claimant, requested the constitution of an arbitral tribunal and filed a request for arbitral decision, pursuant to paragraphs a) and b) of section 1 of article 2 and paragraph a) of section 1 of article 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter referred to only as RJAT), in which the Tax and Customs Authority (hereinafter referred to as AT) is the Respondent.

2. The Claimant is represented, in these proceedings, by its proxy, Dr. B…, and the Respondent is represented by jurists, Dr. C… and Dr. D….

3. The request for constitution of the arbitral tribunal was accepted by the Honourable President of CAAD and was notified to the Respondent on 28 October 2014.

4. By means of the request for constitution of the arbitral tribunal and for arbitral decision, the Claimant seeks the annulment of the act of self-assessment of Personal Income Tax no. 2014 … of 01.02.2014, relating to the year 2011, in the amount of € 20,404.44 (twenty thousand, four hundred and four euros and forty-four cents).

5. After verification of the formal regularity of the request filed, pursuant to paragraph a) of section 2 of article 6 of RJAT and having the Claimant not proceeded to appoint an arbitrator, the arbitrator Dr. Jorge Carita was appointed by the President of the Deontological Council of CAAD.

6. The Arbitrator accepted the appointment made, and the arbitral tribunal was constituted on 6 January 2015, at the headquarters of CAAD, located at Avenida Duque de Loulé, no. 72-A, in Lisbon, as evidenced by the minutes of constitution of the arbitral tribunal which were drawn up and are attached to these proceedings.

7. The hearing provided for in article 18 of RJAT was initially scheduled for 16 June 2015, but due to the impossibility of the Respondent's proxy, it was rescheduled to 6 July 2015, at which the witnesses present were heard, whose testimony was recorded, pursuant to section 2 of article 118 of CPPT, applicable by virtue of paragraph a) of section 1 of article 29 of RJAT. Following the completion of the witness examination, the arbitral tribunal notified the Claimant and the Respondent to, successively, submit written pleadings within a period of 10 days, with the period for the Respondent to begin upon notification of the filing of the Claimant's pleadings.

8. Furthermore, at the hearing provided for in article 18 of RJAT, the Tribunal decided, pursuant to section 2 of article 21 of RJAT, to extend by two months the period for rendering the decision, and consequently set 20 October 2015.

9. The written pleadings of the Claimant and the Respondent were filed on 20 August 2015 and 7 September 2015, respectively.

II. The Claimant submits its claim, in summary, as follows:

1. The Claimant supports the request for annulment of the act of assessment of Personal Income Tax (IRS) to which it was subjected, as illegal, on the grounds of the following defects:

a) Violation of the principle of the right to be heard of the interested parties and the right to be heard, on the grounds that it understands, on one hand, that "to the arguments invoked by the Claimant it is not evident that the AT has provided a response, choosing to maintain the exact same text set out in the draft decision despite the matters invoked at the prior hearing stage" and, on the other hand, "in the exercise of its right to prior hearing, the Claimant attached new documentation intended to prove the facts it alleged, and also requested that the AT proceed with complementary investigations, namely, that the witnesses indicated by it be questioned. However, such questioning was not carried out by the AT, nor did it pronounce on the irrelevance of questioning the said taxpayers."

b) Concluding, on this matter, to the effect that: "In the present case, there is a complete omission of pronouncement, by the body that performed the impugned act, on the matters invoked at the prior hearing stage. The omission of the statement of reasons of the act constitutes a formal defect, due to lack of statement of reasons of the act, capable of leading to the annulment of the procedural decision, insofar as the AT violated an absolutely essential formality imposed by section 1 of article 60 of LGT, by section 1 of article 100 of CPA and articles 7 and 8 of CPA and article 267, section 4 of the Const. of the Port. Rep."

c) Violation of the rules of applicability contained in sections 5 and 6 of article 10 of the Code of Personal Income Tax (CIRS), as the Claimant understands that, notwithstanding being an expatriate in Germany, "the centre of vital interests of the Claimant and spouse has always been located in Portugal. In fact, the claimant, spouse and their respective family unit maintained, from 1996 onwards, until the date of its sale their own and permanent residence in the aforementioned property located in the parish of …, city of Braga in conditions that demonstrated the intention to reside there, with the purpose of maintaining their residence there, they spent nights there using that property as their own and permanent residence when they were in Portugal and this happened several times in a year."

d) It further adds that "the Claimant's son maintained his tax residence at Rua …, no. …, … …, Braga (address of the property described above) from 27.07.2010 until 11.04.2012."

e) It further states that "In fact, since the property disposed of located in the parish of …, city of Braga was intended and was always used as the Claimant's own residence, it proceeded with the reinvestment of the sale value, in the amount of € 100,000.00 (one hundred thousand euros), in the acquisition of the autonomous unit designated by the letter "M", forming part of the urban property located at Rua …, parish and municipality of Vila do Conde." as "From the moment of its purchase, the property, located in Vila do Conde became the Claimant's own and permanent residence (…)" which it acquired "15 months after the disposal of the property located in the parish of …, city of Braga."

f) Concluding, in the initial pleading to the effect that "all the prerequisites are met for the income obtained from capital gains obtained with the property disposed of on 03.06.2011 to be exempt from taxation, as determined by paragraph b) section 5 of article 10 of CIRS. And insofar as this is concerned, the assessment impugned here is illegal, due to error in the classification of the taxable fact, which constitutes grounds for judicial review and annulment of the impugned acts (article 99 of CPPT – by virtue of article 10, section 2 paragraph a) of RJAT."

III. In its Reply the Respondent invoked, in summary, the following:

For its part, the Respondent, defends its position by invoking that:

a) With respect to the alleged violation of the right to prior hearing, the Respondent defends that: "contrary to what is alleged in the initial pleading, the AT considered, (…) the arguments put forward by the C., at the prior hearing stage, and, because it did not consider it valid for alteration of the draft decision, it did not reflect it in the final decision. Moreover, this judgment is expressly set out in the statement of reasons of the decision of 11/07/2014."

b) It further adds that: "the C. also alleges that the AT in order to ascertain material truth, should have heard the witnesses indicated at the prior hearing stage – which is not true.", because, "the witness examination, given the facts that needed to be ascertained, could only have relevance, to clarify or supplement documentary evidence that was not produced – and, therefore, the AT did not proceed with the questioning of the indicated witnesses."

c) With respect to the alleged Violation of the rules of applicability contained in sections 5 and 6 of article 10 of the Code of Personal Income Tax (CIRS), the Respondent argues that the Claimant "could not benefit from the exclusion of tax applicability provided for in paragraph a) of section 5 of article 10 of CIRS, because the C. did not meet the requirements for this purpose, in particular, did not meet the requirement relating to the use of the disposed property, object of the capital gains, as own and permanent residence.", particularly because, "the C. notwithstanding having acquired in 1988 the land where it later built the property, object of this dispute, it is certain that it affirms that it did not occupy it on a permanent basis, in the sense of section 5 of article 10 of CIRS. First of all, because as it itself acknowledges in the initial pleading it did not reside in Portugal."

d) Continuing, furthermore, the Respondent, to the effect that: "And then, as the C. itself also states, it continued not to reside in Portugal after the construction of the said property, maintaining this factual situation until the date of its disposal. Moreover, the C. had its tax residence at another address, not that of the disposed property."

e) Adding to the effect that: "the tax administration understood that the C. could not benefit from the exclusion of tax applicability provided for in paragraph a) of section 5 of article 10 of CIRS, because the C. did not meet the requirements for this purpose, in particular, did not meet the requirement relating to the use of the disposed property, object of the capital gains, as own and permanent residence. (…) Now, notwithstanding the C. having respected the 36-month reinvestment period and having declared the intention to allocate the acquired property to own and permanent residence, the legal requirement that the sold property also constituted its own and permanent residence was not met.", because, in fact, "the intention to reside is not, naturally, sufficient for the fulfilment of the requirements provided for in section 5 of article 10 of CIRS."

f) Ending to the effect that: "The C. notwithstanding having acquired in 1988 the land where it later built the property, object of this dispute, it is certain that it affirms that it did not occupy it on a permanent basis, in the sense of section 5 of article 10 of CIRS. First of all, because as it itself acknowledges in the initial pleading, it did not reside in Portugal. And then, as the C. itself also states, it continued not to reside in Portugal after the construction of the said property, maintaining this factual situation until the date of its disposal. Moreover, the C. had its tax residence at another address, not that of the disposed property. (…) The C. also alleges that the disposed property constituted the own and permanent residence of its son (…) from 2009 onwards (…) [i]t happens that the C.'s son, born (…) does not constitute "family unit", within the meaning of article 13 of CIRS."

g) Concluding, thus, that "no defect can be attributed to the impugned act, which made a correct application of the facts to the law."

IV. Purification

The Tribunal is competent and is duly constituted, pursuant to paragraph a) of section 1 of article 2 and articles 5 and 6, all of RJAT.

The parties have legal personality and capacity, appear to be legitimate and are duly represented.

No nullities, exceptions or preliminary issues arise that prevent the knowledge of the merits of the claim.

V. Factual Matters

With relevance for the decision, the following facts are held as proven:

A. On 13.06.1980, the Claimant married E… (see Doc. no. 7 attached to the initial pleading);

B. On 15.02.1982, the couple's son, F… was born (see Doc. no. 8 attached to the initial pleading);

C. On 05.05.1988 the Claimant and the spouse acquired a plot of land, intended for urban construction, with an area of 700 m2, designated as lot no. …, located in part at … and in part at …, parish of …, municipality of Braga, described in the Land Registry of Braga under no. … of the parish of … (see Doc. no. 9 attached to the initial pleading);

D. On this land, the Claimant and her husband built a house, in 1996, registered in the respective matrix under article …, described in the 1st Land Registry of Braga under no. …/… (see Doc. no. 11 attached to the initial pleading and witness testimony);

E. The Claimant and the spouse were expatriates in Germany, earning income from employment there and being taxed there (witness testimony);

F. On 18.11.2010, the marriage of the Claimant and E… was dissolved by divorce (see Doc. no. 7 attached to the initial pleading);

G. The Claimant's son had his tax residence at Rua …, no. …, …, in Braga, from 27.07.2010 until 11.04.2012 (see Doc. no. 11 attached to the initial pleading);

H. The tax residence of the Claimant that appears in the cadastral register, and until the disposal of the property located in the parish of …, was that of the address of her parents-in-law (agreement and witness testimony);

I. When the Claimant, the spouse and the son came to Portugal, which occurred several times a year, they spent nights, received friends and family and mail, in the property located in the parish of … and paid the expenses of the same (witness testimony);

J. On 03.06.2011, the Claimant disposed of ½ of the urban property registered in the matrix under article …, located in the parish of …, municipality of Braga, for the amount of € 100,000.00 (one hundred thousand euros) (see Doc. no. 12 attached to the initial pleading);

K. On 20.09.2012, the Claimant acquired, for the value of € 110,000.00 (one hundred and ten thousand euros) the autonomous unit designated by the letter "M", forming part of the urban property denominated "Lot …", located at Rua …, no. …, …, …, …, … and … in the parish and municipality of Vila do Conde, registered in the urban matrix under article … and described in the Land Registry of Vila do Conde under no. … of the parish of Vila do Conde, without having needed to request any bank loan for this purpose (see Docs. no. 13 and 14 attached to the initial pleading);

L. The Claimant in the deed of purchase and sale of the autonomous unit designated by the letter "M" forming part of the urban property denominated "Lot …", located at Rua …, no. …, …, …, …, … and … in the parish and municipality of Vila do Conde, registered in the urban matrix under article … and described in the Land Registry of Vila do Conde under no. … of the parish of Vila do Conde, declared that the same was intended for her own and permanent residence (see Doc. no. 13 attached to the initial pleading);

M. The Claimant did not file a model 3 income tax return for the year 2011, within the established period, even after notification by the tax administration to do so (see pages 11 and 12 of the administrative file);

N. On 12.02.2014, the Claimant was notified of the act of self-assessment of IRS no. 2014 …, dated 01.02.2014, relating to the year 2011, in the total amount of € 20,404.44 (twenty thousand, four hundred and four euros and forty-four cents). (see Docs. no. 1 and 2 attached to the initial pleading);

O. On 17.03.2014 the Claimant filed an administrative appeal with the Tax Office of Vila do Conde, against the act of self-assessment of IRS for the year 2011. (see Doc. no. 3 attached to the initial pleading);

P. The Claimant, in June 2014, was notified, through Official Letter no. …/…, of 2014-06-04, of the draft decision to dismiss the above-identified administrative appeal, and to exercise the right to prior hearing, pursuant to the provisions of article 60 of the General Tax Law (see Doc. no. 4 attached to the initial pleading);

Q. The Claimant, on a date that cannot be determined precisely, exercised the right to prior hearing (see Doc. no. 5 attached to the initial pleading and by agreement);

R. On 29.07.2014, the Claimant was notified, through Official Letter no. …/… of 2014-07-23, of the final decision to the effect of dismissing the administrative appeal. (see Doc. no. 6 attached to the initial pleading).

VI. Motivation of Factual Matters

For the conviction of the Arbitral Tribunal, with respect to the facts proven, the documents attached to the proceedings were relevant, as well as the administrative file, and the witness testimony, all analysed and weighed in conjunction with the pleadings, from which there is agreement regarding the factuality presented by the Claimant in the request for arbitral decision.

VII. Facts Held as Not Proven

There are no facts held as not proven, because all facts relevant to the assessment of the claim were held as proven.

VIII. Legal Grounds

In the present case, there are two contested questions of law that require assessment. They are:

a) To determine whether there was omission of an essential formality, by the fact that the Respondent did not transpose to the final decision to dismiss the administrative appeal, the arguments made by the Claimant, as well as the fact that it did not question the witnesses indicated in the prior hearing request that it filed.

b) And if the above question fails, to determine whether the Claimant can benefit from the exclusion from taxation of capital gains resulting from the disposal, on 03.06.2011, of the property located at Rua … no. …, registered in the matrix under article … of the parish of …, municipality of Braga.

Let us see,

I – On the alleged violation of the right to be heard of interested parties, provided for in article 60 of the General Tax Law (LGT)

1. The Claimant invokes as grounds for the illegality of the additional Personal Income Tax assessment impugned in these proceedings, omission of formality, as it understands, on one hand, that "to the arguments invoked by the Claimant it is not evident that the AT has provided a response, choosing to maintain the exact same text set out in the draft decision despite the matters invoked at the prior hearing stage" and, on the other hand, "in the exercise of its right to prior hearing, the Claimant attached new documentation intended to prove the facts it alleged, and also requested that the AT proceed with complementary investigations, namely, that the witnesses indicated by it be questioned. However, such questioning was not carried out by the AT, nor did it pronounce on the irrelevance of questioning the said taxpayers."

2. In its defence, the Respondent alleges, on one hand, that there was no violation of the right to be heard exercised by the Claimant, since "the arguments put forward by the C., (…) are expressly set out in the statement of reasons of the decision of 11/07/2014.", and on the other hand, "the witness examination, given the facts that needed to be ascertained, could only have relevance, to clarify or supplement documentary evidence that was not produced – and, therefore, the AT did not proceed with the questioning of the indicated witnesses."

3. The question arises here as to whether the Respondent violated or did not violate the right to prior hearing exercised by the Claimant, by not pronouncing itself in the final decision on the arguments presented by it and by not questioning the witnesses called by it, that is, the question arises as to whether there was a violation of essential formality that tainted the assessment act impugned in these proceedings.

4. Now, the right of participation of interested parties finds its provision in article 8 of the Code of Administrative Procedure (CPA), according to which:

"Public Administration bodies must ensure the participation of individuals, as well as of associations that have the defence of their interests as their purpose, in the formation of decisions that concern them, namely through their hearing in accordance with this Code".

1. The content and provision of this article 8 of the CPA is then specified by articles 100 to 103 of the CPA providing, as is relevant here, that: "interested parties have the right to be heard in the procedure before the final decision is taken, and must be informed, in particular, of the likely sense of this."

2. In the field of tax law, the right of participation is provided for in article 60 of the LGT, providing that:

"1 - The participation of taxpayers in the formation of decisions that concern them may take place, whenever the law does not provide otherwise, by any of the following methods:

a) Right to be heard before assessment;

b) Right to be heard before the total or partial dismissal of requests, administrative appeals, remedies or petitions;

c) Right to be heard before the revocation of any tax benefit or administrative act;

d) Right to be heard before the decision to apply indirect methods, when there is no inspection report;

e) Right to be heard before the conclusion of the inspection report.

2 - The hearing is dispensed with:

a) In the case of assessment being made on the basis of the taxpayer's declaration or the decision on the request, administrative appeal, remedy or petition being favourable to him;

b) In the case of assessment being made self-assessment, on the basis of objective values provided for in the law, provided that the taxpayer has been notified to file the missing declaration, without doing so.

3 - Having the taxpayer been previously heard at any of the stages of the procedure referred to in paragraphs b) to e) of section 1, hearing before assessment is dispensed with, except in case of invocation of new facts on which he has not pronounced.

4 - The right to be heard must be exercised within the period set by the tax administration in registered mail to be sent for that purpose to the taxpayer's tax residence.

5 - In any of the circumstances referred to in section 1, for purposes of exercising the right to be heard, the tax administration must communicate to the taxpayer the draft decision and its statement of reasons.

6 - The period for exercising the right to be heard orally or in writing is 15 days, and the tax administration may extend this period up to a maximum of 25 days depending on the complexity of the matter.

7 - New elements raised in the hearing of taxpayers must necessarily be taken into account in the statement of reasons of the decision."

1. Having said this, and assessing the specific case, we can observe that the Respondent notified the Claimant of the draft decision on the administrative appeal that it filed regarding the impugned assessment act, giving it the opportunity to exercise the right to be heard that was available to it,

2. … which, taking advantage of this same right, put forward the arguments it considered capable of changing the conviction of the AT regarding the decision projected to the effect of dismissing the appeal and, called witnesses.

3. Now, the Claimant invokes that the arguments made at the prior hearing stage were not heeded by the AT in its final decision, and that it did not question the witnesses called, which is why it considers that an essential formality has been omitted.

4. For its part, the Respondent states that it did not omit any formality (essential or non-essential) since it duly considered the arguments invoked by the Claimant at the prior hearing stage, and these did not contribute to the AT changing the position manifested in the draft decision, and that the questioning of the witnesses called by the Claimant "given the facts that needed to be ascertained, could only have relevance, to clarify or supplement documentary evidence that was not produced – and, therefore, the AT did not proceed with the questioning of the indicated witnesses."

5. Now, it is therefore necessary to assess whether there was an omission of formality (essential or non-essential), and, in this way, whether the Respondent violated the right to prior hearing that was available to the Claimant.

Let us see,

1. The jurisprudence of the Supreme Administrative Court has formed a solid orientation as to formal defects, understanding that these do not necessarily impose the annulment of the act to which they relate, and that essential procedural formalities degrade to non-essential ones if, despite them, satisfaction was given to the interests that the law had in mind in providing for them.

2. See, as to this matter the syllabus of the Judgment of the STA, delivered in appeal no. 0496/06, of 06.12.2006, according to which:

"I - The right to be heard constitutes a manifestation of the principle of the right to be heard as, thereby, it is not only possible to confront the points of view of the Administration with those of the administered party but also to allow the latter to request the production of new evidence that invalidates, or at least calls into question, the paths that the Administration intends to take.

II - And, because this is so, and because it constituted an essential formality the violation of the referred procedural norm or its incorrect implementation has as its normal consequence the illegality of the final act itself and its consequent annulability.

III - However, this is not always the case, as in certain cases the law dispenses with its compliance (see article 103 of the CPA and sections 2 and 3 of article 60 of the LGT) and, in others, it may degrade to non-essential formality and, therefore, be omitted without resulting in illegality determining the annulment of the act."

1. Furthermore, and in accordance with what jurisprudence has been pointing out, the omission of a particular formality (including the omission of the right to prior hearing itself) may be considered an omission of non-essential formality if it can be demonstrated (assessment dependent on the concrete circumstances of each case) that, even without it having been complied with, the final decision of the procedure could not be different.

2. In effect, and in the case in question, the Claimant exercised the right to prior hearing, for which it was duly notified, and invoked the arguments it considered capable of changing the position of the AT, but the understanding of the Respondent, considering these same arguments, is that they were not valid to change the draft decision, which is why it maintained the sense of the decision, converting it into final.

3. As to this matter it is to be noted what was upheld in the Judgment of the Supreme Administrative Court delivered in proceedings no. 0548/12, of 24.10.2012, according to which:

"I – Pursuant to the provisions of article 60, section 7, of the LGT, if it is a matter of new elements relating to factual matters, the carrying out of new investigations may be justified, officially or at the request of interested parties, if they should be considered as appropriate for the ascertainment of the factual matters on which the decision should be based (articles 58 of the LGT and 104 of the CPA).

II – Under penalty of the right to be heard transforming itself into an innocuous ritual, in which the arguments and documents presented by the taxpayer fall under supreme indifference, its analysis by the administration is required, so as to make visible that the decision of the procedure results from a transparent consideration of the elements of fact and of law submitted to its assessment.

III – The principle of beneficial interpretation of the administrative act is only admissible when the intervention of the interested party in the tax procedure is unequivocally incapable of influencing the final decision, which generally occurs in cases where there is an evident legal situation or it is a matter of mandatory administrative activity, with no possibility of the hearing having an influence on the content of the decision."

1. Now, considering that the Respondent considered the arguments made by the Claimant, appearing the same "expressly set out in the statement of reasons of the decision of 11/07/2014.", and that it only did not question the witnesses because the same would only have relevance "to clarify or supplement documentary evidence that was not produced", the present arbitral tribunal understands to the effect that there is no violation of omission of essential formality in the present proceedings, and is therefore not to accept the claim filed by the Claimant.

II – On the alleged violation of the rule of applicability of sections 5 and 6 of article 10 of the Code of Personal Income Tax (CIRS)

1. The question that arises here is whether or not the Claimant can benefit from the exclusion, provided for in paragraph a) of section 5 of article 10 of the CIRS, of taxation of capital gains obtained from the disposal of ½ of the property located in the parish of ….

2. Now, paragraph a) of section 5 of article 10 of the CIRS provides that:

"5 - Excluded from taxation are the gains arising from the onerous transfer of properties intended for own and permanent residence of the taxpayer or of its family unit, under the following conditions:

"

1. From a careful reading of the legal provision here in question, we find that the legal requirements for the exclusion from taxation of gains obtained from the onerous transfer of properties are:

a) the disposed property is intended for own and permanent residence of the taxpayer or of its family unit;

b) the value of the proceeds is reinvested in the acquisition of property for the same purpose within 24 months;

c) the value of the proceeds is reinvested in the acquisition of ownership of another property.

1. As to this matter, the Respondent understands that, in the case in question, the requirements provided for in section 5 of article 10 of the CIRS are met, with the exception of that relating to "own and permanent residence" of the Claimant, as far as the property that it disposed of, in 2011, which is why the capital gain obtained, whose assessment is impugned in these proceedings, should not be excluded from taxation, because the same is an expatriate in Germany, which is why it cannot be considered to have own and permanent residence in Portugal. Moreover, it reinforces this position by mentioning that: "the C. had its tax residence at another address which is not that of the disposed property."

2. In contrast, the Claimant invokes that, "the fact that the Claimant is an expatriate in Germany is not sufficient to conclude that the Claimant did not have own and permanent residence in the disposed property, in 2011, from which it obtained the gain, in question, because it was in that property that the Claimant, her spouse (as long as such) and her son, "spent nights (…) when they were in Portugal and this happened several times in a year. In this property they led the normal life of a family unit, they received their friends and family, they received mail and paid the expenses of the respective property."

Now, let us see,

1. In effect, and specifically, in the present proceedings the question arises as to the meaning of "own and permanent residence of the taxpayer or of its family unit", and the application of the concept to the specific case.

2. The Respondent understands that the concept of "own and permanent residence of the taxpayer or of its family unit" should be interpreted as corresponding to the concept of tax residence defined in paragraph a) of section 1 of article 19 of the LGT, according to which: "the tax residence of the taxpayer is, except as otherwise provided: for natural persons, the place of habitual residence",

3. However, with due respect, it does not seem to us that the Respondent is correct as to this position, since the wording of paragraph a) of section 5 of article 10 of the CIRS is clear in the expression it uses of "own and permanent residence", ignoring the concept of tax residence.

4. In effect, it seems to us that if the legislator intended that one of the requirements for the exclusion of taxation of gains from the onerous transfer of a property was the allocation of this to the tax residence of the taxpayer, it would have expressed it appropriately, and would have used the expression "tax residence" and not that of "own and permanent residence", which, as we shall see, do not have the same meaning.

5. In fact, the distinction between the concepts "own and permanent residence" and "tax residence" for purposes of the application of paragraph a) of section 5 of article 10 of the CIRS was, already the subject of arbitral assessment, in proceedings no. 103/2013 T, to which we hereby adhere and follow, as we understand that it is the same clear and transparent, according to which:

"Article 10, section 5 refers to "the own and permanent residence of the taxpayer or of its family unit". This alternative will only make sense, as will be seen below, from the perspective that the residence "own and permanent residence" may not coincide with tax residence.

Let us see.

Article 13, section 6 of the CIRS states that "The persons referred to in the preceding sections cannot, simultaneously, be part of more than one family unit nor, forming part of a family unit, be considered autonomous taxpayers." That is, if there is a family unit, there will be a tax residence of the family unit itself, which will be the relevant one for purposes of IRS, and the family unit cannot, at least for purposes of this tax, have two tax residences.

In this context, the aforementioned reference in article 10, section 5 of the CIRS to "the own and permanent residence of the taxpayer or of its family unit", can only be understood as having the meaning that own and permanent residence may differ from tax residence.

In effect, and making it concrete, it may indeed occur (even more so in these times of high geographical mobility, fostered by the crisis that is globally being experienced) that one of the members to whom falls the direction of a family unit fixes his "own and permanent residence" in a place distinct from that of the family unit that is part of it. It is enough to think, for example, of a spouse who, owing to economic difficulties is forced to leave the family home on the mainland, to go to work in an Autonomous Region (or vice versa), or to the territory of another Member State of the European Union or the European Economic Area, where there is exchange of information in tax matters, there spending most of the year, and only visiting the family twice a year. In this case, the own and permanent residence of the migrant spouse will be distinct from that of the family unit, which will be the one that is relevant for purposes of tax residence, at least in respect of IRS."

1. Continuing, the above arbitral judgment to the effect that:

"Now, the expression used in article 10, section 5 of the CIRS evidences, precisely, such divergence. In effect the reference to "own and permanent residence of the taxpayer or of its family unit", leaves no room for doubt. The legislator did not wish to say "the own and permanent residence of the taxpayer or of the family unit", it wished to say "or of its", making clear that the own and permanent residence of a taxpayer, which is what is relevant for this article, may be distinct from "that of its" family unit, when tax residence, for purposes of IRS, at least, could not be!"

1. Concluding, "In short, it is thus considered that it results, sufficiently and from the outset, from article 10, section 5 of the CIRS itself the intention of the legislator not to equate the concepts of "own and permanent residence" and "tax residence"."

2. This means that the argument of the AT, as to the fact that the Claimant had its tax residence in property different from the one it disposed of, in 2011, located in the parish of …, and which generated the gain capable of exclusion from taxation pursuant to paragraph a) of section 5 of article 10 of the CIRS, cannot proceed,

3. … given that the requirement of that legal provision is limited only to own and permanent residence of the taxpayer or of its family unit and, not as to its tax residence.

4. However, and taking into account that the Claimant was expatriated, in the year 2011, in Germany, at the time when it proceeded with the disposal of the property located in the parish of Nogueira, it is now necessary to ascertain whether it can be understood that it had own and permanent residence in that property, in which, according to the witness testimony produced in the proceedings, the Claimant and "the family unit spent nights using that property [located in the parish of …] as their own and permanent residence when they were in Portugal and this happened several times in a year. In this property they led the normal life of a family unit, they received their friends and family, they received mail and paid the expenses of the respective property."

5. Now, Official Letter no. …, of 26.05.1998 of the Directorate of Local Tax Services, in force, and with application to the case in question, expressing the position of the services of the Tax Authority as to the question of an expatriate having permanent residence in Portugal, which is relevant to us here, supports the following understanding:

"Expatriates residing abroad may enjoy the exemption provided for in article 52 of the EBF, provided that they allocate the property acquired to permanent residence and effectively install there the seat of their home or family life, even if they live provisionally abroad and this even if their family lives expatriated abroad and the situation lasts several years.

The permanent residence of expatriates is revealed through the following requirements:

a) Installation of water, electricity and possibly telephone;

b) The house being furnished or beginning to be furnished;

c) Being the place of holidays and occupying it, during their trips to Portugal;

d) Installing there the members of their family unit resident in Portugal."

1. Therefore, following this understanding of the AT itself, and bearing in mind the factual matters held as proven at points D), E) and I) there is no doubt that the property disposed of by the Claimant constituted its "own and permanent residence" in Portugal.

2. In light of the foregoing, it is found that the capital gain obtained by the Claimant, arising from the disposal of ½ of the property located in the parish of …, is excluded from taxation under the provisions of section 5 of article 10 of the CIRS, as its requirements are met, namely:

a) the disposed property was intended for own and permanent residence of the Claimant and of its family unit;

b) the value of the proceeds was reinvested in the acquisition of property for the same purpose within 24 months;

c) the value of the proceeds was reinvested in the acquisition of ownership of another property,

wherefore the additional Personal Income Tax assessment impugned in these proceedings should be annulled, as illegal.

DECISION

In accordance with the foregoing, it is decided:

1. To annul the act of additional assessment of Personal Income Tax, in the amount of € 20,404.44 (twenty thousand, four hundred and four euros and forty-four cents), relating to the year 2011, impugned by the Claimant.

Value of the Proceedings

The value of the proceedings is fixed at € 20,404.44 (twenty thousand, four hundred and four euros and forty-four cents) pursuant to article 97-A, section 1, a), of CPPT, applicable by virtue of paragraphs a) and b) of section 1 of article 29 of RJAT and of section 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

Costs

Costs to the charge of the Respondent in accordance with article 22, section 2 of RJAT, article 4 of RCPAT, and Table I annexed to the latter, which are fixed in the amount of € 1,224.00.

Let it be notified.

Lisbon, 20 October 2015

The Arbitrator

(Jorge Carita)