Process: 748/2015-T

Date: July 27, 2016

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD arbitral decision 748/2015-T addressed whether Portugal's differential taxation of capital gains for residents versus non-residents violates EU law on free movement of capital. A French resident challenged IRS assessment 2015… (€7,505.06) relating to 2014 capital gains from selling Portuguese real estate. Article 43(2) of the Portuguese IRS Code (CIRS) permits residents to be taxed on only 50% of real property capital gains, while non-residents face taxation on 100% of such gains at a 25% proportional rate under Article 72(1) CIRS. The claimant argued this differentiated treatment constitutes unlawful discrimination against EU residents under Article 63 TFEU (formerly Article 56 of the EC Treaty) regarding free movement of capital. The Portuguese Tax Authority countered that residents and non-residents occupy objectively different positions: residents face worldwide income taxation with mandatory aggregation of all income at progressive rates, while non-residents are taxed only on Portuguese-source income at proportional rates. However, the European Court of Justice in Case C-443/06 (2007) explicitly ruled that Article 43(2) CIRS violates EU Treaty provisions on capital movement by discriminating based on residence. The Portuguese Supreme Administrative Court confirmed this interpretation in Cases 1031/10 (2011) and 01374/12 (2013), as did prior CAAD decisions 45/2012-T and 127/2012-T. The tribunal applied established EU and Portuguese jurisprudence recognizing that residence-based differential taxation of capital gains from immovable property sales restricts cross-border capital investment and violates the fundamental freedom of capital movement guaranteed to all EU residents, regardless of fiscal residence status or taxation methodology differences.

Full Decision

ARBITRAL DECISION

I – REPORT

A) The Parties and Constitution of the Arbitral Tribunal

  1. A…, resident at … Street, …, in …, France, taxpayer no. …, hereinafter referred to as "Claimant", filed a request for constitution of a singular Arbitral Tribunal, under the provisions of article 2, no. 1, subparagraph a) and 10, nos. 1 and 2 of Decree-Law no. 10/2011, of 20 January, hereinafter referred to as "RJAT" and of Ordinance no. 112-A/2011, of 22 March, for the challenge and declaration of illegality of the assessment of Personal Income Tax (IRS) no. 2015…, relating to the year 2014, in the amount of €7,505.06, seeking its annulment. This assessment is duly identified and attached to the case file, as is the respective proof of payment.

The request for constitution of the Arbitral Tribunal was filed by the Claimant on 14-12-2015, was accepted by His Excellency the President of CAAD and notified to the Tax and Customs Authority on 22-12-2015. The Claimant chose not to appoint an arbitrator, therefore, under the provisions of no. 1, article 6 of RJAT, the undersigned was appointed by the Deontological Council of the Centre for Administrative Arbitration on 05-02-2015 as arbitrator judge.

  1. Thus, in accordance with the provisions of subparagraph c), no. 1, article 11 of RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the singular Arbitral Tribunal was constituted on 22-02-2016. On 29-02-2016 an arbitral order was issued to the Tax and Customs Authority (AT) to present a response within the legal deadline, in accordance with and for the purposes of articles 17, nos. 1 and 2 of RJAT.

On 04-04-2016, the Respondent attached to the case file its response accompanied by the administrative process (PA), which are deemed fully reproduced.

On 22-04-2016, an arbitral order was issued for the parties to express their position on the possibility of waiving the holding of the meeting provided for in article 18 of RJAT, given that the issues raised by the parties are configured as questions exclusively of law, with no evidence to be considered, allowing the process to proceed to written submissions and final decision. The respondent AT expressed itself favorably, by request filed with the case on 03-05-2016. The claimant did not express itself. Accordingly, the arbitral tribunal decided, by order issued on 19-05-2016, to waive the holding of the meeting referred to in article 18 of RJAT, as unnecessary, and set a deadline of fifteen days for the parties to present, if they so wish, their written submissions. In the same order, the date of 27 June 2016 was set as the probable date for the issuance of the arbitral decision, which was extended by a further thirty days, according to an arbitral order of 27 June 2016.

The Claimant was also notified to effect payment of the subsequent arbitration fee by the date indicated for issuance of the arbitral decision.

The Respondent filed submissions on 07-06-2016. The Claimant made no submissions.

B) THE REQUEST FORMULATED BY THE CLAIMANT:

  1. The Claimant filed the present request for arbitral decision arguing for the illegality of the aforesaid IRS assessment, considering that article 43, no. 2 of CIRS, by establishing a differentiated regime for taxation of capital gains realized by residents and non-residents in the national territory, establishes an unacceptable discrimination in light of the provisions of article 56 of the Treaty of the European Union, when applied to residents of another member state who realize capital gains resulting from the alienation of real estate located in Portugal.

The issue of law subject to the present request is whether in the case of capital gains obtained by a natural person non-resident in Portugal, generated by the alienation of real estate located in Portugal, taxation is effected on 50% of such capital gains, by application of article 43, no. 2 of CIRS.

Now, article 43, no. 2 of CIRS, by establishing that taxation on real property capital gains is effected only on half of such capital gains, establishes that this regime refers to "transfers effected by residents", establishing a differentiated regime between residents and non-residents. This issue assumes particular relevance when residents of a Member State of the European Union are concerned, and has already been subject to appraisal by the Court of Justice of the European Union, by the Portuguese Supreme Administrative Court and by arbitral decisions of CAAD.

Thus, the Court of Justice of the European Union, in the Judgment of 11/10/2007, Case C-443/06, concluded that article 43, no. 2 of CIRS, by establishing a differentiated regime for residents in Portugal and for residents in other States of the European Union, violated article 56 of the Treaty establishing the European Community.

In the same sense, the Judgments of the Supreme Administrative Court of 22/3/2011, Case no. 1031/10 and of 30/4/2013, Case no. 01374/12. Also CAAD has pronounced itself, in the same sense in Cases nos. 45/2012-T and 127/2012-T.

Thus, the Claimant considers that the assessment challenged is illegal, because it has its origin in the application of the provisions of article 43, no. 2 of CIRS, from which resulted in the concrete case the non-application of the IRS rate at issue to half of the capital gain, since the Claimant is a resident of another Member State of the European Union (France).

C – THE RESPONSE OF THE RESPONDENT

  1. The Respondent AT, duly notified for that purpose, submitted its response in a timely manner in which it argues for the maintenance in the legal order of the challenged act by corresponding to a correct application of law to the material reality in dispute. It alleges, in summary, that it is necessary to make a conjugated reading of the provisions in question 43, no. 2 of CIRS, 56 and 57, 63 and 65 of the Treaty, in light of the generic prohibition of non-discrimination contained in article 18 of TFEU.

It argues that there is no violation in this case of the freedom of movement of capital, due to the allegedly discriminatory treatment conferred on income from capital gains resulting from the onerous alienation of real rights over real property, taxed at 50% when obtained by residents, and at 100% when obtained by non-residents. It results from article 65 of TFEU a limitation on the freedom of movement of capital, allowing member states to distinguish between taxpayers that are not in identical situations regarding their place of residence or where their capital is invested.

The fact that the holders of capital income (capital gains) are residents or not in Portugal places them in an objectively different situation, not by the simple fact of being in a situation of different residence, but rather by what this represents in terms of the fiscal regime to which they are subject.

Thus, the AT recognizes that in the case of resident taxpayers, the positive balance determined with respect to capital gains - which are subject to mandatory aggregation - is relevant for purposes of taxation at the general rates of IRS, in only 50% of its value. According to the provisions of no. 1, article 15 of CIRS, being natural persons resident in Portuguese territory, IRS applies to the totality of their income, including that obtained outside that territory. That is, it follows unequivocally from the fiscal regime just explained that resident and non-resident taxpayers are not, in any way, in an identical situation, from the point of view of annual taxation of their income, under IRS. In the case at issue, the Claimant, being, as it is, a non-resident taxpayer, and not electing taxation as a resident, the assessment was made in accordance with the provisions of article 72, no. 1 of CIRS, which determines the application of a proportional rate of 25% to the value of capital gains realized, in this case with the onerous alienation of real rights over real property.

It further argues that it was the Claimant who sought taxation under the general regime, and not the election for the general rates of article 68 of CIRS - concerning income subject to definitive withholding - article 72, no. 7 of CIRS chose, freely and knowingly, the taxation described, in general terms, in the previous article. This election regime had (and has) as its effect a neutralization of any allegedly discriminatory treatment conferred on non-residents in Portugal vis-à-vis residents, in the matter of taxation of capital gains in the case of alienation of real rights over real property.

It concludes arguing for the legality of the IRS assessment challenged and for the dismissal of the arbitral request.

II - PROCEDURAL PREREQUISITES

  1. The Arbitral Tribunal is regularly constituted. It is materially competent, under the terms of article 2, no. 1, subparagraph a) of RJAT.

  2. The parties enjoy legal personality and capacity, are legitimate and are legally represented (cfr. articles 4 and 10, no. 2 of RJAT and article 1 of Ordinance no. 112/2011, of 22 March).

  3. The process is not affected by defects that invalidate it.

  4. Having regard to the documentary evidence attached to the case file, it is necessary to establish the factual matter relevant to the understanding of the decision, which is established as follows.

III – Factual Matter

A) Proven Facts

  1. As relevant factual matter, this tribunal accepts as established the following facts:

a) The Claimant resides in …, France, therefore is a non-resident in Portugal, which is relevant for purposes of application of tax law;

b) In Model 3, relating to IRS for 2014, this condition of non-resident status was declared to the Tax and Customs Authority, as results from document no. 2 attached by the Claimant;

c) In the IRS assessment for 2014, effected by AT, the name of the tax representative is indicated, as well as the residence in Portugal of that tax representative, to which the said assessment was sent;

d) In Declaration Model 3, relating to the year 2014, two types of income were declared as obtained: Pension Income (category H) and capital gains (category G).

e) The said capital gains were generated by the onerous alienation of real rights over real property (cfr. document no. 3 attached to the case file by the Claimant);

f) The assessment effected by AT concerned only the capital gain and not the pensions, which, being paid by an entity located in Portugal, were already taxed as IRS in Portugal, by withholding at source as final;

g) The assessment effected by AT concerned the totality of the capital gain obtained by the claimant, in the amount of €26,793.05.

h) The Claimant paid the value of the tax assessment challenged, as results from the respective proof attached to the case file by the Claimant.

B) UNPROVEN FACTS

  1. With relevance for the decision, there are no facts that should be considered as unproven.

C) SUBSTANTIATION OF THE PROVEN FACTS

  1. The facts described above were accepted as proven on the basis of the documentary evidence that the parties attached to the present process. Having in consideration the positions assumed by the parties, the documentary evidence attached to the case file, were considered proven, with relevance for the decision, the facts listed above, moreover consensually recognized and accepted by the parties.

IV – ON THE LAW: SUBSTANTIATION OF THE MERIT DECISION

  1. Having established the factual matter, it is necessary to address the issue of law raised by the Claimant.

In the present case at issue is determining whether, in the case of capital gains resulting from the alienation of real property, the differentiated regime of taxation applicable to residents and non-residents in the national territory, resulting from CIRS, applies. In fact, the legislature introduced in CIRS a limitation of the incidence of tax, for residents, which burdens only 50% of the balance of capital gains. The question is whether the non-application of this principle to non-residents, when they reside in another member state of the EU, in the exact terms as it is provided for residents, constitutes a situation of discrimination in the field of freedom of movement of capital, inadmissible in light of article 63 of the Treaty on the Functioning of the European Union.

The principal issue to be decided is, thus, whether the differentiation, established by national legislation, in article 43, no. 2 of CIRS, for residents and non-residents in national territory, of the basis of incidence in IRS of capital gains derived from the onerous alienation of real rights over real property is or is not incompatible with the freedom of movement of capital provided for in article 63 of the Treaty on the Functioning of the European Union. The issue arises, naturally, for non-residents in Portugal who reside in another member state of the EU, by virtue of the prohibition of discrimination, both of the generic prohibition, as results from the provisions of article 18 of the Treaty, and of the prohibition of any restriction (direct or indirect) to the freedom of movement of capital, due to such discrimination resulting in a less favorable fiscal regime for non-residents.

In the case under appraisal in the present case, it was proven that the AT considered, for purposes of determination of collectible income and consequent IRS assessment to the Claimant, non-resident in Portugal but in France, that is, in another Member State of the European Union, the totality of the capital gain realized in the alienation of real property.

That is, in the case of the present proceedings the application of the regime provided for in no. 2, article 43 of the IRS Code was declined, according to which:

"The balance referred to in the previous number, respecting transfers effected by residents provided for in subparagraphs a), c) and d) of no. 1 of article 10, positive or negative, is considered only in 50% of its value". (emphasis ours)

The AT understands that such discipline is applicable only to residents in national territory, in consonance with the literal element of the norm and with the specificities of the internal regime of taxation of natural persons, in force in Portugal, based on the principle of aggregation and progressivity.

  1. As the Claimant argues, the issue in question has already been appraised by the Court of Justice of the European Union (CJEU), in the Judgment of 11 October 2007, issued in case C-443/06, designated as "Hollmann Judgment".

Following this Judgment, the Portuguese Supreme Administrative Court (SAC) concluded that "no. 2 of article 43 of the IRS Code, (…) which limits the incidence of tax to 50% of capital gains realized only for residents in Portugal, violates the provisions of article 56 of the Treaty establishing the European Community, by excluding from this limitation capital gains that have been realized by a resident of another member state of the European Union."

The case law invoked by the Claimant is not questioned by the AT, although it defends another interpretation, by considering that the introduction, by the State Budget Law for 2008 (Law no. 67-A/2007 of 31 December) of the possibility of the non-resident's choice for taxation in accordance with the rates provided for in article 68 of CIRS, although in that case, all income is considered, including that obtained outside the national territory. This regime, contained in article 72 of CIRS, restores equal treatment between residents and non-residents, so that, from the point of view of the AT, any discrimination would be resolved. It should be noted that nos. 9 and 10 of article 72 of CIRS were introduced with the State Budget Law for 2008.

Thus, it is noted that, beyond the general regime which remained identical, the national legislature instituted, through Law no. 67-A/2007, of 31 December, subsequent to the jurisprudence of the Hollmann Judgment, an election regime, allegedly, for equalization of non-residents to residents, with the objective of avoiding the differentiated treatment of EU and European Economic Area community nationals who realize real property capital gains in Portugal.

  1. Having reached this point, it is important to determine whether with this change the cause that is at the origin of the discriminatory treatment between residents and non-residents will be resolved, when the latter are residents in some state of the EU.

The principle of non-discrimination, provided for in the Treaty, is a fundamental principle in the construction of the European Union, imperative since the constitution of the European project, and should be read as an imposition of equal treatment among European citizens, regardless of their nationality or residence. This principle is, moreover, well established in the case law of the Court of Justice, which over the past decades has been asserting it with clarity and determination.[1]

Also the case law of the SAC[2] has been firm in the decisions issued on this matter, as well as the arbitral case law already issued on this matter[3].

In this framework, it offers no doubt that the provisions of no. 2, article 43 of CIRS constitute, objectively, discrimination of treatment between residents and non-residents. The AT itself, the respondent entity, in the present case, is aware of this discrimination, as can be extracted from the analysis of the articles attached to the case file.

Nevertheless, the AT argues that the introduction of the option for taxation under the general regime of the rates provided for in article 68 of CIRS, restores the necessary equality of treatment, sufficing for this that the taxpayer elects taxation in such terms. From this it concludes that, if discrimination existed in the case of the present proceedings, this was due exclusively to the decision of the Claimant, by not having exercised the legal election at its disposal.

Is it so?

According to the AT, this equalization option, to which the AT refers, allows non-residents in Portugal but residents in one of the member states of the EU, the option for taxation of such income in conditions similar to those applicable to residents in Portugal, eliminating any discrimination.

If this were so, why would not the Portuguese legislature have opted for the pure and simple elimination of the reference to "residents", in the text of article 43, no. 2 of CIRS, with the adjustments eventually necessary?

  1. It is the understanding of this Arbitral Tribunal that the solution adopted by the Portuguese legislature does not guarantee, as the AT alleges, the elimination of the discrimination resulting from the provisions of no. 2, article 43.

Articles 72, nos. 8 and 9 of the IRS Code (version introduced by Law no. 66-B/2012 of 31 December – State Budget Law for 2013) provide:

"8 – The income provided for in nos. 4 to 7 may be aggregated by choice of their respective holders resident in Portuguese territory.

9 - Residents in another member state of the European Union or of the European Economic Area, provided that, in the latter case, there is exchange of information on tax matters, may elect, regarding the income referred to in nos. 1 and 2, taxation of such income at the rate which, in accordance with the table provided for in no. 1 of article 68, would be applicable in the case of being obtained by residents in Portuguese territory

10 - For purposes of determination of the rate referred to in the previous number all income is taken into account, including that obtained outside this territory, under the same conditions that are applicable to residents."

Regarding the exclusive application to residents in Portugal of the limitation of IRS incidence to 50% of real property capital gains, provided for in no. 2 of article 43 of the respective Code, and its non-conformity with the provisions of article 56 of the Treaty establishing the European Community (current article 63 of TFEU), the CJEU has already pronounced itself in the aforementioned Hollmann Judgment.

The issue under appraisal should take into account, further, the principles of primacy of European law and the prevalence of the interpretation of the CJEU over law of communitarian source, as results from the provisions of no. 4 of article 8 of the Constitution of the Portuguese Republic (CRP).

In this framework, it should be said that the Hollmann jurisprudence, issued by the CJEU concluded that the national norm, contained in no. 2 of article 43 of the IRS Code, violates article 63 of the TFEU (former article 56 of TEU), by having a discriminatory (less favorable) character for non-residents and being, in consequence, restrictive of the freedom of movement of capital among member states. This interpretation is, therefore, unequivocal and clear.

The decision issued, in the aforementioned Judgment, rests on the following argumentative topics:

"- An operation of liquidation of a real property investment constitutes a movement of capital, with the Treaty providing a specific norm that prohibits all restrictions to movements of capital;

  • In the case of sale of real property located in Portugal, with the realization of capital gains, non-residents are subject to a higher tax burden than that applied to residents, finding themselves, therefore, in a less favorable situation than the latter;

  • In effect, while to a non-resident a rate of 25% is applied to the totality of capital gains realized, the consideration of only half of the taxable matter corresponding to capital gains realized by a resident allows this person to benefit systematically, on this ground, from a lower tax burden, whatever the tax rate applicable to the totality of their income, given that the taxation of the income of residents is subject to a table of progressive rates whose highest bracket is 42%;

  • This regime makes the transfer of capital less attractive for non-residents and constitutes a restriction on movements of capital prohibited by the Treaty;

  • The discrimination of the national norm is not justifiable by the objective of avoiding penalizing residents (who are subject to a table of progressive rates which may be much higher and are taxed on a worldwide basis, unlike non-residents, who are taxed at the proportional rate of 25%, with no aggregation occurring), because, as above highlighted, being the highest bracket 42% always leads, under the same conditions, to more burdensome taxation of the non-resident, having regard to the reduction to 50% of the taxable income of the resident, there being, objectively, no difference that justifies this inequality of fiscal treatment regarding the taxation of capital gains, between the two categories of taxpayers."

As mentioned in arbitral decisions nos. 45/2012-T and 127/2012-T, considering the provisions of article 43, no. 2 of CIRS, we are faced with a discriminatory regime incompatible with European Union Law, due to violation of article 63 of the Treaty on the Functioning of the European Union. It remains to be determined whether the equalization option, introduced in the Portuguese tax system, following the issuance of the Hollmann Judgment, contained in nos. 8 to 10 of article 72 of the IRS Code, in effect on the date of the tax event, allows the discrimination judgment of the CJEU regarding the restrictive provision of no. 2 of article 43 of the IRS Code to be dismissed with respect to resident taxpayers.

First of all, it must be noted that the solution introduced by the legislature to circumvent the discrimination contained in the aforementioned national norm imposes an additional burden on non-residents, in comparison to residents. To this is added another objection that results from the complexity of the functioning of the tax, aggravated by the "option for aggregation" of all income obtained in the other country, in addition to other relevant issues associated with the principle of territoriality provided for in article 15 of CIRS, to the conditions of personalization of the tax and to the progressivity of the tax, hardly compatible with an adequate consideration of the values obtained in another member state, under the current state of European Union law.

In other words, the AT did not demonstrate (nor could it) that the option for aggregation, as a form of equalization, as it was introduced in nos. 8 to 10 of article 72 of CIRS, is sufficient to exclude the discrimination in question.

In addition, as we said above, there would always remain the doubt as to the reason that led the legislature not to opt for the route of direct elimination of the discrimination contained in the norm of article 43, no. 2 of CIRS. The AT argues that the solution adopted in article 72, nos. 8 to 10 suffices, because also for residents in Portuguese territory, these incomes are subject to aggregation. Now, such argument does not seem adequate because it does not take into account all the other conditions of taxation inherent to the functioning of a tax with the characteristics of personal income tax and evidences an intention of taxation based on income obtained in the other country (when aggregated) well knowing that these are incomparable realities, easily distorted by a whole reality basis that escapes the fiscal sovereignty of the Portuguese state.

We have no doubt that the solution adopted by the Portuguese legislature does not eliminate the discriminatory character in the treatment of residents and non-residents, in the matter of capital gains resulting from alienation of real property.

  1. In this sense, the reference to another Judgment of the CJEU is necessary, in which the Court pronounced itself on a question similar to that resulting in the present case, regarding the appraisal of the option introduced by the Portuguese legislature. Thus, the CJEU pronounced itself, in the Judgment of 18 March 2010, issued in case C-440/08, designated as "Gielen Judgment", in a situation identical to that which we now appraise, with the sole difference that in this case the violation of article 49 was in question and not that of article 63 of TFEU.

Now, in this Judgment the CJEU emphasizes that "the equalization option allows a non-resident taxpayer, (…) to choose between a discriminatory fiscal regime and another supposedly non-discriminatory regime".

The CJEU further considers in the same Judgment that such option is not capable of excluding all the discriminatory effects of the first of these two fiscal regimes, adding that "the recognition of an effect of this nature to the said choice would have as a consequence (…) to validate a fiscal regime that would continue, in itself, to violate article 49 TFEU due to its discriminatory character."

The CJEU concluded, therefore, that "the Treaty opposes a national regulation that discriminates against non-resident taxpayers in the granting of a fiscal benefit (…) despite those taxpayers being able to elect, regarding that benefit, the regime applicable to resident taxpayers".[4]

  1. As properly mentioned in Arbitral Decision no. 45/2012-T, the consequences of what has been left exposed, in accordance with the jurisprudence of the CJEU above referred to, may eventually result in more favorable taxation of real property capital gains obtained by non-residents in Portugal, who reside in the European Union, than by residents, because, in addition to benefiting equally from the reduction to 50% of the basis of IRS incidence, they are subject to a single rate of 25%, which will, in the majority of cases, be lower than the progressive rates of residents, in accordance with the table provided for in no. 1 of article 68 of the IRS Code, to which is added the fact that the latter must aggregate all their income. However, this is a consequence of direct taxation being a field within the competence of member states, falling to them to resolve on the domestic plane this type of discrepancies. One thing is certain and inescapable, at the current stage of European Union Law, there is no principle or norm discerned that prevents positive discrimination of non-residents vis-à-vis residents, but it is clear the prohibition of discrimination of non-residents, in the terms above explained.

  2. This understanding is further supported by the SAC, as extracted from the jurisprudence of the Judgment of 22 March 2011, issued in case no. 1031/10, which annulled the act of assessment issued by the AT, which "faced with the declaration of the taxpayers, assessed them for the tax it considered due (as always happens with IRS): at the rate provided for non-residents (25%, under article 72, no. 1 of the IRS Code) and on the total amount of the capital gain realized and not only on 50% of this value (article 43, no. 2 of the IRS Code), thus ignoring the European jurisprudence and that of this Supreme Court that adopted it (cfr. the Judgment of 16 January 2008, rec. no. 439/06) regarding the incompatibility of that legal provision, as applied, with the (then) article 56 of the TJCE (current article 63 of the Treaty on the Functioning of the European Union), subjecting in this manner, as came to pass, to see annulled in that part the assessment challenged, given the primacy of European law."

  3. In this conformity, the assessment challenged appears illegal, due to incompatibility of no. 2 of article 43 with article 63 of the Treaty on the Functioning of the European Union, insofar as it restricts the reduction to 50% of capital gains subject to IRS to resident taxpayers in Portugal, with its consequent annulment.

In light of the above, the arbitral request is judged well-founded, annulling the IRS assessment that is the subject of the present case.

V - Regarding Compensatory Interest:

  1. The Claimant cumulatively with the request for annulment, files the request for condemnation in the payment of compensatory interest.

Given the merit of the annulment request, the amount paid improperly by the Claimant should be restituted, regarding the annulled tax act. In the case at issue, it is manifest that the illegality of the assessment acts, whose amount the Claimant paid, is attributable to the AT, which, on its own initiative, performed them without legal support.

Consequently, the Claimant is entitled to compensatory interest, under the terms of articles 43, no. 1, of LGT and 61 of CPPT. Compensatory interest is due, from the date of the payments that are shown to have been made, and calculated on the basis of their value, until their complete restitution to the Claimant, at the legal rate, under the terms of articles 43, nos. 1 and 4, and 35, no. 10, of LGT, 61 of CPPT and 559 of the Civil Code, at the legal rate in force.

Furthermore, in accordance with the provisions of subparagraph b) of article 24 of RJAT the arbitral decision on the merit of the claim with respect to which there is no recourse or challenge binds the tax administration, from the end of the deadline provided for recourse or challenge, and must this, in the exact terms of the merit of the arbitral decision in favor of the taxpayer and until the end of the deadline provided for the voluntary execution of judgments of tax courts, "reestablish the situation that would exist if the tax act subject of the arbitral decision had not been performed, adopting the acts and operations necessary for this purpose", which is in harmony with the provisions of article 100 of LGT (applicable by virtue of the provisions of subparagraph a) of no. 1 of article 29 of RJAT), which establishes that "the tax administration is obliged, in case of total or partial merit of a reclamation, judicial challenge or recourse in favor of the taxpayer, to the immediate and full reconstruction of the legality of the act or situation object of the dispute, including the payment of compensatory interest, if it be the case, from the end of the deadline of execution of the decision".

Although article 2, no. 1, subparagraphs a) and b) of RJAT uses the expression "declaration of illegality" to define the competence of arbitral tribunals functioning in CAAD, making no reference to condemnatory decisions, it should be understood that in its competences are included the powers that in judicial challenge proceedings are attributed to tax courts, this being the interpretation that harmonizes with the sense of the legislative authorization in which the Government based itself to approve RJAT and in which it proclaims, as first guideline, that "the tax arbitral process should constitute an alternative procedural means to the judicial challenge process and to the action for the recognition of a right or legitimate interest in tax matters".

  1. The judicial challenge process, although it is essentially a process of annulment of tax acts, admits condemnation of the tax administration in the payment of compensatory interest, as is inferred from article 43, no. 1, of LGT, in which it is established that "compensatory interest is due when it is determined, in amicable reclamation or judicial challenge, that there was error attributable to the services from which resulted payment of the tax debt in an amount superior to that legally due" and article 61, no. 4 of CPPT (in the wording given by Law no. 55-A/2010, of 31 December, to which corresponds no. 2 in the original wording), which provides that "if the decision that recognized the right to compensatory interest is judicial, the period of payment is counted from the beginning of the period of voluntary execution".

Thus, no. 5 of article 24 of RJAT in stating that "payment of interest is due, regardless of its nature, under the terms provided for in the general tax law and in the Code of Procedure and Tax Process" should be understood as allowing the recognition of the right to compensatory interest in the arbitral process. In the case at issue, it is manifest that, following the declaration of illegality and consequent annulment of the assessment act challenged, there is place for reimbursement of the tax, by force of the aforementioned articles 24, no. 1, subparagraph b), of RJAT and 100 of LGT, because this is essential to "reestablish the situation that would exist if the tax act subject of the arbitral decision had not been performed", in the part corresponding to the correction that was considered illegal.

Thus, the AT should give execution to the present arbitral decision, under the terms of article 24, no. 1 of RJAT, restituting to the Claimant the amount paid increased with compensatory interest, which is due from the date of payment made until the date of processing of the credit note, in which it is included (article 61, no. 5, of CPPT).

VI - DECISION

It is decided as follows:

a) To judge the arbitral request well-founded and, in consequence, to annul the tax act that is the subject of the present case and to condemn the AT to restitute to the Claimant the value of tax paid, increased with compensatory interest, counting from the date on which the payment was made.

b) To condemn the AT in the costs of the process, in the amount of €612.00.

VALUE OF THE PROCESS

The value of the process is set at €7,505.06, under the terms of article 97-A, no. 1, a), of CPPT, applicable by virtue of subparagraphs a) and b) of no. 1 of article 29 of RJAT and no. 2 of article 3 of the Regulations on Costs in Tax Arbitration Proceedings.

COSTS

The amount of the arbitration fee is set at €612.00, under the terms of Table I of the Regulations on Costs in Tax Arbitration Proceedings, to be paid by the Respondent, since the request was wholly well-founded, under the terms of articles 12, no. 2, and 22, no. 4, both of RJAT, and article 4, no. 4, of the said Regulations.

Notify.

Lisbon, 27 July 2016

The Singular Arbitral Tribunal,

(Prof. Doctor Maria do Rosário Anjos)

[1] In this sense, cfr., among others, Judgment CJEU of 11-07-2007, Proc. C-443/06 – Judgment "Hollman". Also the Judgment CJEU of 12-06-2003, Proc. C-234/01 – Judgment "Gerritse", had affirmed identical understanding, by asserting that determining the existence or non-existence of discrimination incompatible with EU law implies determining whether the difference in treatment results in the application of a higher effective tax rate on non-residents.

[2] In this sense, cfr. Judgment of the SAC, of 16-01-2008, proc. no. 439/06, relating to the application of the principle contained in article 56 of the Treaty establishing the European Community (TCE), corresponding to the current article 63 of the Treaty on the Functioning of the European Union (TFEU). In the same sense, cfr. Recent Judgments, of 27-11-2013 and of 14-05-2014, respectively, proc. no. 0654/13 and 01319/13. All available at www.dgsi.pt.

[3] Cfr. Arbitral Decisions nos. 45/2012 – T; 127/2012-T, available at www.caad.pt.

[4] Cfr. Points 49 to 55 of the Gielen Judgment – Judgment CJEU of 18/03/2010, Proc. C 440/08.

Frequently Asked Questions

Automatically Created

How are capital gains taxed for non-residents under Portuguese IRS rules?
Under Portuguese IRS rules, non-residents are taxed on capital gains from Portuguese real estate at a flat proportional rate of 25% applied to 100% of the capital gain realized, pursuant to Article 72(1) of the CIRS. Unlike residents who benefit from taxation on only 50% of capital gains under Article 43(2) CIRS, non-residents face taxation on the full amount of their gains. Non-residents are subject to limited tax liability, meaning only Portuguese-source income is taxable, without the mandatory aggregation and progressive rates applicable to residents' worldwide income.
Why was Article 43(2) of the CIRS deemed incompatible with Article 63 of the TFEU on free movement of capital?
Article 43(2) of the CIRS was deemed incompatible with Article 63 TFEU because it establishes discriminatory treatment based solely on fiscal residence. While Portuguese residents are taxed on only 50% of real property capital gains, non-residents from other EU Member States are taxed on 100% of identical gains. The European Court of Justice in Case C-443/06 ruled this differential treatment restricts free movement of capital by discouraging EU residents from investing in Portuguese real estate. The justification that residents and non-residents are in different situations (worldwide vs. territorial taxation) was rejected, as both groups derive the same type of income from the same source and should receive equal treatment regarding that specific income category under EU fundamental freedoms.
Can non-residents challenge discriminatory IRS capital gains taxation through CAAD arbitration?
Yes, non-residents can challenge discriminatory IRS capital gains taxation through CAAD (Centro de Arbitragem Administrativa) arbitration. Process 748/2015-T demonstrates that non-resident EU taxpayers have standing to contest Portuguese tax assessments that violate EU law principles. The CAAD arbitral tribunal has jurisdiction under Article 2(1)(a) of the RJAT (Administrative Arbitration Legal Regime) to review the legality of tax acts, including assessments based on provisions incompatible with EU Treaty obligations. Non-residents must pay the contested amount and request arbitration within the statutory deadline, just as residents do, making CAAD an accessible forum for challenging residence-based discrimination in Portuguese taxation.
What was the outcome of CAAD decision 748/2015-T regarding non-resident capital gains taxation?
While the excerpt does not contain the final ruling, CAAD decision 748/2015-T followed established jurisprudence from the European Court of Justice (Case C-443/06), the Portuguese Supreme Administrative Court (Cases 1031/10 and 01374/12), and prior CAAD decisions (45/2012-T and 127/2012-T), which consistently held that Article 43(2) CIRS violates EU law. The tribunal recognized that taxing non-resident EU citizens on 100% of Portuguese real estate capital gains while taxing residents on only 50% constitutes unlawful discrimination. The expected outcome was annulment of the contested IRS assessment and recognition that non-resident EU taxpayers are entitled to the same 50% capital gains inclusion rate as Portuguese residents under the principle of free movement of capital.
What EU law protections apply to non-resident taxpayers facing capital gains tax in Portugal?
EU law protections for non-resident taxpayers facing Portuguese capital gains tax include Article 63 TFEU, which guarantees free movement of capital between Member States and prohibits restrictions on capital movements. Article 18 TFEU provides general non-discrimination protection based on nationality. These provisions prevent Member States from imposing disadvantageous tax treatment on residents of other EU countries solely due to their non-resident status. The European Court of Justice has established that identical income from identical sources must receive equivalent tax treatment regardless of the taxpayer's residence, unless objective differences justify differential treatment. EU residents can invoke these Treaty provisions directly before national courts and arbitral tribunals to challenge discriminatory tax measures, with precedence over conflicting domestic tax legislation under the primacy of EU law principle.