IRS Capital Gains Tax for Non-Residents: Treaty of Rome Violation and Unequal Treatment Ruling (CAAD 77/2015-T)

Arbitration Decision

I – THE CLAIM

A…, resident in Germany, with Tax Identification Number …, hereby requests the constitution of an Arbitration Tribunal, seeking the annulment of the decision dismissing a Gracious Complaint relating to IRS/2006, which suffers from a defect of violation of law, due to error regarding the assumptions of fact and law, and the respective tax act should be annulled with the proper legal consequences.

Furthermore, the Claimant also invokes in his claim the existence of lapse of the assessment in question, as it was made beyond the four years that the Law permits.

Finally, he also challenges the legality of the assessment, because the rules of incidence that existed at the time for taxation of this type of income obtained by non-residents did not have valid support, as they allegedly violated the provisions of Articles 12, 18, 39, 43, and 56 of the Treaty of Rome.

FACTS ESTABLISHED IN THE RECORD

The Claimant did not invoke any facts in his initial petition, except for the existence of a Gracious Complaint, whose dismissal constitutes the object of the Arbitration Appeal, in addition to the lapse of the IRS assessment of 2006 and the violation of the Treaty of Rome.

From the record, however, the following facts are known:

1. The Claimant is (and was in 2006) a citizen resident in Germany, having, in that year, obtained, among other income, capital gains resulting from the onerous termination of the right of ownership over immovable property located in Portugal, which gave rise to assessment no. 2007…., in the amount of € 4,924.54.

2. This assessment resulted from the electronic submission of an income declaration, form 3, for the year 2006, by the Claimant, on 21-05-2007, registered with no. …-2006-…-…, from which resulted the aforementioned IRS assessment.

3. The Claimant was notified of this assessment, and the Tax Authority informed the Claimant that he could lodge a complaint or appeal in accordance with the terms and deadlines established in Articles 140 of CIRS and 70 and 102 of the Code of Tax Procedure and Process (CPPT).

4. The present Claimant filed judicial opposition against the said tax act, (see Process no. .../07....BEPRT, of the TAF of Porto), which resulted in a favorable decision, determining the total annulment of the opposed assessment, the restitution of the tax paid, as well as the payment of respective indemnifying interest, whose decision of 18-03-2014, became final on 09-05-2014.

5. The decision of the TAF of PORTO was based, in summary, on the fact that the tax treatment given to the present Claimant was unequal (application of a special rate of 25% of Article 72 of CIRS to 100% of the capital gain) compared to that given to residents, in which the taxation of capital gains of the latter is only 50%, to which the general rate is applicable, which violates the provisions of Article 56 of the Treaty establishing the European Community, citing the jurisprudence contained in the Decision of the STA, of 16.01.2008, Case No. 0439/06.

6. In compliance with the said judicial decision rendered by the TAF of Porto, the Tax Authority proceeded to annul the assessment in question and to reimburse the tax assessed to the present Appellant.

7. Subsequently, it proceeded ex officio to a new IRS assessment to tax the Claimant for the capital gain in question, under the rules applicable to residents, to avoid the negative discrimination invoked before the TAF of Porto and confirmed by it, which resulted in a new IRS assessment no. 2014 …, in the amount of € 1,264.87, of which he was notified to lodge a complaint or appeal on 22-08-2014.

8. The Claimant filed a gracious complaint petition against the aforesaid IRS assessment act, on the grounds of lapse of the right to assess, as it was made beyond the four years that the Law permits.

9. The Claimant further states in his gracious complaint petition that, being resident outside Portuguese territory, in Germany, and having obtained capital gains resulting from the onerous alienation of immovable property located in this territory, there was no valid rule of incidence that permitted the taxation of this type of income, in light of the provisions of the Treaty of Rome, from which it resulted that the IRS assessment made, in his view, suffers from illegality.

10. As stated in the Services Information relating to the assessment of the Gracious Complaint, they understood that the Tax Authority merely complied with the decision of the TAF of Porto, eliminating the negative discrimination, by proceeding to an IRS assessment in accordance with the rules applicable to residents, considering that lapse of the tax did not occur, wherefore the Complaint was dismissed by decision of 2014-11-06.

11. This decision was notified to the Claimant through official letter no. …/…-…, by registered mail on 07-11-2014.

12. The Claimant filed on 29-12-2015 an Arbitration Appeal petition, seeking the annulment of the decision dismissing the Gracious Complaint relating to IRS/2006, which suffers from a defect of violation of law, due to error regarding the assumptions of fact and law, and the respective tax act should also be annulled with the proper legal consequences.

THE LEGAL GROUNDS INVOKED

A – By the Claimant

This grounds the request for annulment of the assessment act on the fact that the rules that existed at the time regarding the taxation of this type of income obtained by non-residents did not have valid support, since they violated the provisions of Articles 12, 18, 39, 43, and 56 of the Treaty of Rome.

Another ground invoked is that the assessment that is the subject of the present appeal was made beyond the four years that the Law permits, or that is, lapse occurred.

II – THE RESPONSE OF THE TAX AND CUSTOMS AUTHORITY

Preliminary Issue – The Ineeptness of the Initial Petition

The Respondent alleges that, given the absence of requirements of the initial petition of the Claimant, namely factual grounds and applicable legal rules, its request and cause of action is unintelligible, in light of Article 552 of the CPC and the jurisprudence and also in accordance with Article 186, no. 2, subparagraph a) of the CPC.

And in justification thereof stresses that if the essential facts with legal relevance are not alleged in the initial petition to support its claims, or if the allegation thereof is unintelligible, there is a lack of cause of action, which in the view of the Respondent leads to the ineeptness of the petition.

According to the Respondent, the petition merely alleges "defects," imperfections, illegalities of the act in question, without at any moment discerning any articulation that supports its cause of action.

And that the mere indication of the cause, referring simply to the dismissal of the gracious complaint, does not prevent the appeal petition from being considered inept, since any indication of the facts invoked to support the claim advanced in the petition was completely omitted.

And that, as follows from number 1 of Article 5 of the CPC (former Article 264 of the CPC), it is upon the Claimant that, in invoking ownership of a right, falls the obligation to allege the facts whose proof may lead to the conclusion of the existence of that same right.

For all the foregoing and in accordance with subparagraphs a) and b) of number 1 of Article 186 of the CPC, the petition should, says the Respondent, be considered inept, resulting, in consequence, in the nullity of the process, and, consequently the Respondent should be absolved from the instance, in accordance with the provisions of Articles 98 of CPPT and the aforementioned 186 of the CPC, applicable ex vi Article 29, no. 1, of RJAT.

II.1 – OF THE FACTS

The Respondent presents the facts established in the record, already mentioned above.

II.3 – OF THE LAW

The Respondent presents the following legal grounds:

II.3.1 – OF THE ALLEGED LAPSE

The Respondent stresses that the Claimant alleged the existence of lapse of the right to assess the tax in question, without having made any factual mention that supports this inference.

It further recalls that the first assessment made by the Tax Authority, relating to 2006, in the amount of € 4,924.54, given the form 3 declaration submitted by the Claimant, was notified to him on 22-08-2007.

The deadline for voluntary payment of IRS resulting from this assessment occurred on 21-09-2007.

The Claimant filed judicial opposition of this assessment with the TAF of Porto on 20-12-2007 and on 18-03-2014 the decision of dismissal was rendered by the TAF of Porto, with the respective judgment becoming final on 09-05-2014.

From this it follows that, in accordance with Article 45, combined with Article 46, subparagraphs a) and d) of no. 2, both of the LGT, the period of lapse of the IRS assessment relating to capital gains obtained in Portugal in 2006 by the Claimant, from the alienation of immovable property located here, is suspended.

And the Respondent transcribes, to better demonstrate and substantiate the suspension, subparagraphs a) and d) of no. 2 of Article 46 of the LGT:

"2 – The period of lapse is further suspended:

a) In the case of judicial litigation upon the resolution of which the assessment of the tax depends, from its beginning until the judgment becomes final;

(…)

d) In the event that the right to assess results from a complaint or opposition, from its filing until the decision."

The Respondent further refers to what was decided, on this matter, by the STA in Case no. 0133/07, of 09-05-2007, to demonstrate the right of the State (via the Tax Authority), in the absence of lapse, when it proceeds to a corrective assessment in favor of the taxpayer, even beyond five years, because, according to the STA, it should be considered as made at the time of the first assessment, and not at the date of the assessment that corrected it.

The Respondent thus stresses that the corrective IRS assessment no. 2014…., in the amount of € 1,264.87, is nothing more than a correction of the initial assessment no. 2007…., in the amount of € 4,924.54, which was corrected in favor of the present Appellant.

And, in consequence, the Respondent draws the conclusion that it is completely unfounded to find the lapse institute well-founded.

II.3.2 – OF THE ALLEGED ABSENCE OF A RULE OF INCIDENCE

The Respondent brings to bear, in this regard, the principles of International Law on conflict-of-law rules, when there are tax relationships involving more than one legal system.

And stresses that it does so not because that is the case in the record, but for a didactic matter and better understanding.

It therefore refers to the Manual of International Law, by Alberto Xavier, pp 195 and 259, in the part relating to the connection elements of the normative prediction, whether of a subjective nature, which concern persons (such as nationality or residence), or objective, which concern things and facts (such as source of production (…) the place of situation of assets (…).

It further states that, subsuming the case in question to a capital gain resulting from the alienation of immovable property, it is evident the need to, among the objective connection elements, resort to the real connection elements from which emanates the intuitive, unquestionable rule that is transversal to any branch of Law of "Locus Rei Sitae" or "Lex loci rei sitae," since it is the real connection elements that define the scope of application of taxes directly or indirectly related to immovable property, as a function of their location.

Whence, contrary to what the Claimant intends, there existed and continue to exist, rules both national and international that impose the taxation of capital gains from alienation of immovable property by the country of location of the assets.

It also refers to Chapter III of the OECD Model Convention, hereinafter CMOCDE, respecting the taxation of income and capital, in which it is stipulated that it is the contracting states that determine the rights of taxation of the State of source (where the income is produced and in which it is paid), or of "Lex loci rei sitae" (State where the immovable property is located) and of the State of residence (where the beneficial recipient of the income is subject to taxation in accordance with domestic legislation).

It further specifies, referring to no. 1 of Article 13 of the CMOCDE (ex-vi Article 6 of the CMOCDE) in which a rule of unlimited cumulative competence of taxation of income from the alienation of immovable property to the State of situation/location thereof is established, or that is, in the case in question, Portugal.

And still on the same issue, the Respondent refers to the Convention itself celebrated between the Portuguese Republic and the German State, which confers, in accordance with the same article cited before, the competence to tax the capital gains from the alienation of immovable property located in national territory (Article 13 of the Convention celebrated between the Portuguese Republic and the Federal Republic of Germany ex-vi Article 6 thereof).

Furthermore, the Respondent cites and transcribes Articles 15, no. 2, 10, no. 1, subparagraph a) and 18, no. 1, subparagraph h), namely:

"Article 15 – Scope of Subjection

(…)

2 – In the case of non-residents, IRS applies exclusively to income obtained in Portuguese territory".

"Article 10 – Capital Gains

1 – Capital gains constitute gains obtained that, not being considered business and professional income, of capital or real estate, result from:

a) Onerous alienation of real rights over immovable property and dedication of any assets of the private patrimony to business and professional activity exercised in the individual name by its owner, ..."

"Article 18 – Income obtained in Portuguese territory

(…)

h) Income relating to immovable property located therein, including capital gains resulting from its transfer;"

Whence, the Respondent concludes, "it is manifest and belongs to the realm of obviousness, that, in the case in question, there existed and exist rules of incidence that obligate the Respondent, under the principle of legality and indisponibility of tax credits, to tax that fact, i.e., the capital gains realized by a non-resident on the alienation of immovable property situated in national territory".

Lacking, therefore, substantiation of the claims advanced by the Claimant, all the more so as it was the Claimant himself who voluntarily delivered the form 3 IRS declaration for the year 2006, voluntarily and in which he indicated, in Annex G, relating to Capital Gains, the alienation of the immovable property he possessed, registered in the matrix under article …, located in the municipality of Faro.

Now, the Respondent stresses, if there were no rule of incidence – which, it emphasizes, is not true – there was no obligation to file a return.

Indeed, the declarant himself knew that there was taxation, since what he did not want was to be taxed differently from a resident, with negative discrimination, by violation of the Treaty of Rome, a ground that was the basis of his opposition petition to the TAF of Porto.

Therefore, given the favorable decision of the TAF of Porto, what the Tax Authority did was correct the assessment that was deemed incorrect and proceed to a new, corrective assessment, with taxation of capital gains in the same manner as for residents, eliminating the negative discrimination, as the Claimant intended.

III – THE ALLEGATIONS

III.1 – OF THE CLAIMANT

States that it maintains all the grounds previously advanced, but intends to produce some considerations regarding the Response of the Tax Authority.

It also states that it does not agree with the alleged ineeptness of the initial petition and also stresses that the Decisions cited do not directly relate to the subject matter of the record.

On the other hand, as to the allegation that the assessment act is divisible and susceptible of partial annulment, stresses that such annulment can only be legally admissible when the ground for annulment applies only to a part of the act, that is, when there is illegality only in part (…)

It further states that "on the contrary, if the assessment act has a single legal ground, and it is not possible to distinguish between a part that is in conformity with the law and another that violates it, partial annulment cannot be decreed".

And it further states that, "in cases, such as that of violation of a tax rule, the entire assessment will be based on wrong legal grounds, whereby the act should be entirely annulled (and with it all the effects produced), on the ground of error regarding the assumptions of law (defect of violation of law), since the illegality is total".

III.2 – OF THE RESPONDENT

Alleges that the learned allegations of the Claimant add nothing new to the thesis it has been defending, nor do they prevent the validity of the argumentation developed by the Tax Authority in its Response, which it reiterates.

Wherefore it understands that the arguments of the Claimant cannot at all succeed, since they make an interpretation and application of the legal rules subsumed to the case sub judice notoriously erroneous.

IV – SANATION

The arbitration tribunal was regularly constituted and is materially competent.

The parties have legal personality and capacity and are legitimate.

The claim is timely and the process does not suffer from nullities, having been invoked as a preliminary issue – The ineeptness of the Initial Petition.

V – ESTABLISHMENT OF RELEVANT FACTS

1. The Claimant is (and was in 2006) a citizen resident in Germany, having, in that year, obtained, among other income, capital gains resulting from the onerous termination of the right of ownership over immovable property located in Portugal, which gave rise to assessment no. 2007…., in the amount of € 4,924.54.

2. This assessment resulted from the electronic submission of an income declaration, form 3, for the year 2006, by the Claimant, on 21-05-2007, registered with no. …-2006-…-…, from which resulted the aforementioned IRS assessment.

3. The Claimant was notified of this assessment, and the Tax Authority informed the Claimant that he could lodge a complaint or appeal in accordance with the terms and deadlines established in Articles 140 of CIRS and 70 and 102 of the Code of Tax Procedure and Process (CPPT).

4. The present Claimant filed judicial opposition against the said tax act, (see Process no. .../07....BEPRT, of the TAF of Porto), which resulted in a favorable decision, determining the total annulment of the opposed assessment, the restitution of the tax paid, as well as the payment of respective indemnifying interest.

5. The decision of the TAF of PORTO was based, in summary, on the fact that the tax treatment given to the present Claimant was unequal (application of a special rate of 25% of Article 72 of CIRS to 100% of the capital gain) compared to that given to residents, in which the taxation of capital gains of the latter is only 50%, to which the general rate is applicable, which violates the provisions of Article 56 of the Treaty establishing the European Community, citing the jurisprudence contained in the Decision of the STA, of 16.01.2008, Case No. 0439/06.

6. In compliance with the judicial decision rendered by the TAF of Porto on 18-03-2014, with final judgment on 9-05-2015, the Tax Authority proceeded to annul the assessment in question and to reimburse the tax assessed to the present Appellant.

7. The Tax Authority proceeded ex officio to a new IRS assessment to tax the Claimant for the capital gain in question, under the rules applicable to residents, to avoid the negative discrimination invoked before the TAF of Porto, which resulted in a new IRS assessment no. 2014 …, in the amount of € 1,264.87, of which he was notified to lodge a complaint or appeal on 22-08-2014.

8. The Claimant filed a gracious complaint petition against the aforesaid IRS assessment act, on the grounds of lapse of the right to assess, as it was made beyond the four years that the Law permits.

9. The Claimant invokes in his gracious complaint petition that, being resident outside Portuguese territory, in Germany and having obtained capital gains resulting from the onerous alienation of immovable property located in this territory, there was no valid rule of incidence that permitted the taxation of this type of income, by the provisions of the Treaty of Rome, from which it resulted that the IRS assessment made, suffers from illegality.

10. From the Services Information relating to the assessment of the Gracious Complaint, they understood that the Tax Authority merely complied with the decision of the TAF of Porto, eliminating the negative discrimination, by proceeding to an IRS assessment in accordance with the rules applicable to residents, considering that lapse of the tax did not occur, wherefore the Complaint was dismissed by decision of 2014-11-06.

11. This decision was notified to the Claimant through official letter no. …/…-…, by registered mail, on 07-11-2014.

12. The Claimant filed on 29-12-2015 an Arbitration Appeal petition, seeking the annulment of the decision dismissing the Gracious Complaint relating to IRS/2006, which suffers from a defect of violation of law, due to error regarding the assumptions of fact and law, and the respective tax act should also be annulled with the proper legal consequences.

VI – FACTS ESTABLISHED AS PROVEN

1. All the facts mentioned in the preceding point.

V – FACTS NOT PROVEN

1. There are no facts established as not proven.

VI – OF THE LAW IN GENERAL

At issue, first and foremost, is to address the preliminary issue raised by the Respondent, relating to the alleged:

VI.1 - "Ineeptness of the Initial Petition".

The Respondent contends that, since the initial petition is the procedural act in which the Claimant initiates the exercise of the right of action, translating itself into the constitutive act of the procedural relationship, it is the only pleading absolutely indispensable to the existence of the process.

And that, given what is provided by "Article 552 of the Code of Civil Procedure ("CPC"), among the requirements of the initial petition are the exposition of the factual and legal grounds and the formulation of the claim, to which underlie the legal criteria of intelligibility of the claim and the cause of action in accordance with Article 186, no. 2, subparagraph a) of the CPC".

Wherefore, continues the Respondent, "the essential facts constituting the cause of action as well as the instrumental facts that the party considers relevant should be advanced with a view to the clarified exercise of the contradictory right, by the Respondent".

Whence there must be a discourse and language that is clear, concise and ordered, which allow understanding the fundamental issues raised, since the cause of action is the legal fact from which the author's right emerges and therefore substantiates its claim, whereby it must consist, at a minimum, of the elements of fact and law that allow the Respondent to contest it.

And refers to the Decision of the Court of Appeal of Lisbon, in process 4579/2007-6, which states: "What counts for the correction of the initial petition is the intelligibility of the claim and the cause of action invoked and the existence of a logical nexus between both."

It further alleges that the Claimant merely alleges that the decision dismissing the gracious complaint suffers from a defect of violation of law, due to error regarding the assumptions of fact and law, without invoking, in a specified manner, the facts that may substantiate this allegation.

And stresses that the Claimant does not allege the essential facts with legal relevance, nor attempts any factual description from which its claim may emerge, since it merely alleges "defects," "imperfections," illegalities of the act in question, without at any moment discerning any articulation that supports its cause of action.

It further states that in the case sub judice the Claimant attacks the dismissal of the IRS complaint of 2006, but completely forgets the articulation of the concrete, objective and individualized facts that constitute the cause of action and does not substantiate, in logical, sufficient and adequate terms, the claim it formulates in the action.

Even taking into account the principles of expedition and simplicity of procedure inherent to the arbitration instance, the Respondent stresses that "one cannot ask for the Claimant's vainglory to present any and all document that proclaims itself as a "claim" for adjudication without the essential prerequisites and formalities for the proper conduct of the process being met".

And the Respondent reinforces its thesis, referring to no. 1 of Article 5 of the CPC (former 264 of the CPC), which prescribes that "it is upon the Claimant that, in invoking ownership of a right, falls the obligation to allege the facts whose proof may lead to the conclusion of the existence of that same right".

And reinforces it with a passage from a Decision of the Court of Appeal of Guimarães, of 31.01.2013, rendered in the context of process no. 500/08 4TBMNC.G1, where it is concluded:

"III – The cause of action must be concretized or determined, consisting of concrete and individualized facts or circumstances; they may not present themselves as manifestly irrelevant or contradictory with the claim.

IV – It is upon the author, who invokes the ownership of a right, that the obligation falls to allege the facts whose proof may lead to the conclusion of the existence of the right – Article 264, no. 1 of the CPC".

Wherefore, it concludes, in accordance with subparagraphs a) and b) of no. 1 of Article 186 of the CPC, the petition should be considered inept, resulting, in consequence, in the nullity of the process, and the nullity of the present suit declared and the Respondent absolved from the instance in accordance with the provisions of Articles 98 of CPPT and 186 of the CPC, applicable ex vi Article 29, no. 1 of RJAT.

Let one see, then, first of all, what is stated in the request for arbitration adjudication of the Claimant:

At the outset, in the preamble:

"…hereby requests the constitution of the Arbitration Tribunal, seeking the annulment of the decision dismissing the decision of the Gracious Complaint relating to IRS/2006, which suffers from a defect of violation of law, due to error regarding the assumptions of fact and law, and the tax act itself should be annulled, with the proper legal consequences".

Then, under the title "Lapse of the Assessment" states:

"1 – The assessment made could not take place, relating to IRS/06, since it was made beyond the four years that the law permits, and the tax act should be annulled, by lapse".

Subsequently states, "Without declining:"

"2 – The present Claimant is (and was in the year 2006), resident in Germany having, in that year, obtained among others, capital gains resulting from the onerous alienation of the right of ownership over immovable property located in Portugal…which will have occasioned the present assessment, (Docs. 1 and 2).

"3 – Now, the rules that, at the time, existed that stipulated the taxation of this type of income, (to non-residents) did not have valid support, since they violated the provisions of Articles 12, 18, 39, 43, and 56 of the Treaty of Rome".

"4 – There was not, therefore, at that time, any valid rule of incidence that permitted the assessment of tax relating to capital gains from immovable property to non-residents.

"5 – Thus, there being no base of incidence, the illegality of the act performed stands out".

And finally: "Furthermore":

"6 – The Tax Administration is generically obliged to act in conformity with the Law, (Articles 288, no. 1 of the CRP and 55 of the LGT), wherefore, regardless of proof of the fault of any of the persons or entities that comprise it, any illegality not resulting from action of the taxpayer, will be imputable to the fault of the services themselves…with indemnifying interest being due".

Concludes by stating "GIVEN THE FOREGOING,

"The claimant should be considered well-founded, the respective tax act annulled, the amount of the tax paid being returned to the Claimant, plus the respective interest".

Knowing the content of the request for adjudication, the Tribunal is in a position to decide whether the preliminary issue of the "Ineeptness of the Initial Petition" raised by the Respondent has legal foundation.

Thus,

The initial petition of the Claimant is, in fact, very succinct, but it is known that the cause of action consists in the annulment of the decision dismissing the Gracious Complaint relating to the IRS/2006, as well as, in consequence, the annulment of the respective tax act.

Furthermore, it is invoked that the ground for the intended annulment of the tax act in question is the lapse of the assessment, as it was made beyond the 4 years that the law permits.

Beyond that, it is stated that the rules that at the time of the assessment existed for taxation of non-residents did not have valid support due to violation of the provisions of Articles 12, 18, 39, 43, and 56 of the Treaty of Rome.

And it also stresses that the Tax Authority is generically obliged to act in conformity with the Law, citing Articles 266, no. 1 of the CRP and 55 of the LGT, wherefore, not proceeding thus, there will be fault of the officials or of the services and, therefore, indemnifying interest is owed.

It should be noted that in the petition of Gracious Complaint timely presented to the Director of Finance of Porto, whose decision of dismissal is contested in the Arbitration Appeal Petition, the object of the complaint sought the annulment of the tax act of IRS assessment relating to the year 2006, on the ground of lapse of the same assessment and that at that time, the rules that permitted the taxation of capital gains from immovable property obtained by non-residents did not have valid support, due to violation of the provisions of Articles 12, 18, 39, 43, and 56 of the Treaty of Rome.

Whence it is concluded that the Arbitration Appeal Petition is a repetition of the Gracious Complaint and of the grounds invoked therein and which was subject to assessment, with a decision of dismissal.

In these terms, CONSIDERING:

a) What is provided in Article 5 of the CPC (Article 264/664 of the CPC of 1961), in which it is stated:

"1 – It falls upon the parties to allege the essential facts that constitute the cause of action and those on which the exceptions invoked are based;

2 – In addition to the facts articulated by the parties, the following are also considered by the judge:

a) The instrumental facts that result from the instruction of the case;

b) The facts that are a complement or concretization of those alleged by the parties and result from the instruction of the case, provided that they have had the opportunity to pronounce themselves thereon;

c) The notorious facts and those of which the tribunal has knowledge by virtue of the exercise of its functions.

3 (…)".

b) Also provided on this matter is Article 98 of the Code of Tax Procedure and Process:

"1 – The following are insanible nullities in tax judicial proceedings:

a) The ineeptness of the initial petition;

b) (…)

c) (…)

2 – The nullities referred to in the preceding number may be officially known or raised at any time, until the final judgment becomes final.

3 – The nullities of acts result in the annulment of the subsequent terms of the process that depend absolutely on them, with the useful pieces always being used to establish the facts.

4 – (…)

5 – (…) ".

c) The jurisprudence of the Decision of the STA of 24-03-2010, in Case no. 0956/09 and in the TCA North, of 27-11-2014, in Case no. 00228/07.2BEMDL, from which the following stands out:

In the Decision of the STA:

"I – The ineeptness of the initial petition is, in truth, an insanible nullity of official knowledge, in accordance with Article 98 of the CPPT, which only occurs when the indication of the claim or the cause of action is lacking or unintelligible, when the claim is in contradiction with the cause of action or when substantially incompatible causes of action or claims are cumulated (Article 193 of the CPC)[1].

II – If in the initial petition of opposition to tax execution are formulated causes of action substantially incompatible for assessment within the scope of the procedural means used (omission of legal formalities in the administrative penalty process and nullity of the administrative decision and illegitimacy of the subsidiary liable party) and the opponent terminates this initial petition by requesting that it be judged "well-founded, and therefore the reversed tax execution be declared extinct", there is in the petition an indication of claim and admissible grounds of opposition, wherefore the process may proceed to its assessment[2]".

In the Decision of the TCA North:

"INEEPTNESS OF THE PETITION

I – From the interpretation of Article 186 of the CPC the ineeptness of the initial petition may occur in two ways:

a) Absolute lack of formulation of the claim or the cause of action;

b) Obscure formulation of the claim and/or the cause of action.

II – If the defendant, despite raising ineeptness, contests and after hearing the plaintiff, it is verified that he correctly interpreted the initial petition, the same is not judged inept".

The Tribunal understands, given the applicable legal rules transcribed, the jurisprudence invoked and taking into account that:

d) The initial petition of the Claimant, although succinct and with language not perfected and not usual procedurally in judicial or arbitration petitions, is, however, articulated and minimally intelligible.

e) It is also not perfect, particularly as to the legal grounds, by the practically complete absence of rules that substantiate the alleged defect of violation of law as to the contested tax assessment act, but it is intelligible;

f) It cannot be stated, however, given the jurisprudence cited, that it is an inept petition, in the understanding of the Tribunal, wherefore:

1. It does not present itself with an absolute lack of formulation of the claim or the cause of action, despite the almost complete absence of the legal rules violated;

2. It does not have an obscure and unintelligible formulation;

3. It is not in contradiction with the cause of action;

4. There are no insanible nullities, that referred to in subparagraph a) of no. 1 of Article 98 of the CPPT;

5. What is provided in Article 186 of the CPC is not verified,

6. And it presents admissible grounds.

Wherefore, for all the foregoing and despite the substantiation of the Respondent, this Tribunal decides that the raised preliminary issue does not merit legal merit.

VI.2 – OF THE LAW APPLICABLE TO THE CAUSE OF ACTION

To recall that the capital gains obtained by the Claimant non-resident in Portuguese territory in 2006, as a consequence of the alienation of immovable property located in this territory, were declared in Annex G of the Form 3 IRS Declaration timely delivered by the Claimant.

From which resulted a first IRS assessment with no. 2007…., in the amount of € 4,924.54, made based on the legal rules applicable to non-residents, (special rate of 25% on the entirety of the capital gain), different from those applicable to residents (general rates resulting from aggregation, applicable to 50% of the ascertained capital gain, together with any other possible income).

The Claimant was notified of this assessment, having been clarified that he could lodge a complaint or appeal in accordance with the terms and deadlines established in Articles 140 of CIRS and 70 and 102 of the Code of Tax Procedure and Process (CPPT).

The present Claimant filed judicial opposition against the said tax act, (see Process no. .../07....BEPRT, of the TAF of Porto), which resulted in a favorable decision, determining the total annulment of the opposed assessment, the restitution of the tax paid, as well as the payment of respective indemnifying interest.

The decision of the TAF of PORTO was based, in summary, on the fact that the tax treatment given to the present Claimant was unequal (application of a special rate of 25% of Article 72 of CIRS to 100% of the capital gain) compared to that given to residents, in which the taxation of capital gains of the latter is only 50%, to which the general rate is applicable, which violates the provisions of Article 56 of the Treaty establishing the European Community, citing the jurisprudence contained in the Decision of the STA, of 16.01.2008, Case No. 0439/06.

In compliance with the judicial decision rendered by the TAF of Porto on 18-03-2014, with final judgment on 9-05-2014, the Tax Authority proceeded to annul the assessment in question and to reimburse the tax assessed to the present Appellant.

Subsequently, the Tax Authority proceeded ex officio to a new IRS assessment to tax the Claimant for the capital gain in question, under the rules applicable to residents, to avoid the negative discrimination invoked before the TAF of Porto and accepted by it, which resulted in a new, corrective, IRS assessment no. 2014 …, on 6-08-2014, in the amount of € 1,264.87, of which he was notified to lodge a complaint or appeal on 22-08-2014.

The Claimant filed a gracious complaint petition against the aforesaid IRS assessment act, on 29-09-2014, on the grounds of lapse of the right to assess, as it was made beyond the four years that the Law permits.

The Claimant further states in his gracious complaint petition that, being resident outside Portuguese territory, in Germany, and having obtained capital gains resulting from the onerous alienation of immovable property located in this territory, there was no valid rule of incidence that permitted the taxation of this type of income due to violation of the provisions of Articles 12, 18, 39, 43, and 56 of the Treaty of Rome.

As stated in the Services Information relating to the assessment of the Gracious Complaint, they understood that the Tax Authority merely complied with the decision of the TAF of Porto, eliminating the negative discrimination, by proceeding to a corrective IRS assessment in accordance with the rules applicable to residents, considering that lapse of the tax did not occur, wherefore the Complaint was dismissed by decision of 2014-11-06.

This decision was notified to the Claimant through official letter no. …/…-…, dated 07-11-2014, by registered mail, giving him knowledge of the grounds for dismissal through the Services Information that was attached to the said letter and also of the means of defense.

The Claimant filed on 29-12-2015 an Arbitration Appeal petition, seeking the annulment of the decision dismissing the Gracious Complaint relating to IRS/2006, which suffers from a defect of violation of law, due to error regarding the assumptions of fact and law, and the respective tax act should also be annulled with the proper legal consequences.

The Claimant further invokes in his initial petition that the lapse of this last IRS assessment no. 2014 …, of 6-08-2014, in the amount of € 1,264.87, has occurred, as it was made beyond the four years that the Law permits.

Furthermore, he also alleges that the rules that at the time existed that stipulated the taxation of this type of income (to non-residents) did not have valid support, since they violated the provisions of Articles 12, 18, 39, 43, and 56 of the Treaty of Rome.

And reinforces this thesis by repeating that there was not, at that time, any valid rule of incidence that permitted the assessment of tax relating to capital gains from immovable property to non-residents, whence, he concludes the illegality of the act performed.

And concludes by requesting the annulment of the tax act and the payment of indemnifying interest, as there was fault of any of the persons or entities that comprise the Tax Administration, when it is generically obliged to act in conformity with the Law (Articles 266, no. 1 of the CRP and 55 of the LGT).

EXAMINATION:

I – THE ALLEGED LAPSE OF THE ASSESSMENT

1. First and foremost, let one see what is provided, in this regard, in Articles 45 and 46 of the LGT:

"45 – Lapse of the right to assess

1 – The right to assess taxes lapses if the assessment is not validly notified to the taxpayer within four years, when the law does not establish another period".

(…)

4 – The period of lapse is counted, in periodic taxes, from the end of the year in which the tax event occurred (…)"

"46 – Suspension of the period of lapse

1 – (…)

2 – The period of lapse is further suspended:

a) In the case of judicial litigation upon the resolution of which the assessment of the tax depends, from its beginning until the judgment becomes final;

(…)

c) In the event that the right to assess results from a complaint or opposition, from its filing until the decision".

Whence,

1. In the case of a capital gain obtained by the Claimant in 2006, resident in Germany, which gave rise to a first IRS assessment with no. 2007…., in the amount of € 4,924.54, made on 04-08-2007, based on the legal rules applicable to non-residents,

Of which the Claimant was notified on 22-08-2007, having filed judicial opposition against the said tax act, in 2007, (see Process no. .../07....BEPRT, of the TAF of Porto), resulting in a favorable decision of 18-03-2014, becoming final on 09-05-2014, determining the total annulment of the opposed assessment, the restitution of the tax paid, as well as the payment of respective indemnifying interest.

There was, therefore, a suspension of lapse between the date of filing of judicial opposition with the TAF of Porto on 20-12-2007 and the date of becoming final, on 09-05-2014, or that is, at least 6 years from 2007 to 2013, plus 5 months and 9 days, from January to April 2014.

Whence it is concluded, given the provision in Article 45 of the LGT, combined with Article 46, subparagraphs a) and d) of no. 2, the counting of the period of lapse shall be made as follows:

• Date of tax event – year of 2006.
• Beginning of counting of 4-year lapse period – 31-12-2006
• Year of 2007 - From 1/1/2007 to 19-12-2007 (date of filing of judicial opposition)………………………………………………… 11 months and 19 days
• Years of 2008, 2009, 2010, 2011, 2012, 2013 – 2014 until 09-05-2014 (date of becoming final of the judicial decision) – suspension of lapse.
• Year of 2014 – resumption of counting – from 9/5/2014 to the date of notification of the assessment now contested – 22-08-2014 – 162 days.

Summarizing, as to the period used by the Tax Authority, for verification of the existence or not of the alleged lapse of the corrective IRS assessment in question:

• Year of 2007 - 11 months + 19 days
• Year of 2014 – 5 months + 12 days (162 days)
  16 months + 31 days = 17 months + 1 day =
  1 year + 5 months + 1 day

Time limit for proceeding to the corrective assessment: until 09-05-2017.

• Year of 2007 - 11 months + 19 days
• Year of 2014 - 5 months and 12 days
• Year of 2015 – 12 months
• Year of 2016 – 12 months
• Year of 2017 – 4 months + 29 days
  Sum:………. 44 months + 60 days = 48 months = 4 years

1. Whence, without more, the corrective IRS assessment no. 2014 …, made on 6-08-2014, in the amount of € 1,264.87, duly notified on 22-08-2014, was made within the 4-year lapse period, as is demonstrated above, without any margin for doubt, wherefore the alleged lapse invoked by the Claimant has no legal foundation whatsoever.

II – THE ALLEGED ABSENCE OF A RULE OF INCIDENCE

It is important, first and foremost, to know whether Portugal has competence to tax this type of income (capital gains from immovable property) obtained in Portuguese territory by non-residents.

And to know also whether the assessment in question was made in compliance with applicable legal rules.

OF THE COMPETENCE OF TAXATION

1. As the Respondent well states, the question configures a conflict of rules, given its connection with two States, that of residence of the Claimant and that of location of the alienated property, in addition to the respect due to the Treaty of Rome, in the part in which it does not permit negative discrimination between citizens of the European Union.

2. There is, thus, that in terms of hierarchy of rules applicable to the question under analysis, we have:

a) – The CRP
b) – Community Law
c) – International Law
d) – Portuguese domestic law

1. To know, thus, of the competence for taxation of this income, it is important to analyze what is provided in Article 8, no. 4 of the CRP, as well as what is provided in Articles 1 of the LGT and of the CPPT.

2. Regarding the CRP, the relevant part of Article 8 that is important to the record is transcribed:

"Article 8 - (International Law)

…

1. The rules of international conventions regularly ratified or approved are in force in the internal order after their official publication and insofar as they bind internationally the Portuguese State.

….

1. The provisions of the Treaties governing the European Union and the rules emanated from its institutions, in the exercise of their respective powers, are applicable in the internal order, in accordance with the terms defined by European Union law, with respect for the fundamental principles of the democratic rule of law."

2. As for the Treaty of Rome, in its consolidated version, and the invoked rules on negative discrimination between residents and non-residents, it is not important to assess now, as it is not at issue in the record, given that this question has already been assessed and decided by the TAF of Porto.

3. It is important, rather, to bring to bear the Convention celebrated between the Portuguese Republic and the Federal Republic of Germany to prevent Double Taxation in the matter of Income Taxes and Capital, approved by Law no. 12/82, of June 3 and in force.

4. And from it is gleaned that in accordance with Article 13 – Capital Gains, the following:

"1 – Gains that a resident of a contracting State[3] obtains from the alienation of immovable property considered in Article 6 and located in another contracting State[4] may[5] be taxed in that other State[6].

(…)".

1. As easily deduced, the connection elements in question are the following, as extracted from the Manual of International Law, by Alberto Xavier, timely cited by the Respondent:

"Subjective – which concern persons (such as nationality or residence)" – in this case the Claimant, with residence in Germany.
"Objective – which concern things and facts (such as source of production (…) the place of location of assets (…) – in this case in Portugal.

1. Clarified the framing of the question under analysis and known the applicable Conventional rule, which permits the taxation of gains to Portugal, given that the said rule of Article 13 of the Convention supersedes domestic law, by virtue of what is provided in Article 1 of the General Tax Law (LGT) and also in Article 1 of the Code of Tax Procedure and Process (CPPT),

2. There remain no doubts that the State of location of the alienated immovable property (lex loci rei sitae) has competence to apply its law and, therefore, to proceed to the taxation of the capital gains in question, provided that it respects the principle of non-discrimination, as is set forth in Article 12 of the Treaty of Rome, consolidated version, wherefore the argumentation of the Claimant has no foundation.

OF THE ABSENCE OF VALID RULES FOR TAXATION

1. Also here, as will be seen, this argumentation has no legal support whatsoever.

2. And thus it is because the applicable law, in the broad sense, is that contained in the Code of Income Tax on Individuals, by virtue of what was previously demonstrated, whose rules applicable to the situation under analysis are the following, as the Respondent well states:

"Article 15 – Scope of Subjection

(…)

2 – In the case of non-residents, IRS applies exclusively to income obtained in Portuguese territory".

"Article 10 – Capital Gains

1 – Capital gains constitute gains obtained that, not being considered business and professional income, capital or real estate, result from:

a) Onerous alienation of real rights over immovable property and dedication of any assets of the private patrimony to business and professional activity exercised in the individual name by its owner;…"

"Article 18 – Income obtained in Portuguese territory

1 – Are considered obtained in Portuguese territory:

(…)

h) Income relating to immovable property located therein, including capital gains resulting from its transfer".

1. Thus, given the cited rules and the competence already recognized to Portugal for the taxation of the gains in question, there remain no doubts that their application by the Tax and Customs Authority to the gains in question, determined the existence of the assessment in question, which does not suffer from any illegality as the Claimant intends, wherefore also here the alleged absence of rules for the Tax Authority to proceed to its taxation does not have foundation.

OF THE ASSESSMENT OF IRS TO THE CLAIMANT UNDER THE RULES APPLICABLE TO RESIDENTS

1. The Claimant, who appealed to the Administrative and Tax Court of Porto to challenge the 1st IRS assessment due to violation of the Treaty of Rome, with the allegation that there was negative discrimination in his 1st IRS assessment already identified in the record, now comes to again challenge the corrective assessment, which eliminates the alleged negative discrimination.

2. Now, what the Tax Authority did nothing more than to proceed to a corrective IRS assessment relating to the gains in question, complying with the judicial decision referred to, that is, by taxing the Claimant according to the rules applicable to residents, foreseen in the Code of IRS, thus eliminating the discrimination censured.

3. That is, showing itself already proven that the competence for the taxation of the gains in question belongs to the Portuguese State and showing itself proven that there exist rules, in the Portuguese legal order, that permit the taxation of the same gains,

4. And eliminated that was the negative discrimination in the taxation of the Claimant in IRS with complete compliance of the respective applicable rules of the Treaty of Rome,

5. All the arguments contained in the initial petition of the Claimant cease to have any legal foundation.

OF THE DISMISSAL OF THE GRACIOUS COMPLAINT

1. Resolved all the issues raised by the Claimant, it remains to refer to that of the contest to the dismissal of the gracious complaint also object of the initial petition.

2. Now, attending to the conclusions on the preceding issues or causes of action raised by the Claimant, which have no legal foundation, as was demonstrated, it is deduced, as a corollary of these conclusions, that also there is no legal foundation to challenge the dismissal of the gracious complaint, which took a correct decision, duly substantiated and properly notified to the Claimant.

VII. – Of the Requirement of Indemnifying Interest

1. Contrary to what the Claimant asserts, the corrective assessment in question not suffering from any illegality, indemnifying interest cannot be required.

2. It is this conclusion that flows from Article 43, no. 1 of the LGT:

"Indemnifying interest is owed when it is determined, in gracious complaint or judicial opposition, that there was error imputable to the services from which results payment of the tax liability in an amount greater than that due."

1. And because, provably, as was demonstrated, it was not, in this corrective assessment that is now at issue, assessed tax greater than that due, nor was there error of the services, there cannot be an obligation to indemnify.

VI - DECISION

For all the foregoing and duly substantiated, this Singular Tribunal decides:

To deny merit to the present Appeal, as a consequence, the additional IRS assessment relating to the year 2006, no. 2014 …, of 06/08/2014, in the amount of € 1,264.87, is shown to be correctly made.

Indemnifying interest is not owed in favor of the Claimant, for the grounds expressed, which lead to the conclusion of the correct corrective IRS assessment.

VI – OF THE VALUE OF THE PROCEEDINGS

The value of the action is fixed at € 1,264.87, as results from the record and from the attached documents, in accordance with the provisions of Article 306, no. 2 of the CPC and 97-A, no. 1, subparagraph a) of the CPPT, applicable ex vi Article 29, no. 1, subparagraph a) of RJAT.

VII – OF THE COSTS

In accordance with Articles 12, no. 2 and 22, no. 4, of RJAT and Article 4 of Table I of the Regulation of Costs in Tax Arbitration Proceedings, the value of costs is fixed at € 306.00, to be paid by the Claimant, since the Respondent obtained complete merit on the claim.

Notify the Parties.

Lisbon, October 14, 2015.

The Arbitrator,

(José Rodrigo de Castro)

[1] In italics and underlined by the Tribunal.

[2] Equally in italics and underlined by the Tribunal.

[3] Germany, in this case.

[4] In this case, Portugal.

[5] Which signifies, in accordance with the OECD Model Convention, that such gains may be taxed in both States in question.

[6] In this case, Portugal.