IRS Exemption Under Portugal-Spain Double Taxation...

Process: 798/2014-T

Date: June 25, 2015

Tax Type: Valor do pedido:

Summary

This CAAD arbitration case (Process 798/2014-T) involves a Spanish national employed as a teacher at the Spanish Institute in Lisbon, challenging an additional IRS assessment for 2010. The claimant, paid by Spain's Ministry of Education, Culture and Sports, has resided in Portugal since 1987. The central issue concerns whether her salary qualifies for tax exemption under Article 37 of the Estatuto dos Benefícios Fiscais (EBF) and/or Article 19 of the Portugal-Spain Double Taxation Convention. Initially, Portuguese tax authorities accepted the income as exempt, allowing declaration via Annex H with income code 402. However, in 2012, the tax administration reversed its position, arguing the exemption under Article 37 EBF applies only to international organizations (UN, NATO, OECD) not foreign state entities. The administration invoked Article 19 of the bilateral convention, which permits Portugal to tax remuneration paid by Spain when the recipient: (a) holds Portuguese nationality, or (b) became resident in Portugal before providing the services. Since the claimant established Portuguese tax residency in 1987, before her 1998 employment contract formalization, the tax authorities concluded she didn't move to Portugal solely to perform these services, triggering Portuguese taxation rights. A previous 2013 arbitral tribunal annulled an earlier assessment on procedural grounds (lack of prior hearing), leading to a refund. The 2014 assessment represents a renewed attempt to tax the Spanish teaching income. The case illustrates complex interplay between domestic tax benefits, double taxation conventions, timing of residency establishment, and the distinction between international organizations and foreign government employment for exemption purposes.

Full Decision

ARBITRAL DECISION

I – THE CLAIM

A..., taxpayer identification no. ..., resident at Avenue ... Pontinha, hereby, pursuant to the provisions of Articles 2, paragraph 1, subparagraph a), 5, paragraph 2, subparagraph a), 6, paragraph 1, 10, paragraph 1, subparagraph a) and paragraph 2, all of the Legal Regime for Tax Arbitration (RJAT), requests the establishment of a Singular Arbitral Tribunal with a view to declaring the illegality of the tax act embodied in the additional assessment of Income Tax on Individuals (IRS) no. 2014 ..., of 25.07.2014, the assessment and compensatory interest no. 214 ... and in the statement of account reconciliation no. 2014 ..., of 31.07.2014, concerning the year 2010, with the grounds that are expressly set out.

I-A – FACTS

The Claimant is a Spanish national, with a degree in modern languages and literature, currently working as a teacher at the Spanish Institute "B...", located in Lisbon.
The Claimant states that in the period between 1982 and 1985 she resided in Algeria and that on 7.01.1985, still residing in Algeria, she filed in Portuguese territory a declaration of commencement of activity (cf. doc. 5), with a view to performing sporadic work in Portugal.
She further states that in the year 1986 she established residence in Madrid, Spain and remained there until September 1987, having applied at that date for the position of teacher at the Spanish Institute "B...", located in Lisbon, a position that was granted to her and which she has exercised since 16.09.1987 (cf. doc. 6).
And that on 01.11.1998 she formalized her employment relationship with the celebration of an employment contract with the then Ministry of Education and Science of Spain, for the position of teacher, to perform functions in Portugal (cf. doc. 7) and declaration issued by the Embassy of Spain in Portugal (cf. doc. 8.).
She clarifies that the Spanish Institute "B...", located at Street ... in Lisbon, is an educational centre dependent on the Ministry of Education and Science of Spain, in accordance with Article 1 of the "Internal Regulations" (cf. doc. no. 9) and the "Program of Education Abroad" (cf. doc. 10) and also dependent on the Education Secretariat of the Embassy of Spain in Portugal (cf. doc. 8).
The Claimant clarifies that the remuneration earned is paid by the Ministry of Education, Culture and Sports of Spain (cf. docs. nos. 6 and 8).
She further states that by virtue of the circumstances referred to, the Claimant, until September 1987 was resident in Madrid, Spain, and thereafter came to reside in Lisbon, Portugal.
The Claimant alleges that, in response to a request for clarification from the tax administration services, she was "informed that she should submit the annual income declaration form 3, accompanied by Annex H, because the income she earned was exempt from taxation under Article 42 of the Tax Benefits Statute (EBF), as worded on the date applicable (current Article 37)".
She states that, however, as of the year 1998, the Claimant "was informed by the same services that the income declaration form 3 should be accompanied by annex J", cf. Office no. 5863, of 17/02/2000, which constitutes doc. no. 13 attached to the P.I.
As a result of the submission of the aforementioned declaration form 3 and annex J (cf. doc. 11), she states that "she was notified of the statement of IRS assessment in which the amount of € 3,247.60 of tax to be paid was determined" (cf. doc. 12).
Not accepting this, she filed a gracious complaint against the IRS assessment, which received the following order "Annex J was removed and field 236 of table 13 was changed to zero (...)" (cf. doc. 13).
That is, the Claimant stresses that "the tax administration determined the restoration of the previous declaration situation and confirmed the exemption from taxation of the income earned".
However, the Claimant states that she was selected by the tax administration for analysis of the elements of the declarations submitted for the years 1997, 1998 and 1999 (cf. docs. nos. 14 to 16).
The Claimant states that for the year 2010[1], she proceeded to submit her IRS form 3 declaration, as in previous years, "registering the remuneration earned as a teacher of the Spanish institute "B..." in Annex H – Income Code 402", cf. doc. 17).
It so happened that in July 2011 she was notified by office no. ..., of 19.07.2011, to, with reference to the year 2009, present additional elements and documents (cf. doc. 18), which she did on 29.07.2011 (cf. doc. 19).
By order of 15.02.2012, from the Deputy Director of Finance, the Claimant was notified, through Office no. ..., according to which "the elements contained in the form 3 declaration submitted are altered" (cf. doc. 20).
From the aforementioned order, of which the Claimant provides a partial transcription, the grounds that led to the alteration of the elements of the declaration can be known:

"1. The taxpayer has Spanish nationality, but is resident in Portugal for several years, exercising the activity of teacher and being paid by the Ministry of Education and Science of Spain, considered the income exempt from taxation in IRS given that it is income earned in the service of foreign or international organizations, which can be classified under subparagraph b) of paragraph 1 of Article 37 of the EBF;

Now, in the aforementioned information from DSIRS a distinction is made between foreign or international organizations (such as the UN, NATO or OECD, etc.) and work performed for the Spanish State, by which it does not consider that this income can be classified under Article 17 of the EBF, because it concerns income paid by the Spanish State for functions developed in Portugal, by a taxpayer resident, for tax purposes, in Portuguese territory;
In this way it remains to determine whether the payment of this income is covered by the Convention (...). Article 19 is therefore applicable, in which remuneration paid by the Spanish State is taxed in Portugal provided that one of the following conditions is met: having Portuguese nationality (which is not the case) or that it has not become resident in Portugal solely for the purpose of providing the said services (cf. subparagraph b).

The taxpayer was already resident in Portugal before celebrating the employment contract (1988-11-01) as confirmed by consultation with the System for Management of Registration of Taxpayers" (cf. doc. 20).

In view of the foregoing, the tax administration concludes, states the Claimant, that "(...) given that it is verified that the aforementioned income is subject to and is taxed in IRS under general terms, not benefiting from any exemption, it is proposed that a DC be drawn up to the declaration which is in error, removing the value indicated in table 4 of annex H and transferring it to table 4 of annex A, similarly to what occurred for the year 2009" (cf. doc. 20).
As a consequence, the Claimant was notified on 15.03.2012, of the additional IRS assessment no. 2012 ..., of 27.02.2012, concerning the year 2010, which determined an amount to be paid of € 3,795.48 and which was paid within the voluntary payment period (cf. doc. 21).
For not agreeing with the IRS assessment, as she understands it to be affected by illegality, the Claimant filed, on 30.05.2012, a gracious complaint, which was rejected by order of 31.12.2012.
The Claimant responded to the rejection of the complaint by filing a request for establishment of an Arbitral Tribunal, to which case number 17/2013-T was assigned, whose decision determined the annulment of that additional IRS assessment, on the grounds of failure to grant prior hearing to the taxpayer, now Claimant, whereby she was issued the respective refund cheque no. 8190160295, in the amount of € 3,795.48, concerning the year 2010 (cf. doc. 22).
However, the Claimant states that in March 2014 she was notified to exercise the right to prior hearing, under Article 60 of the General Tax Law (LGT), regarding the draft alteration of the income declaration form 3 for the year 2010 (cf. doc. no. 23).
Subsequently, the Claimant was notified of the decision that determined the alteration of the income declaration form 3 for the year 2010 (cf. doc. 24) and also of the consequent additional IRS assessment no. 2014 ..., of 25.07.2014, the compensatory interest assessment no. 2014 ... and the statement of account reconciliation no. 2014 ..., of 31.07.2014, concerning the year 2010 (cf. doc. 25).
The aforementioned tax act determined a total amount to be paid of € 3,981.41 (?), which was paid within the voluntary payment period (cf. doc. 25), but against which the Claimant brings the present request for establishment of an arbitral tribunal.

I-B – LAW

A) On the non-subjection to taxation in Portugal of the income earned by the Claimant, under subparagraph b) of paragraph 1 of Article 19 of the Tax Treaty

The Claimant alleges that, as stated in the facts described above, "the income earned is paid by the Ministry of Education, Culture and Sports of Spain (cf. docs. 6 and 8), an entity that oversees the Spanish Institute "B...", located in Lisbon (cf. docs. 9 and 10), by which the competence to tax the income belongs to the Spanish State and not to the Portuguese State, in accordance with the Convention between the Portuguese Republic and the Kingdom of Spain to Avoid Double Taxation and Prevent Tax Evasion in the Matter of Income and Property Taxes (Tax Treaty), approved by Resolution of the Assembly of the Republic no. 6/95, of 28.01.1995".
She further states that, indeed, subparagraph a) of paragraph 1 of Article 19 of the Tax Treaty, under the heading "Public Remuneration", provides that "Remuneration, excluding pensions, paid by one Contracting State or by one of its political or administrative subdivisions or local authorities to an individual, as a consequence of services rendered to that State or to that subdivision or local authority, can only be taxed in that State."
From which the Claimant concludes that "the aforementioned provision establishes the principle according to which the State that pays the remuneration has the exclusive right to tax it".
And she further states that the aforementioned principle contains a single exception, which is established in subparagraph b) of paragraph 1 of Article 19 of the Tax Treaty, in which it is provided that "These remuneration may, however, only be taxed in the other Contracting State if the services are performed in that State and if the individual is a resident of that State: i) Being a national of that State; or ii) That has not become a resident of that State solely for the purpose of rendering the said services" (emphasis by the Claimant).
From which, the Claimant clarifies, that under the aforementioned Convention provision, income paid by one State may be taxed in the other State, that of residence, if the services are performed in that State and provided that one of the following conditions is met:

"i) The person earning the income is a national of the State of residence; or

ii) The person earning the income has not become a resident of that State solely for the purpose of rendering the services".

And the Claimant further refers to what KLAUS VOGEL states in an annotation to Article 19 of the OECD Model Convention:

"If an individual earns salary (...) from services rendered in one State (...) paid by that State (...) Article 19 permits only the state of the source of payment to tax that income. However, such income may be taxed exclusively by the other state if – the individual is a resident of that state and has not become a resident of that state exclusively for the purpose of rendering the services (...)" .

And the Claimant states that the same author concludes that "in exceptional cases, taxation by the state of the source of payment gives way to exclusive taxation by the state of residence (...)".
And the Claimant concludes that as results from the factual circumstances previously alleged, she herself earns, from the exercise of the function of teacher at the Spanish Institute "B...", located in Lisbon, a remuneration paid by the Ministry of Education, Culture and Sports of Spain (cf. doc. 8), that is, by the Spanish State.
From which, she stresses, given the provision of the aforementioned Article 19, paragraph 1, subparagraph a) of the Tax Treaty, the competence to tax the remuneration earned by her, the Claimant, belongs to the Spanish State.
And the Claimant completes her conclusion by reaffirming that, indeed, the competence to tax the remuneration earned by the Claimant would only not belong to the Spanish State if, in the case sub judice, one of the conditions provided in subparagraphs i) and ii) of subparagraph b) of paragraph 1 of Article 19 of the Tax Treaty were met, namely: i) the circumstance that the Claimant has Portuguese nationality; or ii) the circumstance that the Claimant has not become resident in Portugal exclusively for the purpose of rendering the services at the Spanish Institute "B...", located in Lisbon, conditions that manifestly do not occur in the present case, as is better evidenced below.
And in detail, the Claimant clarifies that the "condition provided in subparagraph ii) of subparagraph b) of paragraph 1 of Article 19 of the Tax Treaty does not apply because she is a Spanish national" (cf. doc. 1).
And as regards the "condition provided in subparagraph i) of subparagraph b) of paragraph 1 of Article 19 of the Tax Treaty, the Claimant notes that she only established residence in Portugal to exercise the function of teacher at the Spanish Institute "B...", located in Lisbon".
And the Claimant clarifies that, indeed, "the reason that led the Claimant to move to Portugal was the circumstance of having established an employment link with, at that time, the Ministry of Education and Science of Spain for the exercise of the aforementioned teaching function in Portugal, by which the condition provided in subparagraph ii) also does not apply in the present case".
And she clarifies that "nor should it be invoked, for verification of this condition, that the Claimant became resident in Portugal by the fact of having filed a declaration of commencement of activity on 07.01.1985 (cf. doc. 5), this because notwithstanding the submission of that declaration, the Claimant resided, at that date, in Algeria".
And she further states that, "in fact, as evidenced above, between the years 1982 to 1985 the Claimant resided in Algeria (cf. docs. nos. 2 to 4), having established residence in Madrid, Spain, in the year 1986, and there resided until September 1987".
And further that, "in truth, during the aforementioned period the now Claimant only occasionally and very sporadically travelled to Portugal".
And that the submission by the Claimant of the declaration of commencement of activity, on 07.01.1985, was not intended to register her as a fiscal resident in Portugal, but solely to enable her to carry out sporadic work in Portuguese territory, since, as previously mentioned, at that date she actually resided in Algeria.
And the Claimant further reiterates that "she only established residence in Portugal in September 1987, as a result of the employment link established with, at that time, the Ministry of Education and Science of Spain for the exercise of functions at the Spanish Institute "B...", located in Lisbon".
From which, she concludes, in view of the foregoing, and since none of the conditions provided in subparagraphs i) and ii) of subparagraph b) of paragraph 1 of Article 19 of the Tax Treaty is met, the competence to tax the income earned by the now Claimant is, under subparagraph a) of paragraph 1 of Article 19 of that provision, with the Spanish State, contrary to the understanding of the Tax Authority.
For which reason, the Claimant stresses, the tax act in question cannot fail to be annulled.

B) On the exemption for personnel of foreign organizations under Article 37, paragraph 1, subparagraph b) of the EBF

And the Claimant, despite what has been stated above, further states that should it be understood that the right to tax the income earned by her does not belong exclusively to the Spanish State, which she does not concede, she nevertheless still understands that the tax act in question is illegal, since the income earned is exempt from IRS under Article 37, paragraph 1, subparagraph b) of the EBF, contrary to what is upheld by the Tax Authority.
And for that purpose transcribes what is provided by Article 37, paragraph 1 of the EBF:

"Exemption from IRS, under international law applicable, or provided that there is reciprocity: (...) b) Personnel in the service of foreign or international organizations, in that capacity, are exempt from IRS".

And she stresses that, in light of the aforementioned legal provision, where there is a rule of international law or reciprocity between States, income earned by personnel in the service of foreign organizations or international organizations, in that capacity, is exempt from IRS.
And in the context of the interpretation of this provision, the Claimant understands that by "international organization" the entity created by States, or by other entities created by States, endowed with international legal personality and by "foreign organization" the entity with registered office in a foreign country, constituted by a State or by an entity created by States.
Now, the Claimant stresses, as results from the facts alleged, the Claimant exercises the function of teacher at the Spanish Institute "B...", an educational centre dependent on the Ministry of Education, Culture and Sports of Spain (cf. docs. nos. 9 and 10), and the remuneration earned by her is paid by that Ministry (cf. docs. 6 and 8).
And she affirms that the Spanish Institute "B...", as an entity constituted and dependent on the Ministry of Education, Culture and Sports of Spain, is, given the definition above, a foreign organization, for the purposes of Article 37, paragraph 1, subparagraph b) of the EBF.
And she stresses that the Tax Authority seems to forget the distinction between "foreign organization" and "international organization", since it merely concludes that since the same Institute is not an international organization, it cannot, therefore, apply to the Claimant the exemption provided in the aforementioned Article 37, paragraph 1, subparagraph b) of the EBF.
And she further states that, indeed, the aforementioned Spanish Institute is not an international organization, but rather is, given the definition mentioned, a foreign organization, under Article 37 of the EBF, thus the understanding upheld by the Tax Authority is unfounded in this respect.
And the Claimant, finally, notes that under the aforementioned Article 37 of the EBF, the tax benefit of IRS exemption is only applicable if there is international law that provides for such exemption or by application of the principle of reciprocity agreed between States.
And that, the Claimant stresses, it is important in this context to refer to the Cultural Agreement concluded between Portugal and Spain, in 1970, promulgated by Decree-Law no. 654/70, of 29 December, under which both countries agreed to promote cultural and scientific relations, recognizing that it would be necessary to promote rates and customs duties on the import of scientific and cultural material, as well as the elimination of obstacles to the circulation and obtaining of residence authorizations by citizens who carry out activities arising from the application of that Agreement.
And she further states that that agreement also intended to create favorable conditions for the promotion of culture between the two States, conditions that will only be fully achieved with the creation of exemptions from customs rates and duties, and also with the creation of income tax exemptions for citizens who carry out activity within that agreement, namely, teachers who are citizens of one State who exercise activity in another State.
From which, in conclusion, it is extracted, the Claimant stresses, that from the aforementioned Cultural Agreement that Portugal should create conditions for the remuneration earned by a teacher, a citizen of Spanish nationality, who exercises functions in Portugal to benefit from income tax exemption.
And further, underlying that exemption in the aforementioned Cultural Agreement, it is necessary to conclude that "there is a rule of international law applicable under Article 37, paragraph 1 of the EBF".
By which, she stresses, "it is necessary to conclude that the income earned by the Claimant, from the exercise of the function of teacher at the Spanish Institute "B...", located in Lisbon, is exempt from IRS, under Article 37, paragraph 1, subparagraph b) of the EBF, for which reason the tax act in question is illegal and cannot therefore fail to be annulled".
And she stresses that this understanding was what led to the submission of annual income declarations for more than 20 years and which was validated by the Tax Authority, namely through the analysis of the declarations for the years 1997, 1998 and 1999 (cf. docs. 13 to 16), not finding reasons for alteration of the Tax Authority's understanding.

C) On the exemption for technical personnel of diplomatic and consular missions, under Article 37, paragraph 2 of the EBF

And the Claimant further adds that she is technical personnel of the Spanish diplomatic mission in Portugal, by which her income should be exempt, in light of Article 37, paragraph 2 of the EBF.
And this because the Spanish Institute "B...", located in Lisbon, "is an educational centre of the Ministry of Education, Culture and Sports of Spain (cf. docs. nos. 9 and 10), which are under the direct dependency of the Education Secretariat of the Embassy of Spain in Portugal (cf. doc. 6)".
From which the officials of that Institute are classified as technical personnel of that diplomatic mission and that under Article 37, paragraph 1, subparagraph a), which states "Exemption from IRS, under international law applicable, or provided that there is reciprocity: a) personnel of diplomatic and consular missions, as regards remuneration earned in that capacity".
And she recalls that under paragraph 2 of that article "The exemptions provided for in the preceding paragraph do not cover, in particular, members of the administrative, technical, service and equivalent personnel of diplomatic and consular missions, when they are residents in Portuguese territory and reciprocity does not exist".
And that, therefore, in light of the aforementioned provisions, for there to be place for IRS exemption there must be reciprocity between States.
And according to the Claimant, given the Vienna Convention on International Relations, promulgated by Decree-Law no. 48295, of 27 March 1968, validly ratified by both the Portuguese and Spanish States, it cannot fail to be considered that reciprocity exists.
By which, she again concludes that the income earned by her, from the exercise of the function of teacher at the Spanish Institute "B...", located in Lisbon, is exempt from IRS, under Article 37, paragraph 1, subparagraph a) and paragraph 2 of the EBF, for which reason, she reaffirms, the tax act sub judice is illegal, making necessary, as a consequence, its annulment.

D) On the illegality of compensatory interest

The Claimant further states that, without prejudice to all of the above, even if the Tax Authority considers that the IRS assessment in question does not suffer from illegality, which she does not concede, still the respective assessments of compensatory interest and compensatory interest for undue receipt appear, in themselves, to be illegal.
And she begins by substantiating her understanding with what is provided by Article 35 of the LGT, which prescribes: "Compensatory interest is due when, due to a fact attributable to the taxpayer, the assessment of part or all of the tax due or the delivery of tax to be paid in advance, or withheld or to be withheld within the scope of tax substitution, is delayed".
From which it is concluded, the Claimant stresses, that the right to compensatory interest has as its premise the existence of a tax debt, a delay by reference to the moment legally defined as appropriate for its assessment and/or payment, and also an adequate causal nexus between that delay and the conduct of the taxpayer, based on a judgment of fault that is attributable to him.
Now, the Claimant states that, as she has stated, "the completion of the income declaration form 3 for the year 2010, in particular the entry of the remuneration earned from the exercise of teaching functions at the Spanish Institute "B...", located in Lisbon, in Annex H – Income Code 402, followed the procedure that the Claimant adopted over the years and which, besides, was validated by the Tax Authority (cf. docs. 13 to 16)".
And she further concludes that, "if one were to admit that the additional IRS assessment does not suffer from any illegality, there is, in effect, no judgment of fault that motivates the respective assessment of compensatory interest, and it should be considered that the Claimant's error is excusable, since at the origin of the issuance of the tax act of assessment there is not any culpable conduct/omission on her part, but rather an understanding that was, besides, validated by the tax administration over the years".
From which she concludes that, from the foregoing, the additional IRS assessments and compensatory interest for undue receipt in question cannot fail to be annulled.

E) On voluntary payment and indemnitory interest

The Claimant clarifies that to avoid tax enforcement proceedings she proceeded to voluntary payment of the entire tax and interest calculated in the tax act in question (cf. doc. 25) and that, as she has been demonstrating, the error underlying the tax act under review is manifest, error that is attributable to the Tax Authority.
By which, as a consequence of the aforementioned payment, the success of the present request for arbitral decision should, under the law, determine the reimbursement to the Claimant of the amount assessed and unduly paid, plus the respective indemnitory interest to which Articles 43 of the LGT and 61 of the Code of Tax Procedure (CPPT) refer.

II – THE RESPONSE OF THE TAX AUTHORITY AND CUSTOMS AUTHORITY

The Tax Authority and Customs Authority (Tax Authority), hereby responds in the following terms regarding the legality of the tax act embodied in:

a. Additional assessment of Income Tax on Individuals (IRS), identified with no. 2014..., of 25/7/2014;

b. Assessment of compensatory interest for undue receipt no. 2014 ...;

c. Assessment of compensatory interest no. 2014 ...;

d. Statement of account reconciliation no. 2014 ..., of 31/07/2014;

All concerning the year 2010 and requesting that the illegality of the aforementioned act be declared and the consequent reimbursement of the amount paid, plus indemnitory interest.

The Defendant stresses that the ground invoked by the Defendant is that the income declared would be exempt from IRS, either under the Convention between the Portuguese Republic and the Kingdom of Spain to Avoid Double Taxation (Tax Treaty), or under the Tax Benefits Statute – EBF.

The Defendant, however, understands that there is no reason for the Claimant "with all arguments being defeated, as will be demonstrated in the following terms".

II.1 – FACTS

It states that the Claimant is resident in Portugal, for tax purposes, at least since 1986 (31-12-1986) – cf. as extracted from docs. at pp. 40 and at pp. 39 and 38 of the Administrative Proceeding – AP.
On 01-11-1988 the Claimant executed with the Ministry of Education and Science of Spain an employment contract, aiming at the provision of teaching activity in Portugal, being considered for all purposes, states the Defendant, as an official of the Kingdom of Spain and receiving her remuneration directly through the Ministry of Education, Culture and Sports of Spain (cf. docs. joined with the P.I.).
The Defendant further states that the Claimant submitted on 26-04-2011 the IRS Form 3 declaration for the year 2010, in paper format (cf. Doc. 17 joined with the P.I.), having indicated in table 4 of Annex H dependent work income with code 402, that is, with the understanding, incorrect according to the Defendant, that it was remuneration of personnel in the service of foreign or international organizations, under Article 37, paragraph 1 of the EBF (cf. Doc. 17 joined with the P.I.).
Given that the Claimant indicated in the aforementioned table 4 of the annex of the IRS form 3 declaration a tax identification number (NIF) concerning a foreign entity not appearing in the Portuguese tax database, the computer system recorded the error denominated H67, that is, tax identification number of the paying/withholding entity not filled in.
The Defendant states that in view of the error identified, information no. 11/2012, of 14-02-2012 was prepared, which refers to information no. …/11, relating to the same taxpayer and the same type of error, from the IRS Management Service, and as a consequence the Claimant was notified of the draft alteration of the declaration in question.
The notification, under paragraph 4 of Article 60 of the General Tax Law, of the draft alteration was based on information that the income earned and declared in the capacity of teacher in the service of the Spanish State does not fall within that benefit, as it is not being in the service of a foreign or international organization, for the purposes of subparagraph b) of paragraph 1 of Article 37 of the EBF.
Not having exercised her right to prior hearing, the Claimant was notified by Office no. ..., of 06-06-2014 (cf. pp. 6 of AP and doc. 24 joined with the P.I.) of the tax act of IRS assessment in question, against which the Claimant responds through the present request for arbitral decision.

II.2 – BY WAY OF CHALLENGE

The Defendant states that "the facts alleged by the Claimant that are in opposition with the present defence of the Defendant, considered as a whole, should be considered challenged, under Article 574, paragraph 2 of the Civil Procedure Code (CPC), by virtue of Article of the Code of Administrative Procedure (CPTA)".
And the Defendant further states that "the following are specifically challenged, as not proven and as relevant to the decision of the case: Articles 4, 5, 50, 51, 52 and 53 of the esteemed petition".
And it stresses that "at no time did the Claimant prove that in 1985 she was resident in Algeria", contrary to the Defendant who states to prove that, at least since 1986, the Claimant was resident.
The Defendant states that "bearing in mind the burden of proof that is embodied in the principle that whoever alleges a particular fact constitutive of a right has the necessity to prove it (cf. Article 342 of the Civil Code and paragraph 1 of Article 74 of the LGT)",
That is, "the Claimant alleges particular facts that it is her responsibility to provide proof of the reality of the alleged facts, necessary for the success of the claim she has brought to court – which the Claimant has not done".
And the Defendant further states that "the information and inferences contained in Articles 18, 19 and 20" are challenged.
And, for that reason, it stresses that the Claimant states in those articles of the petition that "the tax administration confirmed the exemption from taxation of the income earned by the Claimant" and that she adopted "the tax procedure…validated by the tax administration" – the Claimant being free, states the Defendant, to create the confidence that she has, but she cannot assign to the Defendant any responsibility for the confidence that she herself created.
That is, the Defendant clarifies, that "the fact that there were no corrections made in those tax years does not constitute, and cannot constitute, as the Claimant wishes, a ratification of the declarations submitted by the taxpayer, which would oblige the Tax Authority to immutability of its conclusions".
The Defendant stresses that "taxpayers have at their disposal, for reasons of certainty and security, in order to consolidate their confidence and to legitimize it, the use of the provision of Article 64 of the Tax Procedure Code (RCPIT), requesting from the Director-General of the Tax Authority that he sanction the conclusions of any report of which they may be the subject".
The Defendant further clarifies that "under the terms established in Article 64 of the RCPIT, only if the taxpayer requests the Director-General to sanction the conclusions of the Tax Inspection Report and if it comes to be approved tacitly or expressly is the Tax Authority prevented from acting in relation to the same taxpayer in a manner different from the tenor of the conclusions of the Tax Inspection Report in the 3 years following the years of notification of these, except if, subsequently, simulation, falsification, violation, concealment or destruction of any tax-relevant elements is discovered in relation to the object of the inspection", cf. Central Administrative Court South, case no. 03706/09, of 25-01-2010".
The Defendant further states that "the statements made in Articles 78 and 79 of the petition are specifically challenged, as not proven and as having interest for the proper decision of the case, since from their joining it does not result that her contractual position classifies her as technical personnel of any diplomatic mission".
The Defendant states that from the documents joined it results that the Claimant executed with the Ministry of Education and Science of Spain an employment contract aimed at the provision of teaching activity in Portugal, being considered, for all purposes, as a public official of Spain and receiving her remuneration directly through the aforementioned Ministry, an entity that, as the Claimant correctly refers, is the "...the entity that oversees the Spanish Institute «B...»..." (cf. Article 36 of the petition and doc. 9 and 10 joined).

II.3 – LAW

The Defendant presents the following arguments and legal grounds:

II.3.1 – ON THE (ALLEGED) NON-SUBJECTION TO TAXATION IN PORTUGAL OF THE INCOME EARNED BY THE CLAIMANT

The Defendant stresses that when submitting her IRS Form 3 declaration for 2010, she indicated in table 4 of Annex H Income Code 402, concerning income earned under Article 37, paragraph 1, subparagraph b) of the Tax Benefits Statute, concerning IRS exemptions granted to personnel in the service of foreign or international organizations, as regards remuneration earned in that capacity.
However, the Claimant "now, incorrectly, supports herself as a first argument in the exemption of the sub judice income in the alleged application to her case of Article 19 of the Tax Treaty Portugal-Spain".
And that the Claimant "argues for non-subjection to taxation of the income earned by her (Articles 36 to 55 to 58 of the petition), invoking in support of this argument the Tax Treaty Portugal-Spain, namely its Article 19 which transcribes":

"Article 19 - Public Remuneration

1 –

a) Remuneration, excluding pensions, paid by one Contracting State, or by one of its political or administrative subdivisions or local authorities to an individual, as a consequence of services rendered to that State or to that subdivision or local authority, can only be taxed in that State.

b) These remuneration can, however, only be taxed in the other Contracting State if the services are performed in that State and if the individual is a resident of that State:

i. Being a national thereof; or

ii. Who has not become a resident thereof solely for the purpose of rendering the said services"

The Defendant states that as the Claimant correctly recognizes, although subparagraph a) of paragraph 1 of the Article 19 cited determines that remuneration paid by one Contracting State (in this case Spain) for services rendered to that State (Spain) can only be taxed in that same State (Spain), subparagraph b) of the same number and article establishes that such remuneration will be taxed in the State where it is earned (in this case Portugal), provided that the holder of the income is a resident in that same State (Portugal), and that, alternatively, is a national thereof, or, has not become a resident thereof solely for the purpose of rendering the aforementioned services to the other State.
Now, the Defendant states that "in the case at issue, the situation has classification under subparagraph b) of paragraph 1 of Article 19 of the Tax Treaty, considering that the conditions provided in subparagraphs i) and ii) of subparagraph b) are not cumulative (as results from the conjunction «or»), being sufficient the verification of one of those conditions".
Stressing that the Defendant that it is axiomatic that the Claimant:

a) Exercises activity in Portugal since 1985 – cf. Article 4 of the petition and doc. 5 joined to the petition;

b) Is resident for tax purposes in Portugal, at least since 1986 – cf. Pages 40, 39 and 38 of the AP; and

c) On 01-11-1988 executed with the Ministry of Education and Science of Spain an employment contract aimed at the provision of teaching activity in Portugal, receiving in virtue of that provision the due remuneration paid by the Spanish State, through the current Ministry of Education, Culture and Sports".

That is, the Claimant receives income from the Spanish State, however, before earning such income she was already resident in Portugal, by which she did not establish residence in Portugal solely for the purpose of rendering the teaching services.
In fact, the Claimant submitted on 7-01-1985 a declaration of commencement of activity for the purpose of professional tax, thus being registered, which shows that prior to the date of celebration of the employment contract with the Spanish State, there was already a professional activity being exercised in Portugal (cf. Doc. 5 joined with the petition).
The Defendant stresses that "at that time the Claimant identified herself as A..., using this surname acquired by previous marriage with C..., of Portuguese nationality".
From which the Defendant concludes that to state, on one hand, that in September 1987 she established residence in Portugal solely and exclusively to exercise the profession of teacher at the Spanish Institute "B..." of Lisbon (cf. Article 6 of the petition), and that the reason for that move was the circumstance of having established an employment link with an organism of the Spanish State …
And, on the other hand, to present as the only proof of that argument the employment contract signed with an organism of the Spanish State, dated with the commencement of functions on 1 November 1988 – leaves, the Defendant continues, "serious doubts as to the veracity of her argument".
And the Defendant stresses that "not only does it fail to explain how since 07-01-1985 she was exercising the activity of translator in Portugal, …but also fails to prove that she was resident in Algeria as she affirms in Articles 4, 5, 50, 51, 52 and 53 of the esteemed petition ….as equally ignores the gap of at least 13 months between the date on which she supposedly established residence in Portugal and the date on which she actually celebrated the contract that would permit her to benefit from the regime prescribed in Article 19 of the Tax Treaty concluded between Portugal and Spain".
From which it follows, the Defendant states, that, "without another conclusion being possible to reach, the Claimant has not become resident in Portugal solely to render the services rendered to the Spanish State, being already resident in Portugal, which per se, imposes the exclusive competence of the Portuguese State to tax that income (cf. Subparagraph b) of Article 19 of the Tax Treaty)".
Hence, in the understanding of the Defendant, the Claimant therefore has no reason regarding her claim for non-subjection to IRS taxation in Portugal of the income paid by an organism of the central administration of the Spanish State, in this case the Ministry of Education and Science, current Ministry of Education, Culture and Sports.

II.3.2 – ON THE EXEMPTION FOR PERSONNEL OF FOREIGN ORGANIZATIONS UNDER SUBPARAGRAPH B), OF PARAGRAPH 1 OF ARTICLE 37 OF THE EBF, allegedly applicable to the Claimant

As already mentioned, the Claimant indicated in table 4 of her IRS form 3 declaration for 2010 Income Code 402, erroneously considering it exempt as it concerns remuneration earned in the service of foreign or international organizations, that is, covered by the provision of subparagraph b) of paragraph 1 of Article 37 of the EBF.
And the Claimant did so by classifying the entity where she works as a "foreign organization", defining it as an entity with registered office in a foreign country, constituted by a State or by an entity created by States (as opposed to "international organization", which she defines as an entity constituted by States or by other entities created by States, endowed with international legal personality).
The Defendant raises doubts and serious reservations as to the legal basis or the doctrine from which this understanding of the Claimant results, namely given the alleged dichotomy foreign organization/international organization.
However, the Defendant understands that the legal inferences of the Claimant do not merit acceptance, given the ratio legis and mens legislatoris of the norm of the EBF in question, which has the purpose of covering precisely organizations (whether foreign or international), whose concept is legally distinct from the concept of State, as such organizations, for the most part, have States themselves as members, without being confused with them.
And the Defendant specifies that in the aforementioned norm of the EBF "are covered foreign organizations of which paradigmatic examples constitute the UN, OECD, NATO or the IMF, being that the personnel in the service of these organizations has for the most part a specific status, namely at the taxation level, by force of norms or international treaties specifically related to the organizations themselves".
And that, in this way, the EBF aims to exempt from taxation in IRS the income earned by persons in the service of those, provided that there is a rule or international treaty that specifically provides for such exemption in relation to the personnel of the organization in question.
And the Defendant, by way of illustration, refers to:

a)"The Convention on the Status of the Organization of the Treaty of the North Atlantic, National Representatives and International Personnel, signed in Ottawa on 20-09-1951, approved for ratification, by Resolution of the former National Assembly of the Government Gazette, I Series, no. 170, of 3 August 1955 – note Article 19 of this Convention, and

b. The Convention on Privileges and Immunities of the United Nations, adopted by the Assembly of the Republic on 13-02-1946, approved by accession by Resolution of the Assembly of the Republic no. 38/98 and ratified by decree of the President of the Republic no. 34/98, published in the Government Gazette, Series I-A, no. 175/98, of 31 July 1998 – from which it is stressed, by way of example, subparagraph b) of Section 18 of Article V and, as well, the reservation formulated by the Portuguese State to which Articles 2 of the aforementioned Resolution and decree refer".

And even so, the Defendant reinforces her understanding by stating that, as the Claimant correctly recognizes, the eventual right to the tax benefit will always be dependent, or on the existence of international law that recognizes such exemption, or by application of the principle of reciprocity between states, and the latter only arises at the level of States.
And the Defendant specifies that, in strict terms, the Claimant frames her invocation of the tax benefit by understanding to be in the service of a "foreign organization" which is manifestly different from being in the service of a foreign State (and in the service of a foreign State will be only and solely the officials of diplomatic missions and consular posts, which, will never be the case).
The Defendant further states that "to this is added the fact that the legal instrument on which the Claimant supports the argument of the existence of reciprocity that permits the classification of her tax situation in light of subparagraph b) of paragraph 1 of Article 37 of the EBF is Decree-Law no. 654/70, of 29 December".
And that "such instrument, however, merely embodies the publication of a "cultural agreement between Portugal and Spain". This, however, is nothing more than a declaration of principle, between the two States… and, besides, from it do not result, at all, the conclusions that the Claimant draws in Articles 68, 69 and 70 of her submission".
The Defendant further argues that, in fact, at no time does such agreement concern the creation of income tax exemptions, nor does it result that the Portuguese State has any obligation to create specific tax benefits as a consequence of such agreement.
And that the only legal support for assessing the conditions of reciprocity between States at the fiscal level is embodied in the Tax Treaty concluded between Portugal and Spain, and which follows the model of the tax convention on income and property, Convention which does not welcome any tax benefit that results from the cultural agreement between Portugal and Spain, whereby the income earned by the Claimant is subject to taxation in Portugal.
And the Defendant concludes that "in this case it is verified that the Claimant is/was in the service, as a teacher, of the Spanish State, through the Ministry of Education and Science of Spain, current Ministry of Education, Culture and Sports, which belongs to the central administration of the aforementioned State, an entity that pays her the corresponding remuneration".
And it continues stating that from this it results that the income in question does not fall within subparagraph b) of paragraph 1 of Article 37 of the EBF, given that the Claimant is in the service of a State and not of a foreign or international organization,
By which, the Defendant affirms that "the arguments put forward about the existence of international law that determines the exemption, or even a situation of reciprocity between States, that accepts a privileged regime for the tax situation of the Claimant thus cease".

II.3.3 – ON THE EXEMPTION FOR TECHNICAL PERSONNEL OF DIPLOMATIC AND CONSULAR MISSIONS, UNDER PARAGRAPH 2 OF ARTICLE 37 OF THE EBF, allegedly applicable to the Claimant

As a preliminary question, the Defendant clarifies, from the outset, that contrary to what is argued, the Claimant is not technical personnel of the diplomatic mission of Spain in Portugal.
As already mentioned above, the Claimant executed an employment contract with the Ministry of Science of Spain, being, for that reason, considered as an official of the Kingdom of Spain and receiving her remuneration directly through the Ministry of Education, Culture and Sports of Spain.
The Defendant clarifies that "only can one claim to be an agent or diplomatic technician, for the purposes of application of the EBF and other legal provisions that depend on that qualification, the agents whose personal and subjective status of diplomatic agent is provided for and/or recognized as such".
By which only and exclusively in this case, the Defendant continues, enjoys exemption from all taxes and duties, personal or real, national, regional or municipal, with the exceptions provided by law, without margin for interpretations beyond what is established in its letter, in the Vienna Convention on Diplomatic Relations, approved by Decree-Law no. 48295, of 27 March 1968, more specifically in Articles 1, 34 and 37 - a regime which the Claimant obscures.
And the Defendant refers to subparagraph f) of Article 1 of the aforementioned Vienna Convention, in which it is determined that "Members of the administrative and technical staff are members of the mission personnel employed in the administrative and technical service of the mission".
The Defendant affirms that going through such treaty and all the documents joined by the Claimant, it is easy to conclude that her functions and tasks and employment link to the Spanish State, which is not to the Ministries of Foreign Affairs and Cooperation but rather to that of Education, Culture and Sports of Spain, do not permit her to be classified as technical personnel of the diplomatic mission of Spain in Portugal.
And the Defendant reinforces her understanding by stating that "in fact, the Claimant never even made effort to prove such status, as this would be impossible for her, given the non-existence of such legal classification of her functions".
And she further states that the Claimant merely vaguely affirms, and underscores, only affirms, "that she is qualified as technical personnel of the diplomatic mission of the Embassy of Spain in Portugal, with the Defendant referring to Articles 78 and 79 of the esteemed petition already properly challenged in the present response".
And the Defendant further stresses that "besides, and in total contradiction with the above-stated reasoning, the Claimant states in Article 36 of the esteemed petition that the Ministry of Education, Culture and Sports of Spain is the «entity that oversees the Spanish Institute «B...»…(cf. Article 36 of the petition and docs. 9 and 10 joined with this)" – which leads the Defendant to state that "the Claimant is not a technical personnel of the Embassy of Spain"..
And for further precision, the Defendant wishes, however, to continue to carefully examine the legal regime of technical personnel in the service of diplomatic missions, referring, for that purpose, to "the restrictions and requirements contained in Article 12, as regards the territorial limitation of the diplomatic mission, and consequent workplace of members of the diplomatic mission, and as well the requirement of notification of arrival and departure of members of the diplomatic mission, under its Article 10".
And that, in this way, "the argument of the Claimant ceases which seeks to subsume her functions in Portugal, and her relations with the Spanish State to the capacity of technical personnel of the diplomatic career".
And the Defendant stresses that "it is evident in the pleading of the Claimant a certain confusion in the classification of her tax situation".
And the Defendant further stresses that, on one hand, the Claimant, in her IRS form 3 declaration of the year 2010, invoked the tax benefit of Article 37, paragraph 1, subparagraph b) of the EBF (personnel in the service of foreign or international organizations) and in the documents joined invoked the existence of an employment link to the Ministry of Education and Science of Spain, arguing that the Spanish Institute "B..." which she states is a foreign organization, for the purposes of the aforementioned Article 37 of the EBF.
And that as the main argument and in contradiction with the other arguments brought to the proceedings, she came to rely, erroneously, on the Tax Treaty Portugal-Spain, as the legal instrument legitimizing her argumentative ideology.
And that in parallel, the Claimant further argues to be applicable to her the exemption for technical personnel of diplomatic and consular missions, under paragraph 2 of Article 37 of the EBF, regarding herself as "technical personnel of the Spanish diplomatic mission in Portugal".
Now, the Defendant stresses that "this entire exposition denotes an almost desperation to see recognized a tax benefit, of which she effectively cannot benefit, as she does not meet the prerequisites for such".
And in light of this drift in her defence, the Defendant understands that the claim of the Claimant lacks all legitimacy, as the income earned does not benefit from any exemption in Portugal, either under Article 37 of the EBF, or under any other legal provision.
For which reason, states the Defendant, the claim of the Claimant must be denied, maintaining, as a consequence, the acts assessed fully in force.

II.3.4 – CONCLUSION

For all the arguments stated, states the Defendant that it is evident the legal conformity of the tax act subject of the present arbitral request,
And that, for that reason, there is no error attributable to the services in the issuance of the assessment in question, an indispensable condition for the payment of indemnitory interest requested.
And she further states that, under Article 43, paragraph 1 of the LGT, which establishes:

"Indemnitory interest is due when it is determined, in gracious complaint or judicial challenge, that there was error attributable to the services of which results payment of the tax debt in an amount superior to the legally due"…

As a consequence, the Defendant reinforces, that without there having been error attributable to the services generating any obligation to indemnify, indemnitory interest is not due.

And the Defendant concludes by understanding that the claim for arbitral decision by the Claimant must be judged unfounded, with the tax act of assessment remaining in the legal order and the Defendant being absolved accordingly from the claim.

III – CLARIFICATION

The arbitral tribunal was properly constituted and is materially competent.

The parties enjoy legal personality and capacity and are properly constituted as parties.

The claim is timely and the proceedings do not suffer from any defects, nor have any preliminary exceptions been invoked by the parties.

IV – DETERMINATION OF RELEVANT FACTS

The Claimant, already with the surname A..., this being the surname of her husband C..., of Portuguese nationality, filed in Portugal on 7-01-1985 a declaration of commencement of activity for the exercise of professional activity, to which Article 45-A of the then Code of Professional Tax referred, for the exercise of the professional activity on own account of "Translator", declaring as her tax address the Street …in Lisbon (cf. Doc. 5 attached to the petition).
In that declaration the tax identification number ... was mentioned, appearing in the Management System and Registration of the Tax Registry that the Claimant had tax address in Portugal (at least on 31-12-1986 - cf. Doc. pages 38, 39 and 40 of the AP).
From the employment contract joined as doc. 19 to the petition it appears that this was drafted on 19-12-1985, to exercise functions of Teacher of Portuguese language and culture, in Lisbon, Portugal, without referring from what date, as happens in the "General Clauses of the Contract, which contain only the signature of the Claimant (cf. doc. no. 19 attached to the petition).
From a "hiring date" with contract data concerning 01-11-1988, intended for the position in Lisbon, issued by the Ministry for Public Administrations in Madrid, the signature date is 09-01-1989 (cf. doc. 19 attached to the petition).
From what is known from the proceedings, she submitted on 26-4-1999 the IRS form 3 declaration for the year 1998 in the then 7th Fiscal District of Lisbon, indicating as tax address ... in Pontinha, of the municipality of Loures, appearing as taxpayer A C... and as taxpayer B the Claimant, both having joined 1 Annex B, 1 Annex F, 1 Annex H and 1 Annex J.
In Annex B appears as the beneficiary of the income the Claimant, in the capacity of Translator and in Annex H mentioned, among others, dependent work income, Category A, with the value of 3,698,773$00, in table 402, concerning Remuneration of personnel in the service of foreign or international organizations – Article 42, paragraph 1, subparagraph b) of the EBF and in Annex J mentioned in line 17 of table 4 Public Remuneration – Ministry of Education and Science, the value of 3,698,773$00 (cf. Doc. 11 joined to the petition).
An IRS assessment was made to her, and according to the Demonstrative Note of IRS Assessment no. 5112958321, dated 20/08/1999, it shows the attribution of the tax benefit she invoked in Annex H (cf. doc. 12 joined to the petition).
The Services of the 2nd Finance Directorate of Lisbon proceeded to correct this 1998 IRS declaration, which was notified to the taxpayer, for the purpose of prior hearing on 3-12-1999, a right which she did not exercise (cf. doc. no. 12 joined to the petition).
Subsequently, what is known from the document with no. 15 joined to the petition is a notification to the Defendant, relating to the elements contained in the IRS form 3 declarations for the years 1998 and 1999, this dated 23-08-2000, giving her knowledge that her declarations were selected for analysis, and in response to a request for elements by the Tax Authority, provided a photocopy of the contract with the Ministry of Education and Science and of National Identification Document issued by the Ministry of Interior of Spain on 09-08-2006, valid until 09-08-2016.
Subsequently, according to the IRS form 3 declaration of the year 2010, in question in the present proceedings, submitted in the Finance Service of Lisbon 7 on 26-04-2011, the Claimant invoked the tax benefit of Article 37, paragraph 1, subparagraph b) of the EBF (personnel in the service of foreign or international organizations) in table 4 of Annex H, with Code 402, in the amount of € 24,676$70 of income from category A, with tax identification number of the paying entity 528180486 (cf. doc. 17 joined to the petition).
By Office no. ..., of 20-02-2012, the Claimant was notified that an official correction declaration was prepared to her IRS form 3 declaration for the year 2010, with the grounds contained in an attached information, on the grounds that the exemption she invokes is not applicable to her, of which will result an assessment that will be notified to her in due course (cf. doc. 20 joined to the petition).
In the notification of the IRS assessment no. 2012 ..., of 27-02-2012, with the respective demonstrative statement of the amount calculated of € 3,795.48 to be paid, a payment stamp is affixed dated 5-04-2012 (cf. doc. 21 joined to the petition).
The Claimant reacted against this assessment through a Gracious Complaint on 30-05-2012, which was rejected pursuant to order of 31-10-2012.
It was following this rejection that the Claimant filed the present request for establishment of an arbitral tribunal, whose case ran its course under case number 17/2013-T, with a decision being rendered determining the annulment of the additional IRS assessment, on the grounds of failure to observe essential formalities of the assessment procedure, due to absence of prior hearing of the taxpayer of the draft order rejecting the taxpayer's complaint.
From the execution of this arbitral decision resulted a new corrective assessment, which determined the annulment of assessment no. 2012 ..., of 27-02-2012, in the amount of € 3,795.48, and the issuance of a refund cheque of the same amount (cf. doc. no. 22 joined to the petition).
Subsequently, by Office no. ..., of 21.03.2014, by the Assessment Division of the Finance Directorate of Lisbon, notification was made to, within 15 days, exercise, if willing, the right to prior hearing, regarding the draft alteration of her IRS form 3 declaration for the year 2010, because income had been unduly declared exempt in the amount of € 24,676.70 (cf. doc. no. 23 joined to the petition).
Next, by Office no. ..., of 06-06-2014, the same Tax Authority Service gave notice to the Claimant that it would proceed to an additional IRS assessment, which it did through the Demonstrative Note of Assessment no. 2014 ..., of 25-07-2014, in the amount of € 3,795.48, increased by compensatory interest in the amount of € 186.97, which totals the IRS to be paid in the amount of € 3,981.81, with payment limit date of 08-09-2014 (cf. docs. 24 and 25 joined to the petition).

V – FACTS HELD AS PROVEN

It is known from the elements joined to the proceedings that on 07-01-1985 a declaration of commencement of activity in professional tax was filed in the then Finance Service of the 12th Fiscal District of Lisbon, concerning the year 1985, invoking the exercise of the activity of Translator on own account, with address at the Street ..., Lot 9 – 4th Floor, 1500 – Lisbon and invoking the tax identification number (Portuguese) ....
And that, according to the card of Tax Registry Management System, reported to 31-12-1986, there appears the attribution of the definitive taxpayer number ..., in substitution of provisional number ..., which was as a consequence deactivated (cf. p. 40 of AP).
And also that (conf. doc. no. 6 attached to the petition) a declaration was issued on 14-07-2010 with the seal of the Ministry of Education and Institute "B..." in Lisbon, where it appears that the Claimant exercises the functions of Teacher in that educational establishment since 16-09-1987, with contract celebrated with the Ministry of Education of Spain, with a breakdown of the school years since 1987-88, commencing on 16/09.
On the other hand, there also appears in the proceedings a "hiring date" with contract data concerning 01-11-1988, intended for the position in Lisbon, issued by the Ministry for Public Administrations in Madrid, with the signature date of 09-01-1989 (cf. doc. 19 attached to the petition).
And there was also joined to the petition as doc. no. 6, a Declaration issued by the Ministry of Education – Foreign Central Qualification, in which it is certified, dated 25-01-2010, that the Claimant received, through this entity, in the year 2009, in the period between January and December, the amount of € 27,800.50, having deducted the "foreign worker contributions", in the amount of € 2,393.52 and as the difference of the same contribution the value of € 639.41".

VI – FACTS NOT PROVEN

As to the position of the Parties with respect to the date on which the Claimant established residence in Portugal, she states in Article 11 of her petition the following:

"that by virtue of the circumstances, in September 1987, the Claimant, at that date resident in Madrid, Spain, came to reside in Lisbon, Portugal"

and the Defendant alleges in her Article 18 the following:

"In fact, at no time did the Claimant prove that in 1985 she was resident in Algeria"

and that, according to Article 19, the Defendant continues:

"In contrast to the Defendant who proves indubitably that, at least since 1986, the Claimant was resident in Portugal".

There is, therefore, a failure of proof on the part of the Claimant as to the date on which she came to reside in Portugal, although it is shown to be proven that on 07-01-1985 a declaration of commencement of activity in professional tax was filed in the then Finance Service of the 12th Fiscal District of Lisbon, concerning the year 1985, invoking the exercise of the activity of Translator on own account, with address at the Street ..., Lot 9 – 4th Floor, 1500 – Lisbon and invoking the tax identification number (Portuguese) ....
It is also not shown to be proven in the proceedings in which year she began to submit her periodic income declarations form 3 of IRS, only being known that those relating to 1998, 1999 and 2010 were submitted.

VII – LAW

The issue is to assess and decide whether the tax benefit invoked by the Claimant in her IRS form 3 declaration for the year 2010, Annex H, table 4, Code 402, which is what is in question in the proceedings, concerning the income earned as a Teacher at the Spanish Institute "B...", and consequently the non-taxation thereof in Portugal, has legal grounds for the purposes of the IRS assessment due by the Claimant.

The grounds invoked by the Claimant for the attribution of the tax benefit in IRS or for non-taxation are the following:

a) Non-subjection to taxation in Portugal by application of Article 19 of the Tax Treaty concluded between Portugal and Spain;

b) The exemption applicable to personnel of foreign organizations under subparagraph b) of paragraph 1 of Article 37 of the EBF;

c) The exemption for technical personnel of diplomatic and consular missions, under paragraph 2 of Article 37 of the EBF.

It is, therefore, in light of the aforementioned legal provisions that it is important to know the legality or illegality of the IRS assessment made by the Tax Authority Services, which considered that none of them was applicable to the Claimant.

Let us examine, then:

VII.1 - On non-subjection to taxation in Portugal by application of Article 19 of the Tax Treaty concluded between Portugal and Spain

Let us see, first of all, what is stated in the provision invoked of Article 19 of the Tax Treaty:

"Article 19 - Public Remuneration

1 - …

b) These remuneration can, however, only be taxed in the other Contracting State if the services are performed in that State and if the individual is a resident of that State:

i) Being a national thereof; or

ii) Who has not become a resident thereof solely for the purpose of rendering the said services".

As is apparent from the rule in subparagraph a) of paragraph 1, the remuneration earned at the Spanish Institute "B..." paid by the Ministry of Education of Spain, can only be taxed in that State, that is, exclusively in Spain.
Under the rule in subparagraph b), the competence for taxation can pass to Portugal, provided that one of the conditions (not cumulative) provided in subparagraphs i) and ii) is met, that is:

a. If the beneficiary of the income is a national of the Portuguese State – which does not happen;

b. If the beneficiary has not become resident in Portugal solely for the purpose of rendering the teaching services in question.

It is important, therefore, to determine whether the requirements of subparagraph b) mentioned above, alone in question, that is (of subparagraph ii) of subparagraph b) of paragraph 1 of Article 19 of the Tax Treaty) are met.
Thus:

5.1 – It is shown to be proven in the proceedings that the Claimant invoked as address the Street ..., Lot 9 – 4th Floor, 1500 – Lisbon, in the declaration of commencement of activity as a professional on own account of Translator, for the purposes of Professional Tax, filed on 07-01-1985 in the then 12th Fiscal District of Lisbon, having invoked the tax identification number ..., only issued by the then Directorate-General of Contributions and Taxes to one who submitted her declaration of residence in Portugal.

5.2 – It is relevant to note that in the aforementioned Declaration of commencement of activity, the Claimant already identified herself as A..., having used this surname of ... by reason of marriage with C..., of Portuguese nationality.

5.3 The commencement of functions as Teacher of the Spanish Institute "B..." only began on 16-09-1987, according to the Declaration joined to the proceedings (doc. 6 joined to the petition).

Under these circumstances, the Claimant did not come to reside in Portugal to exercise the functions of Teacher of the aforementioned Institute, as she already resided here since 1985, for the purposes of the exercise of the activity of Translator for the purposes of Professional Tax, as indeed appears from the card of Tax Registry Management System, reported to 31-12-1986, where there appears the attribution of the definitive taxpayer number ..., in substitution of provisional number ..., which was, as a consequence deactivated (cf. p. 40 of AP) – which proves her registration in the tax registry of Portugal at an earlier date.
That under these circumstances, duly proven in the proceedings, the Claimant did not become resident in Portugal solely to render the teaching services of the Spanish Institute "B...", as she already resided previously in Portugal for the exercise of the activity of Translator and, therefore,
The provision of subparagraph ii) of subparagraph b) of paragraph 1 of Article 19 of the Tax Treaty concluded between Portugal and Spain is thus applicable, that is, the taxation of the income in question belongs exclusively to Portugal, by which, in this respect, the Claimant has no reason.
The Claimant does not contest this understanding, with the exception as to facts, when she states that "she only established residence in September 1987, as a result of the employment link with, at that time, the Ministry of Education and Science of Spain for the exercise of functions at the Spanish Institute «B...», located in Lisbon".
The Defendant, for her part, documentally proves that she declared her residence in Portugal in 1985 and became a fiscal resident in Portugal on 31 December 1986.
In terms of which no other conclusion can be reached than that of application of subparagraph ii) of subparagraph b) of paragraph 1 of Article 19 of the Tax Treaty concluded between Portugal and Spain, that is, that exclusive taxation of the income in question belongs exclusively to Portugal,
Finally, it should be noted that from the Comments to the OECD Model Convention there is nothing to state to the contrary of what has been decided, and from the Reservations it also appears that Spain has made any Reservations to the aforementioned Article 19.

VII.2 – On the exemption for personnel of Foreign Organizations under subparagraph b) of paragraph 1 of Article 37 of the EBF

Let us now see what is stated in Article 37 of the EBF:

"Chapter V – Tax benefits relating to international relations

Article 37 - Exemption for personnel of diplomatic and consular missions and foreign or international organizations

1 – Exemption from IRS, under international law applicable, or provided that there is reciprocity:

a) Personnel of diplomatic and consular missions, as regards remuneration earned in that capacity;

b) Personnel in the service of foreign or international organizations, as regards remuneration earned in that capacity.

On this matter, the Claimant interprets the concepts of "foreign organization" and "international organization" as the latter being an entity created by States, or by other entities created by States, endowed with international legal personality, and the former as an entity with registered office in a foreign country, constituted by a State or by an entity created by States.
The Defendant, for her part, argues that the organizations covered by Article 37 of the EBF are organizations whose concept is different from that of State and that are paradigmatic examples of such entities the UN, OECD, NATO or IMF.

It is therefore necessary to analyze and decide.

It should be noted, from the outset and as a preliminary question, that the provision of paragraph 1 of the aforementioned Article 37 of the EBF is exhaustive: "Exemption from IRS, under international law applicable, or provided that there is reciprocity", whereby the exemption sought requires these prerequisites.
That is, the personnel in the service of foreign or international organizations only benefit from the exemption sought if it results expressly from a rule of international law duly ratified or approved and while it binds the Portuguese State internationally.
It is emphasized what results from the heading of Chapter V – Tax benefits relating to international relations, where Article 37 of the EBF is inserted, that is, that this provision only applies in situations where more than one country is involved for the application of this benefit, whether it concerns foreign or international organizations.
In the case of Foreign Organizations, it is important that, in the case at issue, Portugal assumes, by any legal instrument, the recognition of the Institute in question as an organization to which it recognizes having an interest in granting a tax benefit.
Now, it does not appear from the proceedings that any instrument of that nature has been published by Portugal, everything having been conducted in the exclusive sphere of the Spanish State which created the Institute in question, with the objective of disseminating the Spanish language and culture.
All the documentation joined to the proceedings by the Claimant relates only to the Regulation of operation of the Institute in question, its Bodies, its nature, objectives and its operation.
It is a fact that there is a Cultural Agreement concluded between Portugal and Spain, enshrined in Decree-Law no. 654/70, of 29/12, and that in that agreement, both States – Portugal and Spain – undertake to grant certain facilities for installation, for promotion of summer courses, for granting of facilities to scholarship holders, for facilities for obtaining residence and professional cards, for protection of copyright or intellectual property, etc.
But in no case are commitments established to grant tax benefits to teachers teaching in the Institute, merely referring, in this regard, to exemption from import duties on certain goods.
Only, therefore, will there be place for tax benefits applicable to the remuneration earned by teachers teaching in the Institute in question, if under express international legal or internal provisions, by virtue of which Portugal is bound, such would be legally possible.
Finally, the Claimant does not integrate the staff of the Institute in question, it merely being a matter of a person hired to exercise functions as a teacher there.
Thus, it is not legally possible to apply the tax benefit she seeks, under subparagraph b) of paragraph 1 of Article 37 of the EBF.

VII.3 – On the exemption for technical personnel of diplomatic and consular missions, under Article 37, paragraph 2 of the EBF

Let us now see and also before anything else what the invoked provision says:

"Chapter V – Tax benefits relating to international relations

Article 37 - Exemption for personnel of diplomatic and consular missions and foreign or international organizations

1 – Exemption from IRS, under international law applicable, or provided that there is reciprocity:

a) Personnel of diplomatic and consular missions, as regards remuneration earned in that capacity;

b) Personnel in the service of foreign or international organizations, as regards remuneration earned in that capacity.

2 – The exemptions………………………………

The Claimant claims to be considered as technical personnel of the Spanish diplomatic mission in Portugal, which the Defendant contests, speaking of "desperation as a last resort".
The Claimant refers, in defence of her thesis, to the Declaration issued by the Embassy of Spain in Portugal, joining as doc. no. 8 attached to the petition, which merely states that the worker contracted (the Claimant) exercises functions at the Spanish Institute "B..." of Lisbon, that this Centre is dependent "on this Education Secretariat of the Embassy of Spain in Lisbon, receiving their salaries directly from the Ministry of Education, Culture and Sports of Spain".
Now, this dependency cannot but be understood as functional dependency and not as an Institute that integrates the Embassy of Spain.
It would be relevant, therefore, if that declaration stated that the Spanish Institute "B..." integrates the Embassy of Spain in Portugal and that the Claimant integrates the body of the diplomatic mission of the Embassy of Spain – which it does not state.
From which it is clearly inferred that the Embassy of Spain in Portugal and the Spanish Institute "B..." are two different and independent entities, although the latter may be (functionally) dependent on the Embassy.
Besides, the Claimant is a teacher of the aforementioned Spanish Institute and is under the direct dependency of the Ministry of Education and Science of Spain, with whom she concluded the contract and by whom she is paid.
It should be noted, besides, that the provision of paragraph 2 of Article 37 of the EBF states expressly that:

"a) Personnel of diplomatic and consular missions, as regards remuneration earned in that capacity;"

Now, thus, for the Claimant to be able to benefit from the exemption under this latter provision invoked – Article 37, paragraph 1, a), – she would have to provide proof that she integrates or holds the status of a diplomatic agent, being a member of the service personnel of the diplomatic or consular mission of Spain in Portugal – which she did not prove.
And as regards the invoked paragraph 2 of Article 37 of the EBF, the provision states expressly that such exemption "does not cover, in particular, members of the administrative, technical, service and equivalent personnel of diplomatic and consular missions, when they possess Portuguese citizenship or do not have residence in Portugal"[2] and reciprocity does not exist.
As regards residence in Portugal it is a fact proven in the proceedings and as regards reciprocity nothing is invoked by the Claimant that could be of benefit to the Claimant, despite referring for that purpose to the Vienna Convention which was subscribed by both States in question.
Besides, not integrating the Claimant the body of personnel of the Diplomatic and Consular Mission and being even resident in Portugal, nor does the aspect of reciprocity even apply.
In terms of which, also as to this aspect the Claimant has no reason in claiming that this benefit of paragraph 2 of Article 37 of the EBF is applicable to her.

VII.4 – On the illegality of compensatory interest

Contrary to what the Claimant affirms, given that the additional assessment in question does not suffer from any illegality and because the delay in this assessment is due exclusively to the Claimant, compensatory interest cannot fail to be due.
In fact, such conclusion results from the aforementioned Article 35 of the LGT, which reads:

"Compensatory interest is due when, due to a fact attributable to the taxpayer, the assessment of part or all of the tax due or the delivery of tax to be paid in advance, or withheld or to be withheld within the scope of tax substitution, is delayed".

The prerequisites for the requirement of the respective compensatory interest are thus more than evident, as there was a delay in the assessment of the tax due, because the Claimant invoked an exemption to which she was not entitled, solely at her fault.

VII.5 – On the payment of indemnitory interest to the Claimant

The Claimant also invokes the right to the payment of indemnitory interest on the grounds that she has paid the tax required in additional assessment and because this is affected by illegality due to the fault of the services.
Now, as results from Article 43, paragraph 1 of the LGT, only

"indemnitory interest is due when it is determined, in gracious complaint or judicial challenge, that there was error attributable to the services of which results payment of the tax debt in an amount superior to that due."

And because demonstrably, as has been shown, no tax was assessed exceeding that due, nor was there error of the services, there cannot be an obligation to indemnify.

VIII – DECISION

For all the foregoing, this Singular Tribunal decides to deny merit to the present Appeal, therefore,

Demonstrating that the additional IRS assessment for the year 2010, no. 2014..., of 25/07/2014, in the amount of € 3,795.48, increased by the respective compensatory interest of € 186.33, which includes compensatory interest of € 77.36 for undue receipt of IRS, in the total amount of € 3,981.81, was correctly assessed;
That indemnitory interest is not due in favor of the Claimant, for the grounds stated, which lead to the conclusion that the additional IRS assessment and the compensatory interest legally required were correctly assessed.

IX – VALUE OF THE PROCEEDINGS

The value of the action is fixed at € 3,981.81, as results from the proceedings and from the documents attached, under Article 306.º, [... truncated ...]

Frequently Asked Questions

Automatically Created

Is income earned by a Spanish public servant working in Portugal exempt from Portuguese IRS under the Portugal-Spain Double Taxation Convention?

Income earned by a Spanish public servant working in Portugal is generally subject to Portuguese IRS unless specific exemption conditions are met. Under Article 19 of the Portugal-Spain Double Taxation Convention, remuneration paid by Spain can be taxed in Portugal if the recipient either holds Portuguese nationality or established Portuguese tax residency before commencing the government service (meaning they didn't move to Portugal solely to provide those services). In this case, since the teacher became resident in Portugal in 1987 before formalizing her employment contract in 1998, Portugal retained taxation rights over her Spanish government salary.

How does Article 37 of the Estatuto dos Benefícios Fiscais (EBF) apply to foreign government employees residing in Portugal?

Article 37 of the Estatuto dos Benefícios Fiscais provides tax exemption for income earned in service of foreign or international organizations. However, Portuguese tax authorities interpret this provision narrowly, limiting it to genuinely international entities like the UN, NATO, or OECD. Employment by a foreign state government, such as Spain's Ministry of Education, does not qualify under this exemption. Therefore, a Spanish government employee residing in Portugal cannot claim EBF Article 37 exemption merely because their employer is a foreign state entity rather than a Portuguese one. The double taxation convention rules apply instead.

Can a Spanish national teaching at a Spanish government institute in Portugal challenge an additional IRS tax assessment through tax arbitration (CAAD)?

Yes, a Spanish national teaching at a Spanish government institute in Portugal can challenge an additional IRS assessment through CAAD tax arbitration. The Legal Regime for Tax Arbitration (RJAT) allows taxpayers to contest tax assessments, including those involving international taxation issues and double taxation conventions. This case demonstrates that CAAD has jurisdiction over disputes concerning the application of bilateral tax treaties, domestic tax exemptions (EBF), and the characterization of foreign government employment income. The arbitral tribunal can review whether tax authorities correctly applied convention provisions and domestic exemption rules to cross-border employment situations.

What are the requirements for tax exemption under the Portugal-Spain Convention for salaries paid by a foreign state's Ministry of Education?

For tax exemption under the Portugal-Spain Double Taxation Convention regarding salaries paid by Spain's Ministry of Education, Article 19 establishes that Spain has exclusive taxation rights only if: (1) the recipient does not hold Portuguese nationality, AND (2) the recipient became resident in Portugal solely for the purpose of providing the government services. If either condition fails, Portugal may tax the income. Critically, if the individual established Portuguese tax residency before commencing employment with the Spanish government, they cannot claim they moved solely to provide those services, thereby triggering Portuguese taxation rights. Prior residence in Portugal essentially disqualifies the exemption.

How does the CAAD arbitral tribunal assess the tax residency and income exemption of foreign public employees under international double taxation agreements?

The CAAD arbitral tribunal assesses tax residency by examining the taxpayer's registration history and factual timeline of residence establishment versus employment commencement. For income exemption analysis under double taxation agreements, tribunals apply a sequential test: first determining whether Article 37 EBF applies (generally limited to international organizations, not foreign states); second, analyzing Article 19 of the convention by verifying nationality and whether Portuguese residency preceded the government employment relationship. The tribunal reviews documentary evidence including employment contracts, residency registration dates, embassy confirmations, and prior tax authority positions. Procedural rights, such as mandatory prior hearing before assessment alterations, are also scrutinized to ensure administrative legality.

IRS Exemption Under Portugal-Spain Double Taxation Convention for Public Servants – CAAD 798/2014-T

Table of Contents

Summary

Full Decision

ARBITRAL DECISION

I – THE CLAIM

I-A – FACTS

I-B – LAW

A) On the non-subjection to taxation in Portugal of the income earned by the Claimant, under subparagraph b) of paragraph 1 of Article 19 of the Tax Treaty

B) On the exemption for personnel of foreign organizations under Article 37, paragraph 1, subparagraph b) of the EBF

C) On the exemption for technical personnel of diplomatic and consular missions, under Article 37, paragraph 2 of the EBF

D) On the illegality of compensatory interest

E) On voluntary payment and indemnitory interest

II – THE RESPONSE OF THE TAX AUTHORITY AND CUSTOMS AUTHORITY

II.1 – FACTS

II.2 – BY WAY OF CHALLENGE

II.3 – LAW

II.3.1 – ON THE (ALLEGED) NON-SUBJECTION TO TAXATION IN PORTUGAL OF THE INCOME EARNED BY THE CLAIMANT

II.3.2 – ON THE EXEMPTION FOR PERSONNEL OF FOREIGN ORGANIZATIONS UNDER SUBPARAGRAPH B), OF PARAGRAPH 1 OF ARTICLE 37 OF THE EBF, allegedly applicable to the Claimant

II.3.3 – ON THE EXEMPTION FOR TECHNICAL PERSONNEL OF DIPLOMATIC AND CONSULAR MISSIONS, UNDER PARAGRAPH 2 OF ARTICLE 37 OF THE EBF, allegedly applicable to the Claimant

II.3.4 – CONCLUSION

III – CLARIFICATION

IV – DETERMINATION OF RELEVANT FACTS

V – FACTS HELD AS PROVEN

VI – FACTS NOT PROVEN

VII – LAW

VII.1 - On non-subjection to taxation in Portugal by application of Article 19 of the Tax Treaty concluded between Portugal and Spain

VII.2 – On the exemption for personnel of Foreign Organizations under subparagraph b) of paragraph 1 of Article 37 of the EBF

VII.3 – On the exemption for technical personnel of diplomatic and consular missions, under Article 37, paragraph 2 of the EBF

VII.4 – On the illegality of compensatory interest

VII.5 – On the payment of indemnitory interest to the Claimant

VIII – DECISION

IX – VALUE OF THE PROCEEDINGS

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Table of Contents

IRS Exemption Under Portugal-Spain Double Taxation Convention for Public Servants – CAAD 798/2014-T

Table of Contents

Summary

Full Decision

ARBITRAL DECISION

I – THE CLAIM

I-A – FACTS

I-B – LAW

A) On the non-subjection to taxation in Portugal of the income earned by the Claimant, under subparagraph b) of paragraph 1 of Article 19 of the Tax Treaty

B) On the exemption for personnel of foreign organizations under Article 37, paragraph 1, subparagraph b) of the EBF

C) On the exemption for technical personnel of diplomatic and consular missions, under Article 37, paragraph 2 of the EBF

D) On the illegality of compensatory interest

E) On voluntary payment and indemnitory interest

II – THE RESPONSE OF THE TAX AUTHORITY AND CUSTOMS AUTHORITY

II.1 – FACTS

II.2 – BY WAY OF CHALLENGE

II.3 – LAW

II.3.1 – ON THE (ALLEGED) NON-SUBJECTION TO TAXATION IN PORTUGAL OF THE INCOME EARNED BY THE CLAIMANT

II.3.2 – ON THE EXEMPTION FOR PERSONNEL OF FOREIGN ORGANIZATIONS UNDER SUBPARAGRAPH B), OF PARAGRAPH 1 OF ARTICLE 37 OF THE EBF, allegedly applicable to the Claimant

II.3.3 – ON THE EXEMPTION FOR TECHNICAL PERSONNEL OF DIPLOMATIC AND CONSULAR MISSIONS, UNDER PARAGRAPH 2 OF ARTICLE 37 OF THE EBF, allegedly applicable to the Claimant

II.3.4 – CONCLUSION

III – CLARIFICATION

IV – DETERMINATION OF RELEVANT FACTS

V – FACTS HELD AS PROVEN

VI – FACTS NOT PROVEN

VII – LAW

VII.1 - On non-subjection to taxation in Portugal by application of Article 19 of the Tax Treaty concluded between Portugal and Spain

VII.2 – On the exemption for personnel of Foreign Organizations under subparagraph b) of paragraph 1 of Article 37 of the EBF

VII.3 – On the exemption for technical personnel of diplomatic and consular missions, under Article 37, paragraph 2 of the EBF

VII.4 – On the illegality of compensatory interest

VII.5 – On the payment of indemnitory interest to the Claimant

VIII – DECISION

IX – VALUE OF THE PROCEEDINGS

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