Non-Resident Capital Gains Tax (IRS): 50% Exclusion Rule and EU Non-Discrimination Principle

ARBITRAL DECISION

I. REPORT:

A…, resident in … …, … …, France, taxpayer number…, hereinafter simply designated as the Claimant, filed a request for establishment of an arbitral tribunal in tax matters and a request for an arbitral ruling, pursuant to the provisions of articles 2 no. 1 a) and 10 no. 1 a), both of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, abbreviated as RJAT), petitioning the declaration of partial illegality of the act of assessment of Personal Income Tax (IRS) relating to the year 2015, in the amount of € 15,740.56, plus compensatory interest in the amount of € 331.89, deducted from the amount of € 760.56, relating to the previous assessment of IRS already paid, as well as condemning the Respondent to pay the corresponding indemnificatory interest.

To substantiate its petition, it alleges, in summary:

a) By public deed executed on 04/01/2008, the Claimant acquired, jointly with two children, in common and in equal shares, the urban property located on Rua …, nos…, …, … and…, parish of …, municipality of Lisbon, described in the Property Registry of Lisbon under no. … and registered in the respective matrix under article…, for the price of € 285,000.00;

b) On 31/07/2015, the Claimant and the two children sold the aforementioned property for the price of € 550,000.00;

c) The Claimant submitted, in the capacity of non-resident taxpayer, IRS form 3, declaring, for the purpose of calculating capital gains, the values of acquisition and sale of the property and the value of expenses and charges, and the Respondent issued the corresponding IRS assessment with the value to be paid of € 760.56 which the Claimant paid;

d) Subsequently, the Respondent issued a new IRS assessment and compensatory interest, from which, deducted the amount previously paid by the Claimant, resulted a value to be paid by the Claimant of € 15,311.69, which the Claimant paid;

e) For the purpose of calculating the IRS due, the Respondent took into consideration the entire capital gain realized by the Claimant and not 50% of its value;

f) The national legislator makes a differentiated treatment regarding the taxation of capital gains arising from the onerous transfer of real property in accordance with the fiscal residence of the taxpayer;

g) By not considering only 50% of the capital gain realized by the Claimant, the Respondent violated article 62 no. 1 of the Treaty on the Functioning of the European Union, as well as the principle of non-discrimination provided for in article 18 of the same Treaty.

The Claimant submitted 8 documents and did not call any witnesses.

In the request for arbitral ruling, the Claimant opted not to designate an arbitrator, whereby, pursuant to the provisions of article 6 no. 2 a) of the RJAT, the signatory was designated by the Deontological Council of the Center for Administrative Arbitration, and the appointment was accepted in accordance with the legal provisions.

The arbitral tribunal was constituted on 11 April 2017.

Notified in accordance with the terms and effects of the provisions of article 17 of the RJAT, the Respondent presented its response, alleging, in summary, the following:

a) The national legislator makes a differentiated treatment regarding the taxation of capital gains arising from the onerous transfer of real property in accordance with fiscal residence;

b) If the taxpayer is resident in national territory, the capital gain is considered at only 50%;

c) If the taxpayer is not resident in national territory, the capital gain is considered in its entirety;

d) Residents of another Member State of the European Union may opt, with respect to income from capital gains resulting from the onerous transfer of real rights over real property, for the taxation of such income at the rate that would be applicable in case they were earned by residents in Portuguese territory;

e) The Claimant did not make this option, having declared, upon submission of IRS form 3 of income, to wish taxation under the general regime;

f) The CJEU, in the judgment of 11/10/2007, case number C-443/06, known as the Hollmann judgment, called upon to rule on the compatibility with Community law of the rule contained in article 43 no. 1 of the CIRC, ruled that what is relevant for this purpose is not the fact that this article excludes from the limitation of the incidence of tax to 50% of capital gains realized by a resident of another Member State but rather the fact that this could result in a higher tax burden than that which would be applicable to a resident for the same type of operations;

g) The Tax Authority merely applied the law, with no incompatibility or non-conformity with Community law.

The Respondent submitted 5 documents and did not call any witnesses.

Considering the position assumed by the parties and given the lack of necessity for additional production of evidence, the meeting referred to in article 18 of the RJAT was waived, as well as the presentation of arguments, written or oral.

II. PRELIMINARY MATTERS:

The Arbitral Tribunal was regularly constituted and is materially competent.

There are no nullities that invalidate the proceedings.

The parties have legal personality and capacity and are entitled, with no defects in representation.

There are no nullities, exceptions or preliminary issues that prevent the tribunal from ruling on the merits and which it is obligatory to address.

III. QUESTION TO BE DECIDED:

Given the positions assumed by the Parties, it is verified that the only question to be decided is to determine whether the differentiation provided for in the national legislation between citizens resident in Portugal and non-residents in Portugal but resident in another Member State, with regard to the tax base for IRS on capital gains resulting from the transfer of real rights over real property, violates Community law, in particular articles 63 and 18 of the Treaty on the Functioning of the European Union (TFEU).

IV. STATEMENT OF FACTS:

a. Facts Proved:

With relevance to the decision to be rendered in the present proceedings, the following facts were established as proved:

1. In the year 2015, the Claimant was resident in France;

2. By public deed executed on 04/01/2008, the Claimant acquired, jointly with two children, in common and in equal shares, the urban property located on Rua …, nos…, …, … and …, parish of …, municipality of Lisbon, described in the Property Registry of Lisbon under no. … and registered in the respective matrix under article …, for the price of € 285,000.00;

3. Such property was sold, on 31/07/2015, by the Claimant and the two children, for the price of € 550,000.00;

4. On 01/06/2016, the Claimant submitted, in the capacity of non-resident taxpayer, IRS form 3, which was accompanied by a single annex, annex G, in which the property sale transaction referred to in 2) was declared, with the Claimant not having declared to opt for the general taxation regime;

5. The Respondent issued the corresponding assessment, from which resulted tax to be paid by the Claimant, in the amount of € 760.56, which the Claimant paid;

6. By official letter dated 16/08/2016, the Claimant was notified to provide clarifications regarding "transfer of real property not declared or need to prove the values of expenses, sale value, date of acquisition of the properties or allocation to professional activity";

7. As a result of the clarifications provided, it was verified that the sale value amounted to € 145,000.00 and not € 95,000.00 previously declared, whereby, as a result, the Claimant was notified to exercise, if so wished, the right to prior hearing;

8. Not having the Claimant exercised the right to prior hearing, the Respondent corrected the declared value and issued a new assessment, from which resulted a value to be paid by the Claimant in the global amount of € 16,072.25, being € 15,740.56 relating to tax and € 331.69 relating to compensatory interest;

9. The Claimant proceeded to payment of the global amount of € 15,311.69, corresponding to the amount of € 16,072.25 deducted from the amount paid when sending the assessment note referred to in 5) above (€ 760.56);

10. The Respondent determined as the taxable income of the Claimant the amount of € 56,216.27, to which the 28% rate provided for in article 72 no. 1 of the CIRC was applied.

b. Facts Not Proved:

With interest for the proceedings, no other fact was proved.

c. Justification of the Statement of Facts:

The conviction regarding the facts established as proved was formed on the basis of the allegations and documentary evidence submitted by the parties, indicated with respect to each of the points and whose correspondence to reality was not questioned.

V. ON THE LAW:

The statement of facts being established, it is now necessary, by reference thereto, to determine the applicable law.

The question at issue in the present proceedings concerns the differentiation provided for in the national legislation between citizens resident in Portugal and non-residents in Portugal but resident in another Member State, with regard to the tax base for IRS on capital gains resulting from the transfer of real rights over real property.

There is no doubt that national legislation provides for a different legal regime regarding the taxation of capital gains arising from the onerous transfer of real property, depending on whether a citizen is resident or non-resident in Portugal.

Thus, with respect to residents, articles 43 nos. 1 and 2 of the CIRC provide:

"1. The value of income qualified as capital gains is the amount corresponding to the balance determined between capital gains and capital losses realized in the same year, determined in accordance with the following articles.

1. The balance referred to in the preceding number, relating to transfers made by residents provided for in paragraphs a), c) and d) of no. 1 of article 10, positive or negative, is only considered in 50% of its value."

For its part, as regards non-residents in Portugal, article 72 no. 1 of the CIRC prescribes that "capital gains and other income earned by non-residents in Portuguese territory which are not attributable to a permanent establishment located therein and which are not subject to withholding tax at liberatory rates shall be taxed at the autonomous rate of 28%, except as provided in no. 4."

The national legislator thus provides that, for residents in Portugal, capital gains are only considered in 50% of their value, whereas for non-residents in Portugal capital gains are considered in their entirety.

The question thus centers on whether such differentiation provided for by the national legislator is or is not in accordance with Community law, in particular with the freedom of movement of capital and the principle of non-discrimination, provided for in articles 63 and 18 of the Treaty on the Functioning of the European Union (TFEU).

On this question, national jurisprudence, including arbitral, has already pronounced itself extensively, to the effect that article 43 no. 2 of the CIRC, by limiting the incidence of tax to 50% of capital gains realized only for residents in Portugal and excluding from this limitation capital gains realized by a resident of another Member State, violates the freedom of movement of capital, provided for in article 63 of the TFEU.

In this regard, see, among others, judgments of the Administrative Supreme Court of 16JAN2008, case number 439/06; of 22MAR2011, case number 1031/10; of 30ABR2013, case number 1374/12 and, more recently, of 03FEV2016, case number 1172/14, all at www.dgsi.pt.

Also within the scope of arbitral jurisprudence did the arbitrators appointed within the scope of cases 45/2012-T, 127/2012-T and 748/2015-T pronounce themselves in the same sense, all at www.caad.org.pt.

The question at issue in the present case is the same question on which the indicated judgments have focused, which were, furthermore, rendered within the scope of the same legislation, whereby we do not discern any reason not to follow the jurisprudence which, in a manner, we believe to be unanimous, has been followed, and with which we agree and concur entirely.

It is true that, subsequent to the judgment rendered by the CJEU on 11/10/2007, case number C-443/06, known as the Hollmann judgment, the national legislator, with the objective of adapting the national tax system to the decision rendered in this judgment, introduced, through Law no. 67-A/2007, of 31 December, the possibility for residents of another Member State of the European Union to opt, with respect to income referred to in nos. 1 and 2 of article 72 of the CIRC, for taxation of such income at the rate that, in accordance with the table provided for in no. 1 of article 68, would be applicable in case they were earned by residents in Portuguese territory.

It is equally certain that, as resulted from the proved facts – cf. point 4 – the Claimant did not make this option.

But does the Claimant's failure to make this option determine the conformity of articles 43 and 72 of the CIRC with Community law?

We believe not, especially since, as decided by the CJEU in the Gielen judgment, rendered on 18/03/2010, "the option of equalization enables a non-resident taxpayer (…) to choose between a discriminatory tax regime and another supposedly non-discriminatory regime", and that "this choice is not capable of excluding the discriminatory effects of the first of these two tax regimes."

Although in this judgment the issue was not the violation of article 63 of the TFEU but of article 49 of the TFEU, we understand to be entirely applicable to the hypothesis now under consideration the conclusion reached by that court that the recognition of an effect of this nature to the said choice would have the consequence of validating a tax regime that would continue, in itself, to be discriminatory.

Whereby, although the national legislator has enshrined the possibility for the non-resident taxpayer to opt for taxation applicable to residents, the truth is that this does not remove the essential discriminatory effect of the differentiation of regimes provided for in national legislation between residents and non-residents, which is thus violative of articles 63 and 18 of the TFEU.

In view of the principle of the primacy of Community law, enshrined in article 8 number 4 of the Constitution of the Portuguese Republic, the jurisprudence of the CJEU, on the basis of Community law, binds the national courts, whereby this tribunal cannot decide differently from what has already been decided, within the scope of the same legal question and the same legislation, by the CJEU.

In view of all that has been set forth, there is no doubt that the assessment under challenge, in the part that considers as the tax base for capital gains realized by the Claimant more than 50% of its value, lacks legal foundation.

VI. OPERATIVE PART:

In view of the foregoing, the following is decided:

a) To render judgment in favor of the petition for declaration of partial illegality of the assessment under challenge, in the part that considers as the tax base for capital gains realized by the Claimant more than 50% of its value;

b) To render judgment in favor of the petition for reimbursement of the amounts that have been unduly paid; and

c) To render judgment in favor of the petition for payment of indemnificatory interest at the legal rate, calculated on the amounts unduly paid, from the date of payment until actual and full payment by the Respondent.

The value of the case is fixed at € 7,099.44, in accordance with paragraph a) of no. 1 of article 97-A of the Tax Procedure and Process Code, applicable by force of paragraphs a) and b) of no. 1 of article 29 of the RJAT and of no. 2 of article 3 of the Regulation on Costs in Tax Arbitration Proceedings.

The value of the arbitration fee is fixed at € 612.00, in accordance with Table I of the Regulation on Costs of Tax Arbitration Proceedings, in accordance with no. 2 of article 12 and no. 4 of article 22, both of the RJAT, and of no. 4 of article 4 of the aforementioned Regulation, to be paid by the Respondent as the losing party.

Register and notify.

Lisbon, 05 July 2017.

The Arbitrator,

Alberto Amorim Pereira

Text prepared by computer, in accordance with no. 5 of article 131 of the Code of Civil Procedure, applicable by reference of paragraph e) of no. 1 of Decree-Law no. 10/2011, of 20/01.