In the context of Case No. 227/2020-T of October 2nd, 2020 the Arbitration Tribunal of the Administrative Arbitration Centre (“CAAD”) ruled that the situation where the total amount of the capital gains obtained by a non-resident taxpayer is subject to tax while a resident is only taxed on 50% of the capital gains at a progressive rate is illegal because it is discriminatory.
In the present case, the taxable person, who was resident for tax purposes in Switzerland, sold a property in Portugal in 2018, and the Tax Authorities (“TA”) assessed the Personal Income Tax ("IRS") due by applying the rate of 28% on the total gain obtained.
Considering that the existence of a differentiated taxation system applicable to resident and non-resident citizens, when resident in another Member State of the European Union ("EU") or in third countries, constitutes discrimination in the context of the free movement of capital, the taxpayer requested the establishment of an arbitration tribunal, so that the IRS assessment was declared illegal and the refund of the overpaid tax was ordered.
According to Portuguese tax law, capital gains obtained by a Portuguese tax resident are only considered and taxed at 50% of their value at a progressive rate, while capital gains obtained by a non-resident will be subject to the special rate of 28%, applicable to the total amount of the capital gains.
In addition, non-residents may opt, in respect of real estate capital gains, to have such income included in the IRS tax basis and thus be taxed under similar conditions as residents.
In previous rulings, the European Court of Justice (“ECJ”) has ruled that the unequal tax treatment implicit in the Portuguese capital gains tax regime is incompatible with EU law, more specifically with the free movement of capital, and that the introduction of an optional scheme for non-resident taxpayers does not remove the discriminatory nature of that national rule.
Indeed, the ECJ considers that a legislation of a Member State that establishes an optional scheme, which requires from non-residents to opt for a tax treatment equivalent to residents and to declare income received outside Portuguese territory, places an additional burden on that non-resident in comparison with a resident, which cannot exclude the discrimination in question, since it imposes an obligation to make an option which does not extend to a resident and the taxpayer cannot be placed in a situation where he has to choose between two schemes, one legal and the other illegal.
Having said that, real estate capital gains earned by a non-resident should be considered only at 50%, in order to avoid any discriminatory situation.
In the light of the foregoing, the CAAD granted the application, declaring the IRS assessment to be illegal and annulling in part the amount corresponding to the increase in taxation resulting from the total consideration of the capital gains, ordering the AT to repay the tax unduly paid.
António Vicente Marques – Sociedade de Advogados, RL
Lisbon 10 December 2020