The legislative trend in tax has increasingly targeted tax havens and their residents, both by penalizing them through aggravated taxation (resorting mainly to increased tax rates or inapplicability of certain exemptions or deductions) and by instituting anti-abuse mechanisms that aim to dismantle tax evasion schemes from a tax point of view.
In Portugal, article 72, no. 17 (d), of the Personal Income Tax Code (PIT Code), imposes that capital gains deriving from real estate earned by entities that are resident in a tax haven (as per the tax haven list published by the Portuguese government) be subject to an aggravated tax rate of 35%.
A recent ruling by the Portuguese Centre for Administrative Arbitration (CAAD) in Case no. 217/2021-T exposed the fragilities of this norm, deeming it contrary to the free movement of capital principle laid out in article 63 of the Treaty for the Functioning of the European Union (TFEU).
Regarding the facts and circumstances of the case, two persons national and resident in Lebanon (which is considered a tax haven by the Portuguese government) earned capital gains due to the selling of real estate property they owned in Portugal. The Portuguese Tax Administration subjected such capital gains to the aforementioned aggravated tax rate of 35%.
Amongst other arguments that were made, the most relevant one, that ended up deciding the case in favor of the taxpayers, was the one that such aggravated tax rate was contrary to the principle of free movement of capitals, as it is a clear restriction to such fundamental freedom that is not acceptable regarding the criteria set out mainly by the Court of Justice case law.
The ruling, citing CJEU Case no. 184/18, considered that a restriction to the free movement of capitals principle based on the residency of the person must only be admissible so long as it does not entail an “arbitrary discrimination”, i.e., if the situations in question are not objectively comparable or if there are public interest reasons that must be considered, provided the restriction in question is proportionate and adequate to its purpose.
Regarding the comparability of the situations, the Court considered that an argument could not be made around the non-comparability of the situations at hand, given the only criteria that determines the applicability of the aggravated tax rate, instead of the normal rate, is merely the persons’ residency, which does not suffice as to consider that the situations are not comparable.
In respect of the public interest reasons which must be adequate and proportionate, the Court considered that a list of 83 jurisdictions deemed as tax havens by the Portuguese government is clearly excessive.
Still regarding the adequacy of such restrictive measures, the Court considered that applying aggravated tax rates as this one to singular persons is blatantly discriminatory, as singular persons do not have the same means to endeavor the creation of artificial schemes like corporations do, as singular persons are not fictional entities that can be used or manipulated in respect of their nature, place of incorporation, etc.
Further on, the Court resorts to the legislation of other taxes in Portugal that clearly exclude singular persons from the applicability of aggravated taxation norms that exist in other Tax Codes, applying only to corporations.
Also, if such measure was to be proportionate, at least the possibility should be given to those singular persons that reside in tax havens to demonstrate that that is their effective place of residence, and that there is not artificial scheme set out to achieve fiscal savings.
Therefore, the Court ruled in favor of the taxpayers, basing its decision on the fact that the norm contained in article 72 no. 17 is an unjustified and disproportionate restriction to the free movement of capitals.
The matter of preventing tax evasion has gained an incredible momentum in the past decades, especially in Europe, and several jurisdictions have adopted clear measures to neutralize it. However, cases like this are likely symptoms of a will to achieve a goal that has just gone to far. Natural/singular persons do not have the means to manipulate their place of residence like corporations do. There is no artificial scheme to be discovered, no fictional incorporation to be counteracted.
This being said, and regarding tax evasion, the legislator must not be blinded by this will to succeed: the basic fundamental rights and freedoms of people must still be assured, above all else, and the law must be righteous, rather than discriminatory.