IMT Tax Exemption for Tourist Utility Properties – CAAD Arbitration Case 103/2014-T

ARBITRAL DECISION

CAAD: Tax Arbitration

Case No. 103/2014 – T

Subject: IMT – Tax Benefits; Tourist Utility.

I - STATEMENT OF FACTS

1. On 10 February 2014, "A" and "B", with Tax Identification Numbers (NIF) ... and ... (hereinafter referred to as Claimants), domiciled at Rua ..., ..., block ..., ..., ...-... Lisbon, submitted to the Administrative Arbitration Centre (CAAD) a request for the constitution of a singular arbitral tribunal, pursuant to the provisions of Articles 10, No. 1, paragraph a) and 2, No. 1, paragraph a) of Decree-Law No. 10/2011, of 20 January (hereinafter referred to as RJAT), with a view to declaring the illegality of the Real Estate Transfer Tax (IMT) assessment issued by the Tax and Customs Authority (hereinafter referred to as Respondent or AT) in the amount of €24,379.88, with all consequential legal effects.

2. In the request for arbitral ruling, the Claimant opted not to appoint an arbitrator.

3. Pursuant to No. 1 of Article 6 of RJAT, by decision of the President of the Deontological Council, Maria Manuela do Nascimento Roseiro was appointed as singular arbitrator, who accepted the position within the legally prescribed period.

4. Having notified the parties and there being no refusal of such appointment (Article 11, paragraphs a) and b) of RJAT and Articles 6 and 7 of the Deontological Code), the arbitral tribunal was constituted on 7 April 2014, in accordance with the provision of paragraph c) of No. 1 of Article 11 of Decree-Law No. 10/2011, of 20 January, as amended by Article 228 of Law No. 66-B/2012, of 31 December.

5. On 14 July 2014, the first meeting of the arbitral tribunal was held in accordance with the terms and objectives provided for in Article 18 of RJAT (cf. minutes attached to the case file). The tribunal requested clarifications, namely regarding documents still missing[1] that the Claimants had committed to attach to the case file. The representative of the claimants declared not to waive the hearing of the 2nd and 3rd witnesses presented by him, with their hearing scheduled for 11 September. The tribunal decided that the decision would be rendered by 14 October 2014.

6. At the second meeting, held on 11 September (minutes attached to the case file), the representative of the Claimants did not present the witnesses, requesting the use of testimony from one of them, already produced and recorded in case No. 102/2014-T, as well as testimony to be given by the other witness, currently in Brazil, to be conducted via Skype on 19 September 2014, in case No. 110/2014-T. With the agreement of the Respondent, the Tribunal granted the request, and also accepted the attachment to the case file of a copy of a "tourist exploitation contract". The Claimant and Respondent declared that they waived final arguments.

1. Request for Arbitral Ruling

The Claimants allege, in summary (as understood by us), that:

• They acquired from company "C", S.A., on 19 June 2006, fraction BE of the urban property, registered in the urban real estate matrix of the parish of Quarteira, under No. ..., integrated in the Tourist Enterprise ..., and the selling company guaranteed that the transaction would benefit from the IMT exemption provided for in Article 20 of Decree-Law No. 423/83, of 5 December, which was recognized by the notary in the public deed, as well as later by the Registrar of the Real Estate Registry.

• The fraction in question was acquired by the Claimants with the objective of its establishment in the integrated tourist enterprise ... and its commercial exploitation and obtaining return and increase of the investment made there, for which purpose they entered into a contract with "D" – Hotel Construction and Management, S.A. ("D"), a tourist exploitation contract, ceding to this company the exclusive right to exploit the fraction, assuming as cedents a set of duties that condition the free enjoyment of the property, such as delivery of the property free, in operation and with all conditions for tourist use, and assumption of obligations that guarantee compliance with legal requirements imposed by official entities, so as to ensure the tourist classification of the same, in the context of the whole of which it forms part.

• The interpretation of AT is incorrect in assessing IMT on the acquisition price, at the rate of 6.5% pursuant to paragraph d) of Article 17 of CIMT, denying the application of the exemption provided for in Article 20 of Decree-Law No. 423/83, of 5 December, and arguing that the tourist utility attributed to the enterprise, provisionally in June 2005 and confirmed by Administrative Order of May 2007, was requested by company "C, SA", which built the enterprise, and that taxpayers who acquired the properties from such company in an already constructed and installed enterprise cannot benefit from such IMT exemption (nor from Stamp Tax exemption).

• The understanding of AT should not be accepted, which based on the Judgment of the Supreme Administrative Court of 23-01-2013 (case No. 968/12), rejects the recognition of the exemption by the notary, invoking that the acquisition of the fractions by the taxpayer was not intended for the establishment of the enterprise, which was already established.

• "D" is the operator of the Hotel and tourist apartments in the tourist complex ..., receiving 25% of revenues with the remaining 75% paid quarterly to the Claimants.

• The autonomous fraction acquired by the Claimants constitutes a lodging unit of the tourist complex ..., integrating an enterprise to which tourist utility was recognized (cf. the Notice of the DGT, published on 15/07/2005, Official Journal, III Series, p. 15272), falling within No. 1 of Article 20 of Decree-Law No. 423/83.

• The Claimants acted as promoter of the enterprise in which the fraction is integrated and actively contributed to financing the works in progress always from the perspective of investment and return that would come from it, considering the granting of the exemption fundamental to the decision to acquire the fraction.

• The tax privilege provided for in Decree-Law No. 423/83, as amended by Decree-Law No. 38/94, of 8 February, remains in force (now reported to IMT and Stamp Tax, pursuant to the terms and for the purposes provided for in Article 28 of Decree-Law No. 287/2003, of 12 November) and constitutes an objective exemption, intended to benefit the realization of the process of establishment of enterprises of public utility: it is not granted to the builder of the enterprise, to the real estate promoter, or to the entity that licenses and/or operates the enterprise, nor does it require that the acquirer himself perform or promote all the acts (material and legal) of establishment of the public utility enterprise on the property/fraction that he acquired.

• For the objective exemption to arise it is sufficient that it be verified that the property acquired was integrated into the process of establishment of a public utility tourist enterprise, or was legally and economically affected to that enterprise with a view to enabling its complete establishment.

• The new Legal System for the Installation, Operation and Functioning of Tourist Enterprises (RJIEFET), Article 52 of Decree-Law No. 39/2008, of 7 March, reinforces this understanding, by the way it provides for the functioning of Tourist Complexes which can be constituted in plural ownership.

• On the other hand, the instruments that previously regulated the matter (Decree-Law No. 49399, of 24 November 1969, and Decree-Law No. 328/86, of 30 September) distinguished between acts that integrate the construction/installation phase of enterprises and acts that integrate their operation phase, which indicates that the process of installation of a real estate enterprise of tourist utility only ceases when, after being constructed and licensed, the real estate complex is able to function in the terms that allowed it to achieve the status of tourist utility, implying not only construction by the real estate promoter but also the commitment by owners/acquirers, in a mandatory manner, of their fractions, through exploitation contracts with a view to achieving the tourist purpose (Articles 41 et seq. of RJIEFET).

• Whoever acquires a lodging unit in a tourist enterprise established under the plural ownership regime provided for in RJIEFET cannot give it any other destination than the provision of tourist exploitation services, being obliged to keep it equipped and ready to be rented for this sole and permanent purpose, not being a real estate transaction or an investment in a residential product but an investment in the creation/establishment of Portuguese tourist supply.

• The acquisition of this autonomous fraction by the Claimants was not intended for their own occupation, it was intended for the establishment of enterprises qualified as having tourist utility, and the first acquisition of each autonomous fraction, as a lodging unit of the tourist enterprise ..., still integrates the respective establishment process, benefiting from the tax benefit provided for in Article 20 of Decree-Law No. 423/83, of 5 December, given the tourist utility recognized for this enterprise by the State Secretary for Tourism and which encompasses all units that comprise it.

• Article 20 of Decree-Law No. 423/83 did not intend to introduce a benefit that would cover only real estate promoters, and it is a complement to the mechanism of Article 39-A of CIMSISSD, added by Article 3 of Decree-Law No. 140/92, of 17/7, which allows deduction of the tax borne on the acquisition of the lands where the buildings were erected, and should be understood to extend to those who participate in the establishment of the enterprise and, thus, in the promotion of tourist activity.

• Also the fact that the benefit of exemption under IMI covers the owners of properties integrated in enterprises to which tourist utility has been attributed (Article 47, No. 1 of EBF) leads to the understanding that this benefit aims at the same interests of promotion and encouragement of tourist activity that presided over and support the granting of the benefit under Article 20 of Decree-Law No. 423/83.

• And, given the prior legality control to which the notary (Article 49 of CIMT and Article 72, No. 1 of the Real Estate Registry Code) and the Registrar of the Real Estate Registry were obliged, the current requirement by AT of this tax, when it could not have been unaware of the granting of exemption, puts at issue the principles of legal certainty and security.

• The revocation of the benefit granted to the Claimants is not permitted because, apart from the principle of good faith potentially prevailing over the principle of legality itself, it is an act constitutive of rights or legally protected interests that became consolidated in the legal sphere of the Claimants.

• Being, at the moment of acquisition, fully met with all formal and substantive requirements for the granting of the benefit, this cannot be revoked (Articles 140 and 141 of CPA and No. 4 of Article 12 of EBF), so the assessment is illegal and must be annulled.

1. The Respondent's Reply

The Respondent replied, in summary (also as understood by us), that:

• The crux of the question under discussion is whether Article 20, No. 1 of Decree-Law No. 423/83, of 05/12, when referring to "acquisitions of properties or autonomous fractions intended for the establishment of enterprises qualified as having tourist utility" covers only acquisitions of properties or autonomous fractions by promoters with a view to constructing and establishing tourist enterprises, or also acquisitions of autonomous fractions (lodging units) belonging to or integrated in already constructed and established enterprises, with a view to their operation.

• The legislator intended to cover with that norm only acquisitions intended for the "establishment" of enterprises; if it had intended to cover both the activity of establishment and operation of tourist enterprises, it would have said so, as it did in No. 2 of Article 20.

• The distinction between the concepts of "establishment", on one hand, and "operation" and "exploitation", on the other, is clearly evident in the preamble of Decree-Law No. 39/2008, as decided in the Judgment of the Supreme Administrative Court of 23/01/2013: "establishment" emerges as a procedure that comprises the legal acts and formalities intended at licensing (in a broad sense, comprising prior communications or authorizations, as the case may be) of the urban planning operations necessary for the construction of a tourist enterprise, as well as obtaining the titles that make it able to function and be exploited for tourist purpose. After being constructed and the investment promoters obtaining the necessary licenses to make the enterprise able to exercise tourist activity, each tourist enterprise "must be operated by a single entity, responsible for its full functioning and level of service and compliance with applicable legal and regulatory provisions" (No. 1 of Article 44 of Decree-Law No. 39/2008), such entity being designated by the holder of the respective authorization license for use for tourist purposes (No. 2 of Article 44), that is, by the promoter (cf. Chapter VII and Articles 41 et seq. of Decree-Law No. 39/2008, which establishes the rules relating to operation and functioning). And even if the lodging units are occupied by their respective owners, it is incumbent upon the operating entity to assume the continuous operation of the same, having to keep them permanently in tourist exploitation regime (Article 45 of Decree-Law No. 39/2008).

• Precisely, the acquisition effected by the Claimants, already at a moment subsequent to the operation license and, consequently, after the establishment phase of the tourist enterprise, is intended for commercial operation.

• Hence it is common for acquirers of fractions in tourist enterprises in plural ownership to enter into tourist exploitation contracts intended to guarantee the unity and continuity of operation by the operating entity of the tourist enterprise, as well as the permanent commitment to tourist operation of all lodging units that comprise the enterprise.

• The restrictions and obligations associated with the acquisition of the autonomous fraction to which the Claimants refer correspond therefore to a new paradigm of operation of tourist enterprises in plural ownership, with express consecration in law.

• Thus, in accordance with this new paradigm of operation, and not establishment, as the Claimants claim, although the lodging units that comprise the tourist enterprise can be constituted as autonomous fractions, those lodging units are always considered in tourist operation, so their acquisition is intended for operation and not for implementation.

• In sum, on the legal-tax framework of the facts, it is considered that the acquisition in question does not benefit from the IMT exemption provided for in No. 1 of Article 20 of the cited Decree-Law 423/83, referring to the aforementioned Judgment whose jurisprudence is reiterated in the Judgments of the Supreme Administrative Court of 30/01/2013 in case No. 01193/12 and of 11/09/2013 in case No. 01049/13.

• As emphasized in case No. 0968/12, although the interpretation of tax benefits admits extensive interpretation (Article 10 of EBF), the interpreter cannot consider legislative intent that does not have a minimum of correspondence in the letter of the law (No. 2 of Article 9 of CC, ex vi Article 11 of LGT), to which is added the fact that tax benefits are exceptional measures that represent a derogation from the rule of equality and contributive capacity, and must be justified by a relevant public interest;

• With respect to the concept of "establishment" in contrast with the concept of "operation", and with respect to the figure of the promoter, it is concluded that the Claimants effected an acquisition intended for commercial operation, not being covered by the invoked tax benefit.

• Nor can the Claimants invoke the understanding that the Notary or the Registrar had, as interpreters and appliers of law, because only the Respondent had competence to rule on the legal-tax framework of the contested transaction, that is, the Claimants could only invoke a legitimate expectation legally protected if AT had issued binding information at the request of the Claimants, which did not happen.

• The Claimants themselves recognize that the acquisition of the said fraction was intended, precisely, for commercial exploitation, and that they ceded to "D" – Hotel Construction and Management, S.A., the exclusive right to exploit the fraction through a "tourist exploitation contract", but they did not act as promoters of the enterprise (Article 35 of PI),

• The Claimants did not produce any proof that they actively contributed to financing any works in progress, but also this is not relevant to the interpretation advocated by AT regarding the legal provision under discussion because there is no legal basis for the assertion that "the establishment is progressively installed as the lodging units are sold".

• There is also no redundancy or anachronism in the articulation of Article 20 of Decree-Law No. 423/83 with Article 39-A of CIMSISSD, and as for the invocation of exemption under IMI, it is a tax aimed at taxing distinct realities from IMT, being incumbent upon the legislator to adopt the exceptional character measures that it understands to be adequate to the pursuit of relevant extra-fiscal public interests and that are superior to the taxation itself that they prevent.

• It is not proved in the case file that the Claimants through the acquisition of the mentioned fraction impelled the enterprise and contributed as guarantor of its realization, all the more so since the acquisition of the mentioned fraction occurred at a moment subsequent to the granting of the tourist operation license No. .../05 of 30/09/2005, by the Municipality of Loulé;

• And the compression of the content of the right of property in a tourist enterprise in plural ownership consists in "restrictions established in function of the form of operation and functioning of the enterprise and not by virtue of its establishment."

• In accordance with Article 45, No. 1, in fine of LGT, combined with No. 1 of Article 35 of CIMT, the right to assessment of the missing tax only lapses if it has not been validly notified to the Claimants within eight years from the said transmission, so, with the present assessment AT did not violate the principles of certainty and legal security.

• There was no violation of the principles of legal certainty and security, nor serious injustice – the Notary and the Registrar are public authorities vested with a general supervisory duty, without competencies that permit them to ascertain the tax-legal situation of the taxpayer, substituting themselves for AT, and the latter was not conditioned by prior binding information.

• The understanding of the Notary regarding the acquisition in question being exempt from IMT does not invest the Claimants with a right or legitimate expectation capable of founding any right to compensation.

• The intervention of the Notary, in whose Office the deed was executed, or of the Registrar in whose Conservatory the competent Real Estate Registration was carried out, has merely supervisory function of compliance with tax obligations, in accordance with what is provided for in Article 54 of CIMT within the limits of their respective competence, it not being incumbent upon them to substitute AT.

• The tax benefit of IMT exemption provided for in No. 1 of Article 20 of Decree-Law No. 423/83 is a benefit of automatic nature, not susceptible to being granted through any administrative act nor being applicable to the case the provisions of Articles 140 and 141 of CPA on the revocation of acts.

1. Questions to be Decided

The questions on which the tribunal must rule are:

• Determination of the meaning and scope of Article 20, No. 1 of Decree-Law No. 423/83, of 05/12, with respect to the segment of the norm "acquisitions of properties or autonomous fractions intended for the establishment of enterprises qualified as having tourist utility", so as to decide whether the acquisition by the Claimants of autonomous fractions followed by execution of an exploitation contract with another entity that carries out the exploitation of the whole still constitutes "establishment".

• Whether the fact that the Claimants did not pay IMT when executing the deed of transmission of the fraction, convinced that they were covered by the exemption provided for in Article 20, No. 1, of Decree-Law No. 423/83, of 05/12, prevents the assessment effected by the Respondent, insofar as it constitutes illegal revocation of an administrative act, in violation of Articles 140 and 141 of CPA.

1. Case Management

The Tribunal is materially competent and is regularly constituted, pursuant to Articles 2, No. 1, paragraph a), 5, No. 2, and 6, No. 1, of RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to Articles 4 and 10, No. 2, of RJAT and Article 1 of Order No. 112-A/2011, of 22 March.

The case does not suffer from vices that would invalidate it.

Therefore, we proceed to the merits decision.

II. LEGAL REASONING

1. Proven Facts

11.1. On 19/06/2006, the Claimants acquired from company "C" S.A., for the price of €375,075.00, the autonomous fraction designated by the letters BE, of the urban property registered in the urban real estate matrix of the parish of Quarteira under No. ..., and corresponding to a T1 one-bedroom apartment in the tourist enterprise "...", located on Avenida ..., in Vila Moura/Quarteira (Article ... of the request for ruling, Nos. 3, 4 and 6.1 of the Reply, real estate record sheet attached by AT and clarification attached by the Claimants on 08/10/2014).

11.2. The status of public utility of the enterprise, requested by "C" S.A. and subject to prior recognition by administrative order of the State Secretary for Tourism, of ...2005 (Official Journal No. ..., 3rd series, of .../06/2005), was confirmed by administrative order of the State Secretary for Tourism, of .../05/2007 (Official Journal No. ..., 2nd series, of .../06/2007), with validity of seven years from the attribution, on 30/09/2005, of tourist operation license issued by the Municipality of Loulé.

11.3. In the deed executed on 19/06/2006, the notary considered applicable to the transmission the IMT exemption provided for in Article 20 of Decree-Law No. 423/83, of 5 December (Request, Articles 14 and 15, Document No. 2, attached to the case file by the Claimants, and Tax Inspection Report, point III.3 and 8, PA, pages 11 to 13).

11.4. On 19 June 2009, a tourist exploitation contract was entered into between "D" - Hotel Construction and Management, S.A. and the male Claimant regarding the real estate fraction, with the Parties declaring that: "The first grantor acts as the operating entity of the Hotel and tourist apartments, both with five-star classification, which integrate the tourist complex called '...', located in Vilamoura Algarve, constituted under horizontal ownership regime and which also has various complementary services and equipment (...)" and the second grantor, as legitimate owner of the identified real estate fraction, cedes to the first grantor the tourist exploitation of the respective apartment within the scope of the entire enterprise, in a coherent and integrated manner, and in accordance with the level of a five-star tourist enterprise".

11.5. The second grantor granted to the first grantor, who accepted, the exclusive right to exploit the apartment, namely through short-term tourist rentals, this transfer contract having a duration of two years, being successively renewed for periods of one year.

11.6. The said contract provided: "of the total revenue resulting from the tourist exploitation of the apartment by 'D', this will receive 25%, with the remaining 75% paid quarterly to the Claimants, after deduction of costs relating to tidying, cleaning, and maintenance materials", being the total revenue the gross amount of the apartment rental.

11.7. The first grantor committed itself to keep the apartment as well as its contents in conditions adequate to its tourist use, being responsible for maintenance (referring to its ordinary repair and supposing the type of average quality of goods) and the second grantor obliged itself to: deliver the property to "D", at the beginning of the said contract, free, in operation and with all conditions for a tourist use; to guarantee that the property would have furnishings, furniture and equipment of high level for tourist needs, inherent to the quality and tourist classification of the property and considering the maximum capacity of persons who may occupy it; to constitute and maintain in force, during the contract's validity, insurance on the fraction, covering the risks of collapse, fire, damage caused by earthquake, thunderstorms or other forces of nature, explosions and civil liability. And also to keep the apartment and furnishings at the level for operation inherent to the five-star tourist classification of the enterprise.

11.8. In the framework of a partial inspection action concerning the Real Estate Transfer Tax (IMT), for the year 2006, an inspection action conducted on 12 August 2013 (Internal Service Order No. OI...), concluded that the Claimants had improperly benefited from the exemption provided for in Article 20 of Decree-Law 423/83, of 5/12, with a draft report being prepared and notified on 14/08/2013 to the claimants (point IX of the Final Report, PA page 14).

11.9. In response to official communication 14155, of 12 August 2013, regarding the conclusion of the inspection action, the Claimants sent to the Head of the Finance Department of Faro a statement addressed to the Director of Finances of Faro, Av. 5 de Outubro, 25-A, in Faro, dated 25 August 2013, expressing surprise at the interpretation of the services and requesting reconsideration of the case (PA attached to the case file, pages 16 and 17).

11.10. Considering that the claimants did not exercise the right to hearing regarding the Tax Inspection Report, the Report of the Tax Inspection of the Finance Department of Faro was converted into final form on 30 August, dispatched on the same date by the Director of Finances (PA attached to the case file, pages 7 to 14).

11.11. The Tax Inspection Report concluded for the correction of the taxable matter in the amount of €375,075.00 and collection of IMT, by application of the rate of 6.5%, in the amount of €24,379.88 as the taxpayer improperly benefited from the exemption provided for in Article 20 of Decree-Law 423/83, of 5/12. (point 9. Report and order of Head of Division, page 13 and 7 of PA).

11.12. The Tax Inspection Report was sent, by official communication DDF/... of 03/09/2013, to the Finance Service of Loulé 2 (Quarteira), for assessment of the missing tax (page 6, PA); by official communication No. ..., a 2nd copy was sent to the Claimants on 18/09/2013 (Document No. 3 attached to the case file by the Claimants).

11.13. The Head of the Loulé 2 (Quarteira) Service notified, by official communication No. ..., of 10.10.2013, the taxpayers to, within thirty days from the signing of the receipt notification, request payment slips in the amount of €24,379.88 of IMT and that after that period debt would be drawn for compulsory collection, with late payment interest beginning to run in accordance with Article 38 of IMT (PA, page 4).

11.14. The Claimants, in letter dated 21 October 2013, addressed to the Head of Finances of Loulé 2, Rua de S. Tomé e Príncipe, Edifício Solaris, Quarteira, acknowledged receipt of the official communication of 10.10.2013, expressing surprise at the new communication and requesting resolution of the previous complaint (PA attached to the case file, page 15).

11.15. On 22 November 2013, the Finance Service of Loulé 2 (Quarteira) issued the IMT assessment in the amount of €24,379.88, for payment by 25/11/2013, concerning the transmission effected by the deed of 19/06/2016, of fraction BE of the urban property, registered in the urban real estate matrix of the parish of Quarteira under No. ..., with appraised value of €194,550.00 and price of €375,075.00 (Document No. 1 attached with the request for ruling and PA, pages 1 to 5).

1. Unproven Matters

The factual matter taken as proved is sufficient for the consideration of the legal question, there being no unproven facts relevant to the resolution of the present dispute.

1. Grounds of Proof

The factual determination was made on the basis of the facts alleged by the parties and not contested, as well as on the documentation attached to the case file, including the administrative file. The testimony of witnesses was heard and duly considered in the general characterization of the factual situation, in the final legal reasoning.

1. Application of Law

14.1. The Concept of Establishment

The positions of the Parties in the case are divergent regarding the application of the tax benefits provided for in No. 1 of Article 20 of Decree-Law No. 423/83, of 05/12, with respect to the interpretation of "establishment" of enterprises declared as having tourist utility, with the Claimants understanding that this includes the acquisition of autonomous fractions integrated in tourist enterprises under plural ownership regime, and the Respondent considering that this type of acquisition, situated at a moment subsequent to the issuance of the enterprise operation license, is not part of the establishment process, having as its purpose commercial operation.

To support their position, the Claimants invoke, on one hand, the importance of the participation of the fraction acquirers in the realization of the enterprise, through financing of the works (without which the promoter could not have carried out the enterprise) and, on the other hand, consider essential to the characterization of the situation the manner in which the fraction is affected to the functioning of the same enterprise, emphasizing the absence of power of disposition of the property on the part of the acquirers.

With this they intend to demonstrate that the acquirers present themselves as investors, promoters of the enterprise, falling within the domain of application of the norm that granted tax benefit directed to the establishment of enterprises qualified as having tourist utility, No. 1 of Article 20 of Decree-Law No. 423/83.

14.2. The Interpretation of No. 1 of Article 20 of Decree-Law No. 423/83, of 5 December – Jurisprudence Uniformization

In the consideration and decision of a case such as that which is the object of the present proceedings, one cannot fail to take into account the high number of Judgments already delivered by the Supreme Administrative Court, Section of Tax Litigation, with emphasis on the existence of a decision handed down in enlarged proceedings, pursuant to the provisions of Article 148 of CPTA, on 23 January 2013, in case No. 968/12, which gave rise to Jurisprudence Uniformizing Decision No. 3/2013, published in the Official Journal, 1st Series, of 4 March 2013.

It was a case of acquisition of a fraction integrated in plural ownership regime in a tourist enterprise to which the status of "tourist utility" had been recognized.

The said judgment proceeded to the literal interpretation of Article 20, No. 1, of Decree-Law 423/83, in conjunction with other norms of the same instrument (especially Articles 16, No. 2, and 20, No. 2), analyzed legislation prior and subsequent to Decree-Law 423/83 (both norms relating to the exercise of tourist activity and of specifically fiscal character), and, as to the question of the concept of "establishment"[2], decided by majority of the Judges Councillors sitting in the Section, that "The concept of 'establishment', for purposes of the benefits to which No. 1 of Article 20 of Decree-Law No. 423/83, of 5 December, refers, relates to the acquisition of properties (or of autonomous fractions) for construction of tourist enterprises, after the respective urban planning operations have been duly licensed, aimed at benefiting the companies engaged in the activity of promotion/creation of the same and not the acquirers of autonomous fractions in enterprises constructed/established in plural ownership regime, since this has to do with 'operation' and not with 'establishment'"[3].

Beyond the developed reasoning contained in the Judgment in question, let us retain the conclusions summarized in the respective "summary": "I – In the determination of the meaning and scope of the tax norms and in the qualification of the facts to which they apply are observed the general rules and principles of interpretation and application of laws", being that "Whenever, in tax norms, terms peculiar to other branches of law are employed, the same must be interpreted in the same sense that they have there, unless something else derives directly from the law" (Article 11, Nos. 1 and 2, of LGT). II – Within the scope of the legal system of installation, operation and functioning of tourist enterprises, established in Decree-Law No. 39/2008, of 7 March, the concept of installation of a tourist enterprise comprises the set of legal acts and the formalities necessary for licensing (in a broad sense, comprising prior communications or authorizations, as the case may be) of the urban planning operations necessary for the construction of a tourist enterprise, as well as the obtaining of titles that make it able to function and be exploited for tourist purposes (cf. Chapter IV, Articles 23 et seq.). III – When the legislator uses the expression acquisition of properties or of autonomous fractions intended for "establishment", for purposes of the benefit to which No. 1 of Article 20 of Decree-Law No. 423/83, of 5 December, refers, it cannot but be understood as referring precisely to the acquisition of properties (or of autonomous fractions) for construction of tourist enterprises, after the respective urban planning operations have been duly licensed, aimed at benefiting the companies engaged in the activity of promotion/creation of the same. IV – This concept of "establishment" is what proves adequate to all types of tourist enterprises and is not put in question by the fact that enterprises can be constructed/established in plural ownership regime, since this has to do with "operation" and not with "establishment". V – In tourist enterprises constituted in plural ownership (which comprise lots and or autonomous fractions of one or more buildings, pursuant to the provision of Article 52, No. 1, of Decree-Law No. 39/2008, of 7 March), two distinct procedures stand out, although they may occur simultaneously: one relating to the practice of operations necessary to establish the enterprise; another, relating to operations necessary to put it into operation and exploit it, being that the sale of the projected or constructed units necessarily forms part of the second. VI – The legislator intended to impel tourist activity by providing exemption/reduction of payment of Stamp Tax/Seal Tax for promoters who intend to construct/create establishments (or to readapt and remodel existing fractions) and not when it is a matter of mere acquisition of fractions (or lodging units) integrated in enterprises and intended for operation, even if they are acquired at a date prior to the very establishment/licensing of the enterprise. VII – Whoever acquires the fractions does not become a co-financier of the enterprise, with responsibility for its establishment, since he is acquiring a tourist product that was placed on the market by the promoter, whether the acquisition is made off-plan or after the enterprise is established, as any final consumer, all the more so since the fractions can be acquired for their exclusive use and without any temporal limit (in the case of tourist enterprises constituted in plural ownership). VIII – Inasmuch as the acquisition of properties or of autonomous fractions intended for construction/establishment of tourist enterprises is not in question, but rather the acquisition of lodging units by final consumers, even though because integrated in the enterprise in question they are affected to tourist operation, the same cannot benefit from the exemptions enshrined in Article 20, No. 1, of Decree-Law No. 423/83. IX – This interpretive result is what results from the historical, rational/teleological and also literal element of the legal norms in question. X – Tax benefits are measures of exceptional character instituted for the protection of relevant extra-fiscal public interests and that are superior to those of taxation itself that they prevent (Article 2/1 of EBF) (...)" and although admitting extensive interpretation (Article 10 of EBF), the interpreter cannot consider legislative intent that does not have a minimum of correspondence in the letter of the law, even if imperfectly expressed (Article 9/2 of Civil Code), in addition to which because they represent a derogation from the rule of equality and the principle of contributive capacity that materially grounds taxes, tax benefits must be justified by a relevant public interest".

This tribunal adheres to the reasoning of the Uniformizing Decision No. 3/2013, and its respective conclusions. Moreover, it understands that, given the uniformization existing in jurisprudence and in accordance with the provision of No. 3 of Article 8 of the Civil Code[4], an identical solution would necessarily be imposed in the case sub judice.

It is to be noted that the Claimants bring no new grounds to the present case, having directed all their argumentation and production of evidence to attempting to demonstrate that their intervention, as well as that of the other buyers – payment of deposits and amounts paid for the fractions, as well as the cession of exploitation of the fractions, with severe restrictions on the free disposition of property – constituted an indispensable means to the viability of the enterprise, realizing the establishment, licensing as well as the functioning, through exploitation contracts with a view to achieving the tourist purpose and without which the status of tourist utility of the enterprise would not have been maintained.

But, as exhaustively analyzed in Uniformizing Decision No. 3/2013, the legislator, in establishing the exemption in No. 1 of Article 20 of Decree-Law No. 423/83, abstracted from the financing modalities adopted by promoters which, for the construction of enterprises, can use only own capital as well as resort to the product of the sale of future fractions, through the execution of promise of sale and purchase contracts.

In this latter case, the acquirers of the fractions do not become co-financiers of the enterprise, with responsibility for establishment, since they are investing in real estate products within the scope of the so-called residential tourism as any final consumer, whether the acquisition is realized off-plan or after the enterprise is installed/constructed. "In fact, when individuals acquire the fractions they do so as consumers of a tourist product. The objective that motivates individuals is the realization of their own investment, and they may also choose to be users of the enterprise[5] or to cede the operation, participating in the results of the same (cf. No. 4 of Article 45 of Decree-Law No. 39/2008). For although it is considered that the fractions become affected to operation, nothing prevents the same from being occupied exclusively by their respective owners and for an indefinite period, as derives, in a clear manner, from legal provisions, such as those contained in Articles 45, No. 1, of Decree-Law No. 39/2008".

"The promoters of enterprises are solely responsible for the real estate investment, with the risk of the same falling upon them, as well as for the obtaining of the necessary licenses to make them able to function and operate. The tax benefit only has justification regarding those who carry out the establishment of the enterprise and put it on the market and not in relation to all those who use and operate it, even though through the purchase of its units."

Indeed, however innovative the model used by the enterprise promoters may have been, the Claimants are fundamentally income-producing property owners. They opted for an investment in a tourist enterprise, but this did not mean, even though the financing method chosen by the promoting company was based on the very early commercialization of the fractions and that subsequently the operation of the property is carried out in an integrated manner[6], the transformation of real estate property owners into investors/promoters of enterprises qualified as having tourist utility, covered by the tax benefits provided for in No. 1 of Article 20 of Decree-Law 423/83[7].

14.3. As to the Invoked Irrevocability of Administrative Act

The Claimants argue that having the acquisition been effected in the light of information from the selling entity that the transmission would benefit from IMT exemption and this having been confirmed by the Notary who executed the respective deed and by the Registrar of the Real Estate Registry, the principles of legal certainty and security are put in question.

They further argue that the present assessment could not occur because it would mean the revocation of an administrative act granting tax benefits, in violation of Articles 140 and 141 of CPA, and Article 12, No. 4, of EBF, in particular as to the period for revocation of the act.

14.4. Intervention of the Notary and the Registrar of the Real Estate Registry

At the time of the deed of acquisition of the fraction, Article 49 of the Real Estate Transfer Tax Code (under the heading "Cooperation obligations of notaries and other entities") provided in No. 1: "When IMT is due, notaries and other officials or entities performing notarial functions cannot draw up deeds, any other notarial instruments or private documents that operate transmissions of immovable property, nor proceed to the recognition of signatures in the contracts provided for in paragraphs a) and b) of No. 3 of Article 2, without being presented with the declaration referred to in Article 19 accompanied by the corresponding proof of collection, which they shall file, making mention thereof in the document to which they relate, whenever the assessment must precede the transmission" and in No. 3: "Where automatic exemption or exemption dependent on prior recognition is applicable, the entities referred to in No. 1 must verify and note the exemption or require the document evidencing such recognition, which they shall file".

And No. 4 of the same article provided "Notaries must send to the General Directorate of Taxes, on computer media, in the terms and periods provided for in the Notary Code, the following elements: a) A list of acts or contracts subject to IMT, or exempt therefrom, executed in the notes books in the preceding month, containing, regarding each of those acts, the number, date and importance of the collection documents or the reasons for the exemption, names of the parties, matricular articles and respective parishes, or mention of the omitted properties (...)" .

On the other hand, Article 50 (acts relating to immovable property subject to registration) of CIMT provides: "No fact, act or legal transaction relating to immovable property subject to registration can be permanently registered without proof that the IMT that is due has been paid". And Article 54 (Supervisory obligations of public authorities in general): "Compliance with the obligations imposed by this instrument is supervised, in general, and within the limits of their respective competence, by all authorities, local authorities, public departments and legal entities of public utility, and in particular, by the General Directorate of Taxes" (No. 1).

It follows from these normative provisions that if the notary, at the moment of execution of a notarial deed, did not require the prior assessment of the tax by accepting the interpretation that a tax benefit applied, did the practice of an administrative act, subject to the revocation restrictions provided for in CPA and EBF, occur? And that the intervention of the Registrar, taking the deed as a basis, constituted an administrative act, confirmatory of the legality of the prior act?

CIMT is very clear in qualifying the intervention of the notary and other public authorities as "cooperation" with the tax administration – it is a matter of verifying (supervising) whether tax was paid or whether the requirements provided for in exemption norms are invoked.

In the case at hand, at the date of the deed, No. 3 of Article 49 provided, alternatively, two situations of exemption: whereas in situations dependent on prior recognition the notary had to require the document evidencing such recognition (by the competent services of the tax administration, it is clear) which he filed, in cases of automatic exemption, it said "the entities referred to in No. 1 must verify and note the exemption".

Does this mean that notaries were attributed competence to interpret and apply tax norms, in all cases where the enjoyment of a tax benefit did not depend (as in the case of Article 20, No. 1, of Decree-Law 423/83) on prior official recognition?

At that time Article 10 of CIMT also said, in No. 1 that: "Exemptions are recognized at the request of the interested parties, to be presented before the act or contract that gave rise to the transmission to the competent services for decision, but always before the assessment that would be carried out" but in the following numbers it distinguished various situations, corresponding to the exemptions provided for in Articles 6 to 9, some concerning the intervention of various entities in the procedure and others of automatic recognition[8].

With the wording given by Law No. 64-A/2008, of 31/12/2009, which approved the State Budget for 2009), Article 10 more fully distinguishes cases of exemptions of prior recognition and of automatic recognition, including in No. 8, exemptions contained in legislation outside this code, as exemptions of automatic recognition, with the competence for their verification and declaration falling to the finance service where the declaration provided for in No. 1 of Article 19 is presented.

And Article 43 now provided (in accordance with the provision of No. 8 of Article 10) that where an exemption applies, the entities referred to in No. 1 must note the exemption and require the evidencing document which they file[9].

The IMT exemption provided for in Article 20 of Decree-Law No. 423/83 is, precisely, a case provided for in legislation outside this code maintained in force after the approval of the Property Taxation Reform[10].

From the combination of the norms referred to, and despite the initial wording of Article 10, in force at the time of the deed in the case at hand, not expressly mentioning the manner of action in the case of exemptions provided for in external laws, there does not result the attribution to the Notary of competence for the practice of tax acts of exemption recognition.

As to the intervention of the registrar of the real estate registry[11], his intervention is, in these cases, "merely subsidiary, dispensing with any additional proof, when the very title (notarial deeds and equivalent documents) already makes mention of payment, being equally dispensed with any proof when the title makes reference to the recognition of the exemption or to the filing of documents that recognized it (see Article 49")"[12].

As to the notary, the tribunal considers that the interpretation most consonant with the set of norms referred to and their insertion in the legal system (Article 9 of the Civil Code) is that, falling to that entity the verification of the requirements for the application of the exemption norm, it should gather the necessary elements for the qualification of the situation, accepting the declarations and characterization made by the parties to the transaction[13]. Were it to be revealed a more complex situation, dependent on interpretation of tax norms, the notary should, in the absence of specific competence in tax matters, request prior clarification of the situation from the competent services or adequately highlight such cases in the list sent subsequently to the Tax Administration.

Not being perceived, by either the notary or the parties, of an erroneous legal characterization, taxpayers remain subject to possible detection of improper treatment as an exemption, the situation being subject to subsequent assessment.

This is what happened. The AT, detecting through tax inspection that the transmission of property corresponded to an acquisition of a fraction in a tourist enterprise, whose promotion had belonged to the selling company, understood that to the tax situation corresponded not an exemption but rather assessment of IMT, having considered applicable the provision of Article 45, No. 1 in fine of LGT, combined with No. 1 of Article 35 of CIMT, exercising the right to assess the tax within eight years from the said transmission, which took place without any tax assessment.

Against this action the Claimant invokes, as legal reasoning, the irrevocability of the tax act but such argument does not hold because according to the tribunal's analysis no tax act of exemption recognition was practiced.

It is to be emphasized that the argumentation of the Claimants, including as to the irrevocability of the act, is grounded in the nature of an objective tax benefit acquired at the moment of acquisition by the meeting of formal and substantive requirements for its granting and in the invoked prevalence of the principle of good faith over the principle of legality. And this does not hold, for the reasons already set forth.

Thus, the petition is considered without merit.

III. DECISION

1. In view of the foregoing, the present Arbitral Tribunal decides:

a) To declare without merit the petition for declaration of illegality of the IMT assessment of 22/11/2013 (DUC ...), as it does not recognize the existence of violation of Article 20, No. 1, of Decree-Law No. 423/83, of 05/12, nor of Article 141 of CPA;

b) To condemn the Claimants to pay the costs of the present case.

1. Value of Case and Costs

The value of the case is fixed at €24,379.88 (twenty-four thousand three hundred and seventy-nine euros and eighty-eight cents) pursuant to Article 97-A, No. 1, of CPPT, applicable by force of Article 29, No. 1, a) of RJAT and Article 3, No. 2, of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).

The amount of costs is fixed at €1,530.00, to the charge of the Claimants and calculated in accordance with Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, all in accordance with Articles 12, No. 2, and 22, No. 4, of RJAT and Article 4 of RCPAT.

Let it be notified.

Lisbon, 10 October 2014.

The Arbitrator

Maria Manuela Roseiro

Text prepared by computer, pursuant to No. 5 of Article 131 of CPC, applicable by reference of paragraph e) of No. 1 of Article 29 of Decree-Law No. 10/2011, of 20/01.

The wording of this decision follows the old orthography.