Process: 138/2014-T

Date: September 12, 2014

Tax Type: IUC

Source: Original CAAD Decision

Summary

CAAD Process 138/2014-T addressed the liability for IUC (Imposto Único de Circulação - Unique Circulation Tax) on vehicles under financial leasing agreements in Portugal. BANK A, S.A., a credit institution specializing in automobile financing, challenged multiple IUC tax assessments issued by the Tax and Customs Authority for vehicles registered in its name but subject to financial lease contracts. The central legal issue concerned whether the lessor (financial institution) or the lessee should bear IUC liability when vehicles are under locação financeira arrangements. Under typical financial leasing structures, the bank acquires vehicles selected by customers, delivers them to lessees who maintain temporary possession through rental payments, and retains ownership until the lessee exercises the purchase option by paying the residual value. The vehicles in question were registered in the bank's name during the relevant tax periods, though lessees subsequently exercised purchase options in various years between 2009-2012. Critically, these vehicle transfers were not recorded in the motor vehicle register during the years corresponding to the challenged assessments. The bank paid the disputed assessments under Decree-Law 151-A/2013's exceptional regime, paying only the principal tax amount without compensatory interest. The arbitration tribunal was constituted under Decreto-Lei 10/2011 (RJAT - Legal Framework for Arbitration in Tax Matters), establishing CAAD's material competence to adjudicate IUC disputes. This case highlights fundamental questions about IUC liability allocation in financial leasing contexts, the interpretation of vehicle registration requirements under Portuguese tax law, and the availability of tax arbitration as a dispute resolution mechanism for circulation tax assessments.

Full Decision

ARBITRAL DECISION

CAAD: Tax Arbitration

Case No. 138/2014 – T

Matter: IUC – financial lease

I – REPORT

BANK A, S.A., legal person number…, with registered office at …, number ..., … (hereinafter "Claimant"), filed a petition for the constitution of an arbitral tribunal in tax matters and a petition for an arbitral award, 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 Framework for Arbitration in Tax Matters, abbreviated as RJAT), requesting the declaration of illegality of the following assessments of Unique Circulation Tax: …, …, …, …, …, …, …, …, …, …, …, …. , …, …, …, …., …., …., …., …., …. , … , …. , …. , …. , .. , … , … , …. , … ,… , … , … , … , … , … , … , … , … , … , …. , … , … , … , … , … , … , … , … , … , … , … , … , … , … , … , … , … , … , … , … , … , … , … , … , … , … , … , … , … .

The petition for the constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 18-02-2014.

Under the terms provided in article 6, no. 2, a) and article 11, no. 1, b), of the RJAT, as amended by article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council designated the undersigned as arbitrator of the singular arbitral tribunal, who communicated acceptance of the assignment within the applicable time limit.

On 04-04-2014 the parties were duly notified of this designation, and did not manifest any desire to refuse the designation of the arbitrator, under the combined terms of article 11, no. 1, a) and b) of the RJAT and articles 6 and 7 of the Code of Ethics.

Thus, in accordance with the provisions of article 11, no. 1, c) of the RJAT, as amended by article 228 of Law No. 66-B/2012, of 31 December, the singular arbitral tribunal was constituted on 22-04-2014.

The Tax and Customs Authority responded, arguing that the petition should be ruled unfounded.

Given that none of the purposes legally assigned to it were present in the case, the parties waived the holding of the meeting provided for in article 18 of the RJAT, which was thus dispensed with.

The parties, as they expressed their wish, submitted written arguments, reaffirming their respective positions.

The arbitral tribunal was regularly constituted and is materially competent, according to the provisions of articles 2, no. 1, a), and 30, no. 1, of Decree-Law No. 10/2011, of 20 January.

The parties enjoy legal personality and capacity, are legitimate and are represented (articles 4 and 10, no. 2, of the same decree and article 1 of Order No. 112-A/2011, of 22 March).

The case is not affected by nullities and no exceptions were raised.

Thus, there is no obstacle to the consideration of the merits of the case.

Everything considered, it is necessary to render

II. DECISION

A. MATTERS OF FACT

A.1. Facts deemed proved

1- The Claimant is a credit institution with strong presence in the national market.

2- In its areas of activity, automobile sector financing is included.

3- A substantial part of its activity consists of the celebration – among others – of financial lease contracts intended for the acquisition, by companies and individuals, of motor vehicles.

4- These contracts generally follow a common script, typical of this type of financing: the Claimant, after being contacted by the customer – who, at that stage, has already chosen the type of vehicle it intends to acquire, its characteristics (make, model, accessories, etc.), and even its price – acquires the vehicle from the supplier indicated to it by the customer, and subsequently proceeds to its delivery to the said customer – who thus assumes the status of lessee.

5- During the period to be stipulated in the contract, this lessee maintains temporary enjoyment of the vehicle – which remains the property of the Claimant – by means of remuneration to be paid to the Claimant in the form of rents; being able to acquire the vehicle, for itself or for a third party, at the end of the contract, by payment of a residual value, or during its term, under the conditions provided for.

6- The motor vehicles referred to in the assessments which are the object of the present case, with the registration numbers … , … , … , … , … , … , … , … , …, … , … , … , … , … , … , … , … , … , were, in the tax periods to which they referred, registered in the name of the Claimant.

7- The vehicles identified above, in the periods of the assessments which are the object of the present case whose tax period commenced on a date prior to the date of their respective sale indicated below were always assigned by the Claimant, under a financial lease regime, pursuant to validly celebrated contracts.

8- The lessees of the aforementioned motor vehicles decided to exercise their purchase option, against payment of the countervalue contractually due.

9- Thus, the vehicles in question were sold in the following years:

                                                          i.      …. – 2012;

                                                        ii.      … – 2009;

                                                      iii.      … – 2009;

                                                      iv.      … – 2010;

                                                        v.      … – 2009;

                                                      vi.      … – 2011;

                                                    vii.      … – 2012;

                                                  viii.      …– 2009;

                                                      ix.      … – 2009;

                                                        x.      … – 2011;

                                                      xi.      …– 2009;

                                                    xii.      … – 2009;

                                                  xiii.      … – 2012;

                                                  xiv.      … – 2012;

                                                    xv.      … – 2010;

                                                  xvi.      … – 2010;

                                                xvii.      … – 2010;

                                              xviii.      … – 2011.

10- The motor vehicles subsequently identified were sold, not to the previous lessees, but to third parties, by indication of those: …, … and … .

11- The alienations of the vehicles in question were not recorded in the motor vehicle register, in the years to which the assessments in question in the present case refer.

12- The Claimant proceeded, in a timely manner, to the payment of the assessments which are the object of the present case.

13- By having proceeded to its payment under the exceptional regime instituted by Decree-Law 151-A/2013, the Claimant only paid the amount due (and contained in the aforementioned assessment acts) as tax, having been dispensed from the payment of the corresponding compensatory interest.

A.2. Facts deemed not proved

With relevance to the decision, there are no facts that should be considered as not proved.

A.3. Substantiation of the matters of fact proved and not proved

Regarding the matters of fact, the Tribunal does not need to rule on everything that was alleged by the parties, but rather has the duty to select the facts that matter for the decision and to discriminate the proved from the not proved matter (see article 123, no. 2, of the Tax Procedure and Process Code and article 607, no. 3 of the Civil Procedure Code, applicable by virtue of article 29, no. 1, a) and e), of the RJAT).

In this way, the facts relevant for judging the case are chosen and delimited according to their legal relevance, which is established in view of the various plausible solutions of the legal question(s) (see former article 511, no. 1, of the Civil Procedure Code, corresponding to the current article 596, applicable by virtue of article 29, no. 1, e), of the RJAT).

Thus, taking into account the positions assumed by the parties and the documentary evidence attached to the case, the above-listed facts were deemed proved, with relevance to the decision, facts that were moreover consensually recognized and accepted by the parties, with the exception of the facts referred to in items 9 and 10, which the Respondent contests.

Regarding these latter facts, the Tribunal formed its conviction based on the available documentary evidence, freely assessed, taking into account a judgment of normality founded on the common experience of things.

Indeed, as the sales invoices were available, as well as the financial lease contracts of the vehicles in question (whose normal purpose is precisely the transfer of ownership of the vehicle by the lessor at the end of the contract), and taking into account that it would not be at all normal for the invoices in question to actually be issued (and the Respondent does not contest that they were), with the Claimant bearing the VAT and corresponding income increase, to mask a fictitious transaction for purposes that cannot be guessed (and which the Respondent does not even suggest), no reasonable doubt remained for this Tribunal with respect to the actual occurrence of the sale of the vehicles, in the terms deemed proved.

There was also considered the circumstance that the line of business of the Claimant – which is public and notorious – has no room for the systematic retention of second-hand vehicles.

The content of article 16 of the initial petition was not deemed proved or not proved, given its conclusory nature.

B. ON THE LAW

The question at issue in the case is to ascertain whether the Claimant should, or should not, be considered a taxpayer of IUC, regarding vehicles which it acquired and regarding which it celebrated a financial lease (Leasing) contract, and which it alienated without such operation having been duly recorded in the register, taking into account two distinct periods, namely:

i) In the tax periods in whose initial day the lease contract was in force;

ii) In the tax periods subsequent to the one in which the alienation – not recorded – of the vehicle occurred, and where the said contract had already ceased to exist.

The matter in question has already been the subject of several decisions within the scope of arbitral tribunals functioning within CAAD[1], all[2] in the sense of the granting of the respective petitions, and whose grounds are generally adhered to, dispensing, as unnecessary and tedious, with their reproduction, given that no innovative arguments were advanced in the present case, formulating only the clarifications that follow.

i)

Article 3 of the IUC Code provides that:

"1- The taxpayers of the tax are the owners of vehicles, being considered as such the natural or legal persons, of public or private law, in whose names they are registered.

2 - Financial lessees, purchasers with retention of title, as well as other holders of purchase option rights by virtue of the lease contract are equated to owners."

Article 4 of the same Code states that:

"1 - The unique circulation tax is of annual periodicity, being due in full in each year to which it refers.

2 - The tax period corresponds to the year which begins on the date of registration or on each of its anniversaries, in relation to vehicles of categories A, B, C, D and E, and to the calendar year, in relation to vehicles of categories F and G."

Finally, article 6, also of the IUC Code, tells us that:

"1 - The taxable event of the tax is constituted by ownership of the vehicle, as attested by the registration or registration in national territory. (...)

3 - The tax is considered due on the first day of the tax period referred to in no. 2 of article 4."

From the combination of the referred standards, and taking into special consideration no. 3 of article 6, it is concluded that IUC will be an annual tax, which becomes due on the first day of the tax period, and the taxpayer thereof will be the owner of the vehicle, or those equated to the owner.

In the present case, it is verified that, in the first group of cases at hand, the owner of the vehicle was the Claimant.

However, it is also verified that the vehicles in question, in the period now at issue, were assigned to third parties, pursuant to financial lease contracts.

Thus, the conditions of both no. 1 and no. 2 of article 3 of the IUC Code are verified.

The question that then arises is whether the verification of that no. 2 does or does not eliminate the tax status resulting from no. 1.

Being not a question of linear solution, and as arguments can be elaborated in either of the possible directions of answer, it is understood that the answer to be given should be affirmative, that is, in the case of the existence of one "equated" to owner, the tax status of the latter (of the owner) will be eliminated, with only the "equated" being a taxpayer of the tax.

This answer is considered to be imposed, it is believed, essentially and furthermore, for reasons of coherence of the system, taking into account, above all, that in the case of IMI (see article 8/2 and 3) the tax status of non-owner eliminates the tax status of the owner.

Thus, despite the distinct – and perhaps not entirely felicitous – terminology used in the IUC Code, taking into account the interpretation criteria formulated in article 9 of the Civil Code, and especially the lack of reasons for a reasonable legislator to regulate in distinct terms the equation to ownership in cases of IUC and IMI, it is understood that, indeed, the definition of the taxpayer of that tax will be made, alternatively (and not cumulatively), under the terms of no. 1 or no. 2 of article 3 of its respective Code.

This understanding is further reinforced by the obligation enshrined in article 19 of the IUC Code, which imposes "on entities that proceed to financial leasing" the obligation "to provide to the General Tax Directorate the data relating to the tax identification of users of leased vehicles." Naturally, this obligation will only be understood, from the perspective that the leasing entities see their tax status eliminated by virtue of the lease, since, if it were not so, the latter would not make sense, as the AT could always collect the tax in question from the lessor, an entity which will, moreover and as a rule, be more solvent than the lessee.

Thus, with the vehicles in question in a financial lease regime, the taxpayer of the respective IUC will be the lessee, under the terms of no. 2 of article 3 of the IUC Code, and not the Claimant, as owner, under the terms of no. 1 of the same article.

This conclusion is not obstructed by the circumstance, mentioned by the AT in its arguments, that the Claimant may not have given due compliance with the above-referred article 19 of the IUC Code. Indeed – and as is clear – the sanction for non-compliance with any obligation that might lie or lay on the claimant in that regard would always have to be sought under the regime of Tax Violations, and not, naturally, in subjection to a tax.

Thus and in view of the foregoing, the assessments referred to in this part were made in error of law, and should, as such, be annulled.

ii)

As for the second group of situations – which refers to the tax periods subsequent to the one in which the alienation, not recorded, of the vehicle occurred – the question that arises is whether, as the transfer of ownership from the Claimant to the purchasers of the vehicles was not recorded, the Claimant should, or should not, be considered a taxpayer of the corresponding IUC.

We are here beyond the term of the financial lease contract, in a situation in which only the application of the already transcribed no. 1 of article 3 of the IUC Code is at issue, and not its no. 2.

Specifically, it is a matter of ascertaining whether the legal provision that "The taxpayers of the tax are the owners of vehicles, being considered as such the natural or legal persons, of public or private law, in whose names they are registered" aims to burden, without more, with tax status, the holder of the registration on the vehicle, or whether, rather, this registration merely presumed ownership, the latter being the legal situation that is the object of the tax incidence.

Granting that the legislative formulation is not here, once again, as felicitous as it could be, it is nonetheless understood that it will, indeed, be the ownership of the motor vehicle that is the object of the tax incidence, and IUC should not be considered as a "tax on registration"[3].

In this sense, moreover, and beyond everything that was very learnedly expounded in the decisions to which reference was here, opportunely, made, it suffices to see that registration is not the only index of ownership used in the Code. Thus, in article 6/1, also already transcribed, it is stated that "The taxable event of the tax is constituted by ownership of the vehicle, as attested by the registration or registration in national territory". That is, registration or registration will not, in themselves, be the object of the tax incidence, but rather mere means of attesting the ownership of the vehicles.

Thus, and establishing in the present case that, indeed, the vehicles to which the assessments in question refer, referring to periods subsequent to the term of the financial lease contracts that fell upon them, were sold by the Claimant, and thus, at the beginning of the periods in question, are not its property, the Claimant should not be subject to the corresponding IUC, and these assessments should also be, given the error of fact and law that underlies them, annulled.

The Claimant combines, with the petition for annulment of the tax act which is the object of the present case, a petition for condemning the AT to payment of compensatory interest on the amount paid by it following notification of the assessments now annulled.

It is a prerequisite for the award of compensatory interest that the error in which the AT labored be imputable to it[4].

In the present case and in this regard, the Claimant states in its arguments that "the AT was not unaware that financial lease contracts had been celebrated – which, in addition to being registered, are communicated to the AT under article 19 of the IUC Code - at the moment when the tax was due, for which reason, even if eventually unaware that the latter had already ceased and the ownership of the vehicles transferred, it would no longer be the Claimant's responsibility for IUC, but that of the lessee".

However, in the present case, nothing was established either regarding the registration of the financial lease contracts, or regarding the Claimant's compliance with the obligation that was incumbent upon it, by virtue of article 19 of the IUC Code.

Treating such facts, of which the Claimant intends to avail itself, the same should have proceeded to its timely allegation and proof. Not having fulfilled this burden, nor resulting from any probative element available in the case, the same cannot be taken into account.

Thus, as it is not possible to formulate the judgment of censure indispensable to condemning the AT to compensatory interest, the corresponding petition should be dismissed.

The AT argues that it should not be held responsible for the costs of the present arbitral case, as it was the Claimant who gave cause to the action.

However, it does not appear that it is right.

Indeed, in the tax arbitral process the AT is notified of the arbitral petition and may, under the terms of article 13/1 of the RJAT, proceed to revoke the contested tax act. At the very least, the AT had knowledge of the grounds alleged by the Claimant, which led to the present arbitral decision, and opted to proceed with the litigious route.

Wherefore it should be held responsible for the costs.

C. DECISION

In these terms, this Arbitral Tribunal decides:

a) To rule the arbitral petition granted and, as a consequence, to annul the tax acts which are the object of the present case and to condemn the AT to refund to the Claimants the tax paid;

b) To absolve the AT from the petition for condemnation to pay compensatory interest;

c) To condemn the AT to payment of costs of the proceedings, in the amount of €612.00, taking into account that already paid.

D. Value of the Case

The value of the case is set at €2,920.89, in accordance with article 97-A, no. 1, a), of the Tax Procedure and Process Code, applicable by virtue of a) and b) of no. 1 of article 29 of the RJAT and no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is set at €612.00, under the Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, as the petition was entirely granted, under the terms of articles 12, no. 2, and 22, no. 4, both of the RJAT, and article 4, no. 4, of the cited Regulation.

Notify.

Lisbon

12 September 2014

The Arbitrator

(José Pedro Carvalho)

[1] See cases 14/2013T, 26/2013T, 27/2013T, 73/2013T and 170/2013T, 256/2013T, 286/2013T, 289/2013T and 294/2013T, all available at www.caad.org.pt.

[2] With the exception of the decision rendered in case 256/2013T, whose petition only partially succeeded.

[3] Which would always have to be concluded following the thesis sustained by the AT, given the inadmissibility of irrebuttable presumptions, in matters of tax incidence (as is the case), resulting from article 73 of the General Tax Law.

[4] See article 43 of the General Tax Law.

Frequently Asked Questions

Automatically Created

Who is liable for IUC (Imposto Único de Circulação) on vehicles under a financial leasing agreement in Portugal?
Under Portuguese tax law, IUC liability for vehicles under financial leasing agreements (locação financeira) generally follows vehicle registration. In CAAD Process 138/2014-T, the vehicles were registered in the lessor's name (BANK A, S.A.), making the financial institution the registered owner during the relevant tax periods. While the lessees had possession and use of the vehicles under lease contracts, the legal ownership remained with the bank until the purchase option was exercised. The key issue was whether registration alone determines IUC liability or whether actual possession and economic enjoyment by the lessee should be considered. The case involved vehicles where lessees exercised purchase options between 2009-2012, but these transfers were not recorded in the motor vehicle register during the years of the disputed assessments.
Can a leasing company challenge IUC tax assessments through CAAD tax arbitration?
Yes, leasing companies can challenge IUC tax assessments through CAAD (Centro de Arbitragem Administrativa) tax arbitration. In Process 138/2014-T, BANK A, S.A. successfully invoked CAAD's jurisdiction under Decreto-Lei 10/2011 (RJAT - Legal Framework for Arbitration in Tax Matters), specifically articles 2(1)(a) and 10(1)(a). The arbitration tribunal was constituted as a singular tribunal, with the arbitrator designated by the Deontological Council under article 6(2)(a) and article 11(1)(b) of RJAT. The tribunal confirmed its material competence to hear IUC disputes under articles 2(1)(a) and 30(1) of DL 10/2011. The case demonstrates that financial institutions engaged in vehicle leasing have standing to challenge circulation tax assessments through administrative arbitration, providing an alternative to traditional judicial appeals.
What is the legal basis for CAAD arbitration in IUC disputes under Decreto-Lei 10/2011?
The legal basis for CAAD arbitration in IUC disputes is established by Decreto-Lei n.º 10/2011, of 20 January, which created the Legal Framework for Arbitration in Tax Matters (RJAT). Article 2(1)(a) grants CAAD jurisdiction over disputes concerning 'the legality of acts of tax assessment,' while article 10(1)(a) governs petition requirements for arbitral tribunal constitution. Article 30(1) confirms CAAD's material competence for tax disputes. In Process 138/2014-T, the tribunal was constituted under article 11(1)(c) as amended by Law 66-B/2012 of 31 December. The procedural framework includes arbitrator designation by the Deontological Council (article 6(2)(a) and 11(1)(b)), party notification rights regarding arbitrator selection (articles 6-7 of the Code of Ethics), and the possibility of waiving oral hearings under article 18 when parties agree, as occurred in this case.
How does Portuguese tax law determine vehicle tax liability in financial leasing (locação financeira)?
Portuguese tax law determines vehicle tax liability in financial leasing primarily through vehicle registration records. The IUC Code establishes that the registered owner is typically liable for circulation tax. In locação financeira arrangements, the lessor (financial institution) acquires the vehicle from the supplier indicated by the customer, delivers it to the lessee who gains possession and use rights through rental payments, but retains legal ownership until the purchase option is exercised. Process 138/2014-T illustrates the complexity: vehicles were registered in the bank's name during the disputed tax periods, but lessees had possession under valid lease contracts and later exercised purchase options. However, these sales were not recorded in the motor vehicle register during the relevant assessment years. This temporal mismatch between economic reality (lessee possession/subsequent purchase) and legal formality (registration in lessor's name) created the liability dispute. The determination of who bears IUC obligations depends on interpreting whether registration formalities or economic substance should prevail.
What was the outcome of CAAD Process 138/2014-T regarding IUC on leased vehicles?
While the complete decision text is not provided in the excerpt, Process 138/2014-T demonstrates that BANK A, S.A. challenged the legality of multiple IUC assessments for vehicles under financial lease contracts. The bank argued it should not be liable for IUC on vehicles that were assigned to lessees under valid financial lease agreements, particularly where lessees subsequently exercised purchase options. The Tax and Customs Authority defended the assessments, arguing the petition should be ruled unfounded. The case proceeded to written arguments after parties waived the oral hearing under article 18 RJAT. Notably, the bank had already paid the disputed assessments under the exceptional regime of Decreto-Lei 151-A/2013, which allowed payment of only the principal tax amount without compensatory interest. The arbitral tribunal confirmed its jurisdiction and competence, found no procedural obstacles, and proceeded to analyze the merits, examining the allocation of IUC liability in financial leasing contexts where vehicle registration and economic possession diverge.