IMT Exemption Under Article 270 CIRE for Property Acquired in Insolvency Proceedings – CAAD Decision 138/2016-T

Arbitral Award

The Arbitrators José Baeta de Queiroz (President), Mariana Vargas and Raquel Franco (Adjunct Members), appointed by the Deontological Council of the Administrative Arbitration Centre (CAAD) to form the collective arbitral tribunal constituted on 23-05-2016, decide as follows:

I. Report

On 07-03-2016, the company "A…, S. A.", NIPC …, filed a petition for constitution of a collective arbitral tribunal, pursuant to the joint provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter designated as "RJAT"), in which the Tax and Customs Authority (hereinafter, "AT") is the respondent.

The petition for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the AT on 18-03-2016, followed by the remaining legal procedures until the constitution of the collective arbitral tribunal, in accordance with the provisions of paragraph c) of item 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.

a) Object of the petition

The Petitioner requests that the tribunal declare the illegality of the tax assessment acts for Municipal Tax on Onerous Property Transfers ("IMT") Nos. …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, which it attached to the petition for arbitral pronouncement, and, consequently, that these be annulled and that the tax paid be restituted, plus compensatory interest, all pursuant to paragraph a) of item 1 of Article 2 of the RJAT.

b) Summary of the petition and response

The Petitioner is a credit institution whose business purpose consists of carrying out financial operations, under the provisions of Article 4 of the General Regime of Credit Institutions and Financial Companies, approved by Decree-Law No. 298/92, of 31 December.

In the context of its activity, the Petitioner acquired, within insolvency proceedings of various taxpayers, acting in its capacity as creditor thereof, the immovable property identified in the attached table as document 70.

Within the scope of these property acquisition operations, the IMT exemption provided for in Article 270 of the Insolvency and Company Recovery Code (CIRE) was automatically granted to the Petitioner, and no tax was assessed with respect to those acquisition operations[1]. Later, however, the Petitioner was notified of the Respondent's understanding regarding the alleged incorrect application of the aforementioned IMT exemption within the scope of those operations, according to which the Petitioner would have benefited "improperly" from the exemption in question inasmuch as, in the acquisitions of the immovable property in question, the necessary requirements for the application of item 2 of Article 270 of the CIRE were not met.

The Petitioner alleges that, having the acquisition of the properties been effected within the framework of the liquidation of a certain insolvent estate, it is covered by the IMT exemption provided for in item 2 of Article 270 of the CIRE.

The AT contends that this exemption covers all acts integrated within the scope of insolvency plans, or payment plans, or liquidation of the insolvent estate, with the reservation, however, that the object of the exempt transfer be the company or establishment and not one or two assets thereof considered in isolation.

II. Procedural Soundness

The Tribunal is competent and is regularly constituted, pursuant to Articles 2, item 1, paragraph a), 5 and 6, all of the RJAT.

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

The proceedings do not suffer from defects that would invalidate it.

The cumulation of claims is admissible pursuant to the provisions of item 1 of Article 3 of the RJAT, insofar as the arbitral pronouncement petition formulated, and its possible merits, depend on the assessment of the same factual circumstances and the interpretation and application of the same principles or rules of law, in the present case, item 2 of Article 270 of the CIRE.

III. Reasoning

III.1 Factual Matters

Before addressing the legal issues, it is necessary to present the factual matters relevant to their understanding and decision, which, having examined the documentary evidence and the administrative proceedings (PA) attached to the record and taking into account the facts alleged and not contradicted, is established as follows:

A) Proven Facts

The Petitioner is a credit institution whose business purpose consists of carrying out financial operations, under the provisions of Article 4 of the General Regime of Credit Institutions and Financial Companies, approved by Decree-Law No. 298/92, of 31 December.

The Petitioner was notified of 31 IMT assessments relating to the immovable property and within the scope of the insolvency proceedings identified below, which it paid on the dates indicated:

The Petitioner was a creditor of the insolvent taxpayers in the proceedings identified in the table above.

B) Unproven Facts

There are no facts with relevance to the case that have been considered unproven.

III.2 On the Law

The disputed issue in the present arbitral action concerns the interpretation of item 2 of Article 270 of the CIRE, specifically as regards whether all acquisitions of immovable property within the scope of insolvency and company recovery proceedings are exempt from IMT or only those that occur within the scope of the acquisition of companies or commercial establishments.

Current item 2 of Article 270 of the CIRE provides as follows:

"Also exempt from municipal tax on onerous property transfers are acts of sale, exchange or assignment of the company or of its establishments, integrated within the scope of insolvency plans, payment plans or recovery, or practiced within the scope of the liquidation of the insolvent estate"[2].

The Petitioner understands that this provision should be interpreted in the sense that IMT exemption is granted, on the one hand, within the scope of operations of full or partial acquisition of the company subject to the insolvency proceedings, and, on the other, to mere acts of acquisition of immovable property considered in isolation carried out in the liquidation phase of its assets. And it should be so, in its view, because the legislator, when establishing that fiscal benefit in respect of IMT within the scope of insolvency proceedings, aimed to enable the rapid and attractive sale of immovable property forming part of the debtor's assets, in order to satisfy the interests of creditors or to promote the recovery of the company, which is why it would be incongruous to exclude from the scope of the exemption acts of alienation of immovable property comprised in the insolvent estate of the company when it is a matter of an isolated sale. It further alleges that the approval of the CIRE, through Decree-Law No. 53/2004, of 18 March, aimed to carry out a structural reform of the company recovery and bankruptcy process – provided for in the Code of Special Procedures for Company Recovery and Bankruptcy ("CPEREF") – that would promote the streamlining and restructuring of asset liquidation and creditor payment procedures. In parallel with the creation of measures standardizing the different existing procedures, the new statute adopted a model based essentially on the primacy of the creditors' will in the conduct of the proceeding, an option that is evident from the very wording of Article 1 of the CIRE, which determines as the purpose of the insolvency proceeding "the satisfaction of creditors". To implement this objective, the legislator clarified that, if it is not possible to achieve it through the recovery of the company comprised in the insolvent estate, such objective should be obtained through "liquidation of the assets of the insolvent debtor and distribution of the proceeds among creditors" – cf. item 1 of Article 1 of the CIRE. Thus, and since the assets of debtors (insolvent) constitute the guarantee of satisfaction of existing claims, it shall be the responsibility of creditors to decide on the realization of that guarantee. Such realization may be made either through complete liquidation of the debtors' assets or through maintenance of the activity and consequent restructuring of the insolvent company, being "by this means that, surely, the public interest in preserving the proper functioning of the market is best satisfied" - cf. point 3 of the Preamble preceding the CIRE. With regard to the regulation of tax matters within the scope of the insolvency process, the basic principle of the prevalence of creditors' will is evident in the normative provisions relating to the attribution of "Emolument and Fiscal Benefits", provided for in Title XIII of the CIRE.

In the view of the AT, the provision in question only establishes IMT exemption for cases in which immovable property is acquired within the framework of a company or commercial establishment, and that the sale of property of the company, in isolation, is not covered by the exemption, being consequently subject to IMT under the general rules.

It is therefore necessary to decide.

The provision established in item 2 of Article 270 of the CIRE establishes a fiscal benefit. This qualification results from item 2 of Article 2 of the Statute of Fiscal Benefits ("EBF"), which provides that "fiscal benefits are exceptional measures instituted for the protection of relevant extra-fiscal public interests that are superior to those of taxation itself that prevent" (item 1) and that "fiscal benefits are exemptions, reductions of rates, deductions from the taxable base and the tax due, accelerated depreciations and reintegrations and other fiscal measures that comply with the characteristics enunciated in the preceding item" (item 2).

To the interpretation of tax provisions, the rules and general principles of interpretation of laws are applicable, in accordance with item 1 of Article 11 of the General Tax Law (LGT), namely Article 9 of the Civil Code (CC), with special emphasis, when doubt persists "about the meaning of the rules of applicability to apply", on the "economic substance of the tax facts" (cf. item 3 of Article 11 of the LGT). It is also important to reference Article 10 of the EBF, pursuant to which "the provisions establishing fiscal benefits are not susceptible to analogical integration, but admit extensive interpretation."

According to the general rules of legal hermeneutics, the letter of the law is the minimum limit of the interpretative task (in the sense that it is from the legislative text that one must start to determine the meaning of the provision), but also its maximum limit (in the sense that it is not possible to attribute to the provision a meaning that is not minimally provided for in its letter).

In the present case, starting from the literal element, the result of the interpretation is not univocal. Indeed, if on the one hand the provision in question refers to acts of sale of "company" and of "establishment", it is also true that it further includes operations of "exchange" or "assignment", which seem to open the door to transfers of something other than a company or establishment - inasmuch as exchanges of companies or establishments are not known - and that assignment, being onerous because only thus could IMT be applicable, does not have conceptual autonomy as against sale. Therefore, the literal element does not permit us to draw firm conclusions about which operations the legislator intended to include in the exemption provision. And, being so, Article 9, item 2, of the CC prescribes that the teleological, systematic and historical elements of the provision in question should be heeded as aids to the interpretative task.

As to the historical element, the CPEREF, the statute that preceded the CIRE, provided, in item 2 of Article 121, a surtax exemption for "transfers of immovable property, integrated in any of the company recovery measures, which result (…) from the sale, exchange or assignment of elements of the company's assets (…)". There was, therefore, no doubt that the exemption applied to the isolated sale of immovable property occurring within the scope of company recovery proceedings.

Subsequently, Law No. 39/2003, of 22 August, authorized the Government to legislate on the insolvency of natural and legal persons, repealing the CPEREF. The new legal regime should place emphasis on the satisfaction of creditors, whether through the liquidation of assets or through an insolvency plan (cf. Article 1, item 2, of Law No. 39/2003). As regards fiscal benefits, item 3 of Article 9 of Law No. 39/2003 authorized the Government "to exempt from municipal surtax the following transfers of immovable property, integrated in any insolvency or payment plan or carried out within the scope of the liquidation of the insolvent estate: (…) those resulting from (…) the sale, exchange or assignment of the company, establishments or elements of its assets (…)". Thus, Law No. 39/2003 was even more favorable to the transfer of immovable property included in the insolvent estate than the CPEREF in that it did not restrict the exemption from taxation to transfers of immovable property that could take place in a context of company recovery, extending it also to transfers that took place in a context of liquidation of the insolvent company or its establishments.

As to the teleological element, it is necessary to ascertain the reason for the IMT exemption provided for in item 2 of Article 270 of the CIRE and, specifically, whether this reason justifies the exemption of isolated property transfer operations or only those that take place in the broader context of the transfer of the company or establishment. Now, as to this aspect, the Supreme Administrative Court (STA) has had the opportunity on several occasions to clarify what should be understood as the ratio legis of the legal provision under analysis, with reference made here, by way of example, to the Decision of 17.12.2014, appeal 01085/13, in which that Court states that "account must be taken of the aim that the legislator intends to achieve with the granting of such exemption, - 'to promote and support the rapid sale of the property forming part of the insolvent estate for obvious reasons of interest to creditors, but also of the public interest in the resumption of the normal functioning of the business world in which each insolvency proceeding presents itself as a disturbing element', giving fiscal incentives to those who acquire the immovable property forming part of the insolvent estate and which will be sold in the liquidation phase. With no need to differentiate, for such purpose, situations in which the company as a whole is being sold with all its assets and liabilities, from situations in which one or more of the commercial establishments comprising it are being sold, or in which immovable property forming part of its assets is being sold. The objective pursued by the teleology of the provision will be equally pursued when the acquisition is of elements of the company's assets, it being unnecessary that the object be the company or establishments thereof integrated within an insolvency plan."[3]

Finally, it is also important to consider the systematic element to determine the meaning of the provision in question, above all because the IMT exemption provided for in item 2 of Article 270 of the CIRE is not the only one provided for property transfer operations that take place within the scope of the insolvency process, being accompanied by the exemption also of IMT provided for in item 1 of Article 270 of the CIRE and the exemption of stamp duty provided for in paragraphs d) and e) of Article 269 of the CIRE. It happens that both one and the other apply, clearly, both to the transfer of immovable property effected together with the company or establishment of which they form part, and to the isolated transfer of immovable property. Also from this perspective it therefore seems that the interpretation according to which the IMT exemption provided for in item 2 of Article 270 of the CIRE covers the transfer of immovable property when effected together with the company or establishment of which they form part or when effected in isolation is the most consonant with the overall spirit of the legal order.

In conclusion, facing the doubts raised by the lack of clarity of the verbal statement of the provision in question, recourse to the historical, teleological and systematic elements permits concluding with certainty that the IMT exemption provided for in item 2 of Article 270 of the CIRE applies, not only to the sales or exchanges of companies or establishments as a universality of assets, but also to sales and exchanges of immovable property (as elements of its assets), provided that they are framed within the scope of an insolvency or payment plan, or carried out within the scope of the liquidation of the insolvent estate.

This has also been the direction of the prevailing case law of the arbitral tribunals constituted at the CAAD, of which example is the award rendered in case No. 123/2015-T, of 01.09.2015, where it can be read, on the interpretation being defended here, that "Beyond this interpretation, permitted by the literal tenor of item 2 of Article 270 of the CIRE, being manifestly that which resonates with the teleology of the modality of exemption identified, which is to incentivize the acquisitions of assets of the insolvent company, in the case at issue the sale was carried out to creditors of the insolvent company, whereby one is faced with a situation whose economic substance is essentially identical to that of situations of dation in payment of assets of the company or of assignment of assets to creditors, which are expressly provided for in paragraph c) of item 1 of the same Article 270, as cases of IMT exemption. Therefore, in cases where the sale is carried out to creditors of the insolvent company, the economic substance, to which Article 11, item 3, of the LGT requires attention in the interpretation of tax rules of applicability, would always require that these situations be understood to be covered by the exemption, so that, if the situation does not fall within item 2 of Article 270 of the CIRE, it would always fall, by extensive interpretation, within item 1 of the same article."

It is thus concluded, in the same sense as the prevailing case law of the STA and the arbitral tribunals constituted at the CAAD, that is, that the provision established in item 2 of Article 270 of the CIRE covers operations of transfer of immovable property from the insolvent estate that take place in isolation, that is, not integrated in the transfer of the company or of a commercial establishment, as well as those that take place within the context of these broader transfers.

For the foregoing reasons, the assessment in question is defective due to an error as to the legal prerequisites, consisting of a violation of Article 270, item 2, of the Insolvency and Company Recovery Code, which justifies its annulment pursuant to the provisions of Article 135 of the Code of Administrative Procedure.

As to the petition for compensatory interest made by the Petitioner, Article 43, item 1, of the LGT establishes that "compensatory interest is due when it is determined, in gracious recourse or judicial contestation, that there was error attributable to the departments from which results payment of the tax debt in an amount greater than legally due". In the present case, it is proven that tax was paid in the total amount of € 557,471.45. On the other hand, the error affecting the assessment is attributable to the Tax and Customs Authority, which carried out the assessment act on its own initiative, despite the Petitioner having requested the exemption. From the combination of the two facts it follows that the Petitioner has the right to be reimbursed of the amount paid, pursuant to the provisions of Articles 100 of the LGT and 24, item 1, of the RJAT and, furthermore, to be indemnified for the improper payment through the payment of compensatory interest, by the Respondent, from the date of payment of the amount, 25-11-2014, until reimbursement, at the legal default rate, pursuant to the provisions of Articles 43, items 1 and 4, and 35, item 10, of the LGT, Article 559 of the Civil Code and Ordinance No. 291/2003, of 8 April.

IV. Decision

In accordance with the foregoing, the members of this Arbitral Tribunal agree to:

a) Judge totally well-founded the petitions for declaration of illegality and annulment of the additional IMT assessment acts challenged, in the amount of € 557,471.45;

b) Determine the reimbursement of the tax improperly paid, in the amount of € 557,471.45;

c) Condemn the AT to pay compensatory interest due from the date of payment of the tax until full reimbursement of the amount paid.

Case Value

In accordance with the provisions of Article 306, items 1 and 2 of the Code of Civil Procedure, approved by Law No. 47/2013, of 26 June, 97-A, item 1, paragraph a) of the Code of Administrative Procedure and Tax Procedure and Article 3, item 2, of the Regulation of Costs in Tax Arbitration Proceedings, the case value is fixed at € 557,471.45.

Costs

Pursuant to the provisions of Articles 12, item 2 and 22, item 4 of the RJAT and 2 and 4 of the Regulation of Costs in Tax Arbitration Proceedings and Table I attached thereto, the amount of costs is fixed at € 8,353.80, to be borne by the Respondent.

Notify.

Lisbon, 10.10.2016

José Baeta de Queiroz

(President)

Mariana Vargas

(Adjunct Member)

Raquel Franco

(Adjunct Member)

(Text prepared by computer, pursuant to Article 131, item 5 of the Code of Civil Procedure, applicable by reference of Article 29, item 1, paragraph e) of the Legal Regime of Arbitration in Tax Matters)

[1] IMT with two origins is involved:

• Assessed with reference to immovable property acquired within the scope of insolvency proceedings relating to legal entities, in the amount of € 509,438.99 and;
• Assessed with respect to immovable property acquired within the scope of insolvency proceedings relating to natural insolvent persons, who were configured as individual entrepreneurs, in the amount of € 48,032.46.

[2] Wording of Article 234 of Law No. 66-B/2012, of 31 December.

[3] See, in addition to this, the decisions of 03-07-2013, appeal 0765/13, of 11.11.2015, appeal 968/13, of 18.11.2015, appeals 01067/15 and 0575/15, respectively, of 16 December 2015, appeal 1345/15, and of 20 January 2016, appeal 1350/15, all at www.dgsi.pt.