IMT Exemption for Real Estate Investment Funds: Tacit Revocation of Tax Law (CAAD 149/2018-T)

ARBITRAL DECISION

I – Report

1. The taxpayer A... – Open Real Estate Investment Fund, with tax identification number ..., represented by the management company B... – Real Estate Investment Funds Management Company, S.A. (hereinafter "Applicant"), filed on 26 March 2018, a request for the establishment of a Collective Arbitral Tribunal, pursuant to article 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter "RJAT"), in which the Tax and Customs Authority (hereinafter "TA" or "Respondent") is named.

2. The Applicant requests an arbitral ruling on the illegality of the acts of assessment of IMT (Municipal Tax on Real Estate Transfers):

1. no. ..., in the amount of € 100,402.51 (one hundred thousand four hundred and two euros and fifty-one cents), assessed and paid on 27.12.2017 with payment deadline of 28.12.2017;

2. no. ..., in the amount of € 874,597.51 (eight hundred and seventy-four thousand five hundred and ninety-seven euros and fifty-one cents), assessed and paid on 27.12.2017 with payment deadline of 28.12.2017;

3. no. ..., in the amount of € 543,064.57 (five hundred and forty-three thousand and sixty-four euros and fifty-seven cents), assessed and paid on 27.12.2017 with payment deadline of 28.12.2017;

4. no. ..., in the amount of € 392,413.21 (three hundred and ninety-two thousand four hundred and thirteen euros and twenty-one cents), assessed and paid on 27.12.2017 with payment deadline of 28.12.2017;

5. no. ..., in the amount of € 315,979.96 (three hundred and fifteen thousand nine hundred and seventy-nine euros and ninety-six cents), assessed and paid on 27.12.2017 with payment deadline of 28.12.2017;

6. no. ..., in the amount of € 113,542.33 (one hundred and thirteen thousand five hundred and forty-two euros and thirty-three cents), assessed and paid on 27.12.2017 with payment deadline of 28.12.2017.

1. These assessments, totalling € 2,340,000.09 (two million three hundred and forty thousand euros and nine cents), would violate article 1 of Decree-Law no. 1/87, of 3 January, and should therefore be annulled, with reimbursement of the amount of tax paid, plus compensatory interest calculated from the date of the improper payments to the date of issuance of the respective credit notes.

2. The request for the establishment of the Arbitral Tribunal was accepted by the esteemed President of CAAD and automatically notified to the TA.

3. The Deontological Council appointed the arbitrators of the Collective Arbitral Tribunal, who communicated acceptance of the appointment within the applicable timeframe, and notified the parties of this appointment.

4. The Collective Arbitral Tribunal was constituted on 7 June 2018; it was properly constituted and is materially competent.

5. Pursuant to article 17 of the RJAT, the TA was notified on 12 June 2018 to submit its response.

6. The TA submitted its Response on 29 August 2018.

7. In that response, the TA alleges, in summary, the total lack of merit of the Applicant's request.

8. The Arbitral Order of 3 October 2018 dispensed with the meeting provided for in article 18 of the RJAT, established a timeframe for arguments, and set 27 November 2018 as the deadline for issuing and notifying the final arbitral decision.

9. The Applicant submitted its written arguments on 29 October 2018 and attached a copy of the arbitral decision issued in the CAAD arbitral process no. 188/2018-T in which it was also the Applicant and which concerned tax acts of a nature analogous to those now under discussion.

10. The Respondent did not submit arguments.

11. The parties have legal personality and capacity and have standing.

12. The TA proceeded with the appointment of its representatives in the proceedings and the Applicant provided a power of attorney, with the parties thus being duly represented.

13. The proceedings do not suffer from any nullities and no further previous or subsequent questions, prejudicial or exceptional, exist that would prevent consideration of the merits of the case, with conditions being met for a final decision to be issued.

II – Factual Basis

II.A. Facts considered proved and relevant to the decision

1. The Applicant represents an alternative Collective Investment Organism (CIO), real estate-based, open in the contractual form of an Open Real Estate Investment Fund (FIIA), in accordance with the classification of the general CIO regime, approved by Law 16/2015 of 24 February, established by authorization from the Real Estate Markets Commission dated 6 June 2005.

2. This Fund commenced operations on 15 July 2005, with its management entrusted to the joint-stock company "B... – Real Estate Investment Funds Management Company, S.A.", and its assets comprising urban properties, or their autonomous fractions, intended for resale or economic exploitation, through lease or other form of onerous exploitation.

3. On 28 December 2017, the management company of the Fund entered into a purchase, sale and mortgage contract with the joint-stock commercial company C..., S.A., with tax identification number ..., through which the Applicant acquired for the Fund it represents the full ownership of the autonomous fractions designated by the letters: "A", "B", "C", "D", "E", "G", "H", "J", "K", "L", "M", "N", "O", "P", "Q", "R", "S", "T", "U", "V", "X", "Y", "Z", "AA", "AB", "AC", "AD", "AE", "AF", "AG", "AH", "AI", "AJ" and "AK", all of the urban property designated as lot number 1 (commercially designated as "...") located in ..., parish and municipality of ..., described in the Land Registry Office of ... under number ..., and registered in the respective urban property matrix of the parish of ... under article ... .

4. For the purpose of acquiring these assets, the Applicant completed and submitted the respective declarations for IMT assessment (Model 1), on the basis of which the TA calculated tax in the total amount of € 1,365,000.00 (one million three hundred and sixty-five thousand euros).

5. On 28 December 2017, the management company of the Fund entered into a purchase, sale and mortgage contract with the joint-stock commercial company D..., S.A., with tax identification number ..., on the basis of which the Applicant acquired for the Fund it represents the full ownership of the autonomous fractions of the urban property designated as lot 32, located in ..., parish and municipality of ..., described in the Land Registry Office of ... under number ..., and registered in the respective urban property matrix under article ...:

i. for the price of € 1,544,654.00 (one million five hundred and forty-four thousand six hundred and fifty-four euros), the autonomous fraction designated by the letter "A";

ii. for the price of € 2,923,616.00 (two million nine hundred and twenty-three thousand six hundred and sixteen euros), the autonomous fraction designated by the letter "B";

iii. for the price of € 256,660.00 (two hundred and fifty-six thousand six hundred and sixty euros), the autonomous fraction designated by the letter "C";

iv. for the price of € 2,217,529.00 (two million two hundred and seventeen thousand five hundred and twenty-nine euros), the autonomous fraction designated by the letter "E";

v. for the price of € 1,447,910.00 (one million four hundred and forty-seven thousand nine hundred and ten euros), the autonomous fraction designated by the letter "F";

vi. for the price of € 1,408,202.00 (one million four hundred and eight thousand two hundred and two euros), the autonomous fraction designated by the letter "G";

vii. for the price of € 247,636.00 (two hundred and forty-seven thousand six hundred and thirty-six euros), the autonomous fraction designated by the letter "H";

viii. for the price of € 1,862,681.00 (one million eight hundred and sixty-two thousand six hundred and eighty-one euros), the autonomous fraction designated by the letter "I";

ix. for the price of € 1,763,410.00 (one million seven hundred and sixty-three thousand four hundred and ten euros), the autonomous fraction designated by the letter "J";

x. for the price of € 599,957.00 (five hundred and ninety-nine thousand nine hundred and fifty-seven euros), the autonomous fraction designated by the letter "K";

xi. for the price of € 457,007.00 (four hundred and fifty-seven thousand and seven euros), the autonomous fraction designated by the letter "L";

xii. for the price of € 270,738.00 (two hundred and seventy thousand seven hundred and thirty-eight euros), the autonomous fraction designated by the letter "M".

1. For the purpose of acquiring these assets, the Applicant completed and submitted the respective declarations for IMT assessment (Model 1), on the basis of which the TA calculated tax in the total amount of € 975,000.02 (nine hundred and seventy-five thousand euros and two cents).

II.B. Facts considered not proved

Based on the documentary evidence made available in the proceedings and consensually accepted by the parties, with interest for the decision of the case, nothing remained unproven. There is no controversy regarding the factual matter.

III – Legal Basis

III.A. Position of the Applicant

a) The Applicant begins by alleging that the IMT assessments are illegal because they disregard what is established in article 1 of Decree-Law no. 1/87, of 3 January: "acquisitions of immovable property made for a real estate investment fund by its respective management company are exempt from Sisa (Transfer Tax)".

b) In the Applicant's view, this regime, which emerged in the development of Decree-Law no. 246/85, of 12 July, which regulated the activities of real estate investment funds, was maintained in force by article 31, 6 of Decree-Law no. 287/2003, of 12 November, which reformed the taxation of assets, approving the new Codes of Municipal Tax on Real Estate (CIMI) and Municipal Tax on Onerous Transfers of Real Estate (CIMT).

c) From this, the Applicant deduces that acquisitions of immovable property carried out by a management company of a real estate investment fund with the intention of these assets becoming part of that fund, with the fund as the acquirer, continue to be exempt from IMT under the regime established in Decree-Law no. 1/87, of 3 January.

d) This is also because there was no express revocation of Decree-Law no. 1/87, of 3 January, and this decree did not provide for any temporary validity. Nor does it accept that a tacit revocation can be seen in the circumstance that article 46 of the Tax Benefits Statute (EBF), introduced by the State Budget Law for 2007 (Law no. 53-A/2006, of 29 December), came to establish an IMT exemption for properties integrated in open real estate funds.

e) It applies to the hypothesis of revocation the criteria contained in article 7, 2 of the Civil Code, which restrict the possibilities of revocation to the following circumstances: a) Express declaration of revocation; b) Incompatibility between the new provisions and the preceding rules; c) The new law regulates the entire matter of the previous law.

f) From this it concludes that:

a. the IMT exemption introduced in article 46 of the EBF by the 2007 State Budget Law did not proceed to the express revocation of the exemption provided for in Decree-Law no. 1/87;

b. there is no incompatibility between the rule of Decree-Law no. 1/87 and that of article 46 of the EBF, since in its view they refer to different taxpayers and apply to different moments – the first to Funds as acquirers, the second to Funds as alienators (of assets in their patrimony).

c. article 46 of the EBF did not come to regulate all (or even part) of the matter contained in article 1 of Decree-Law no. 1/87, instead introducing a new exemption that subsists alongside the already existing one, which remains unchanged.

g) In support of its understanding, the Applicant emphasizes that successive amendments to article 46 of the EBF, subsequently renumbered to article 49 and later revoked, never made mention of Decree-Law no. 1/87 and its article 1.

h) The Applicant concludes that, since the exemptions – from the EBF and Decree-Law no. 1/87 – are substantially and structurally different and independent from one another, they cannot be considered contrary, contradictory or logically irreconcilable, and therefore the IMT exemption provided for in article 1 of Decree-Law no. 1/87 was in force and applied to acquisitions of immovable property by the Applicant.

i) The Applicant further claims compensatory interest for the improper payment of tax, pursuant to article 100 of the LGT, and on the basis of article 43, a of the same LGT.

j) In Arguments, the Applicant reiterates the arguments presented in the Request for Arbitral Ruling, to conclude that the interpretation assumed by the TA in its Response errs and that the exemption remains in force to the present.

III.B. Position of the Respondent

a) In its Response, the Respondent maintains the understanding that the assessment in dispute constitutes a correct application of Law, not suffering from any defect.

b) In fact, the TA argues that, with the amendment introduced by Law no. 53-A/2006, of 29 December, no. 1 of article 46 of the EBF came to provide for the exemption from IMT, in addition to IMI, which it had previously provided; and that this implied the revocation of article 1 of Decree-Law no. 1/87.

c) That is, in its interpretation, paragraphs a) and j) of article 88 of Law no. 53-A/2006, of 29 December, which amended article 46 of the EBF, established the applicable transitional regime: paragraph a) maintaining, in its respective terms, the right to tax benefits constituted prior to the date of entry into force of the amendment; and paragraph j) establishing that those amendments applied to funds that would be established after the date of 1 November 2006 – meaning that the new regime applies only to properties integrated after the date of entry into force of the new law, even if the funds had been established before its entry into force; and that therefore the EBF, with respect to the IMT exemption, would use the assumption of integration of properties in the fund, referring to their future integration, and not to properties already integrated prior to the date of entry into force of the law.

d) On the other hand, the Respondent rejects, as contrary to the letter and spirit of the law, the interpretation claiming that article 46, 1 of the EBF establishes an IMT exemption for acquisitions of properties in which those funds appear as alienators. The provision of IMT in article 46, 1 of the EBF would not, therefore, imply any expansion of tax benefits, compared to what was provided for in article 1 of Decree-Law no. 1/87, particularly because its purpose would have been only to eliminate the abusive use of tax benefits.

e) Therefore, having article 46 of the EBF come to regulate the tax benefits of IMT in acquisitions of immovable property by investment funds, thus regulating the same matter, this would result in the tacit revocation of article 1 of Decree-Law no. 1/87, of 3 January (neither of the norms being in force, since article 49 of the EBF, which succeeded article 46, was revoked by Law no. 7-A/2016, of 30 March).

f) The Respondent did not submit arguments.

IV. On the Merits of the Case

1. The question to be decided is, therefore, whether article 1 of Decree-Law no. 1/87 was or was not revoked, particularly by Law no. 53-A/2006, of 29 December.

2. This question has already been addressed, among others, by the decisions of CAAD in processes no. 544/2016-T, 677/2016-T, 440/2017-T, 547/2017-T, 580/2017-T, 622/2017-T and 188/2018-T. We shall not lose sight of the general principle enshrined in article 8, 3 of the Civil Code: "In the decisions it pronounces, the judge shall take into consideration all cases that merit analogous treatment, in order to obtain an interpretation and uniform application of the law".

3. Articles 7, 1 and 2 of the Civil Code establish that: "1. When not intended to have temporary validity, a law ceases to be in force only if revoked by another law. 2. Revocation may result from express declaration, from incompatibility between the new provisions and the preceding rules or from the circumstance that the new law regulates the entire matter of the previous law."

4. On the one hand, no temporary validity was provided for in article 1 of Decree-Law no. 1/87, so the eventual cessation of its validity can only result from revocation by another law, as follows from no. 1 of this article 7 of the Civil Code.

5. On the other hand, there was no express revocation, particularly before or with the approval of the EBF, by Decree-Law no. 215/89, of 1 July. The approval of the EBF was preceded by a comprehensive review of tax benefits, which was initiated by Law no. 2/88, of 26 January (State Budget 1989), which in its article 49 revoked various tax benefits, including the one provided for in article 7 of Decree-Law no. 1/87, but not the one provided for in article 1, which is at issue here. The list of expressly revoked tax benefits was completed by Decree-Law no. 485/88, of 30 December, which also does not include the tax benefit provided for in that article 1 of Decree-Law no. 1/87.

6. After the approval of the EBF, there is also no law that expressly revokes that article 1 of Decree-Law no. 1/87. Specifically, express revocation was proposed by the Government in article 81, 3, of the Draft State Budget Law for 2007 (Draft Law no. 99/X), in a list of tax benefits to be revoked, but was not included in the approved budget law (Law no. 53-A/2006, of 29 December), although the express revocation of other tax benefits was maintained in its article 87.

7. It is, therefore, unequivocal that it was not intended to expressly revoke article 1 of Decree-Law no. 1/87.

8. In the absence of express revocation, the revocation of that article 1 of Decree-Law no. 1/87 can only result from tacit revocation, resulting from "incompatibility between the new provisions and the preceding rules or from the circumstance that the new law regulates the entire matter of the previous law".

9. As for tacit revocation, let us note that the EBF, in its initial wording, did not include any norm on taxes on assets relating to real estate investment funds, so it cannot be understood to have regulated the entire matter of the "previous law".

10. Decree-Law no. 189/90, of 8 June, added article 56 to the EBF, establishing that "properties integrated in real estate investment funds are exempt from municipal contribution". Law no. 39-B/94, of 27 December, amended the wording of this article to "properties integrated in real estate investment funds and equivalent, in pension funds established in accordance with national legislation and in pension savings funds are exempt from municipal contribution". With the renumbering carried out by Decree-Law no. 198/2001, of 3 July, this article 56 was renumbered as article 46.

11. Law no. 32-B/2002, of 30 December, gave article 46 the following wording: "Properties integrated in real estate investment funds and equivalent, in pension funds and in pension savings funds, which are established and operate in accordance with national legislation are exempt from municipal contribution".

12. With Law no. 53-A/2006, of 29 December, article 46 of the EBF came to encompass tax benefits in the field of IMT, relating to properties integrated in real estate investment funds. The wording became as follows: "1 - Properties integrated in real estate investment funds, in pension funds and in pension savings funds that are established and operate in accordance with national legislation are exempt from municipal tax on real estate (IMI) and municipal tax on onerous transfers of real estate (IMT). 2 - Real estate integrated in mixed or closed real estate investment funds with subscription by unqualified investors or by financial institutions on their behalf do not benefit from the exemptions referred to in the previous number, with IMI and IMT rates reduced to half."

13. With Decree-Law no. 108/2008, of 26 June, this article 46 of the EBF was renumbered as article 49, and this was successively amended by Law no. 3-B/2010, of 28 April, by Law no. 55-A/2010, of 31 December, by Law no. 83-C/2013, of 31 December, and came to be revoked by Law no. 7-A/2016, of 30 March.

14. In any of the aforementioned versions, article 49 only refers to properties integrated in real estate investment funds, with no reference to IMT relating to their acquisition. In this context, it cannot be understood that tacit revocation of article 1 of Decree-Law no. 1/87 occurred, since any subsequent law did not regulate the entire matter provided for therein, particularly that relating to benefits for acquisition of immovable property by real estate investment funds.

15. On the other hand, no norm is found to be incompatible with that tax benefit, and it should be recognized that, while the IMT exemption provided for in no. 1 of Decree-Law no. 1/87 applies to situations in which the Fund is in the capacity of acquirer, the exemption of article 46 of the EBF applies to situations in which the Fund is in the position of alienator, selling immovable property that already forms part of its patrimony – meaning, therefore, that acquisitions of immovable property made for an investment fund to which article 1 of Decree-Law no. 1/87 refers do not come under the provision of article 46 of the EBF.

16. Moreover, the existence of benefits relating to the acquisition of immovable property concurrently with benefits relating to their transfer is expressly provided for in the regime of incentives for urban rehabilitation, in paragraphs b) and c) of article 45 of the EBF, in the wording introduced by Law no. 114/2017, of 29 December (and was previously provided for in no. 2 of article 45 and in no. 8 of article 71), which demonstrates that, from the legislative perspective, there is no obstacle to the accumulation of benefits.

17. There is, therefore, no incompatibility of benefits for acquisition of immovable property with benefits for their transfer, so the regime of the aforementioned article 46 is not incompatible with the maintenance of the exemption for the acquisition of immovable property by real estate investment funds.

18. It will be concluded that article 46 of the EBF does not regulate the entire matter of exemptions for real estate investment funds, and it is perfectly acceptable that it introduced a new exemption that does not tacitly revoke the previously existing one. As was concluded in a previous arbitral decision, "the exemptions under analysis are substantially and structurally different and independent from one another, and cannot by any means be considered contrary, contradictory or logically irreconcilable. And much less can they be considered legally and economically incompatible. One retains its own utility independently of what may happen to the other".

19. It must be concluded that article 1 of Decree-Law no. 1/87, of 3 January, was not tacitly revoked, nor globally revoked, nor was it revoked at the time when the acquisitions in question were made (without forgetting that, in accordance with article 5, 1 of the IMT Code, the incidence of IMT is regulated by the legislation in force at the time when the tax obligation is constituted, article 2 establishing that this is constituted at the moment when the transfer occurs). A conclusion reinforced by the fact, already mentioned, that express revocation of Decree-Law no. 1/87 was included in the proposal for the State Budget Law for 2007, and the proposal was not approved, corroborating the conclusion that it was not intended to revoke its article 1.

20. Consequently, the assessments challenged suffer from the defect of violation of law that justifies their annulment, pursuant to article 163, 1, of the Code of Administrative Procedure, subsidiarily applicable pursuant to article 2, c), of the LGT.

V – On Compensatory Interest

1. In addition to the declaration of the illegality of the assessment, the Applicant further petitions that it be recognized the right to compensatory interest, a matter that falls within the competence of this Tribunal, as expressly provided for in no. 5 of article 24 of the RJAT.

2. The process of judicial challenge, although essentially a process of annulment of tax acts, admits the condemnation of the TA for payment of compensatory interest, as can be inferred from article 43, 1, of the LGT, which establishes that "compensatory interest is due when it is determined, in an administrative claim or judicial challenge, that there was error attributable to the services from which resulted payment of the tax debt in an amount exceeding that legally due", and from article 61, 4, of the CPPT, which establishes that "if the decision that recognized the right to compensatory interest is a judicial one, the payment period is counted from the beginning of the period for voluntary compliance".

3. Once the illegality of the assessment is determined and its consequent annulment, and with the improper tax debt having been paid, the right to compensatory interest subsists, whenever this results from error attributable to the services of the TA, as provided for in no. 1 of article 43 of the LGT.

4. In the present case, we are faced with an assessment determined by the TA which proved to be legally unjustified, not by any act or procedure of the Applicant, but by an erroneous understanding regarding the assumptions of the assessment – an understanding sustained by the TA itself.

5. It is therefore considered that an error attributable to the services has been verified, with the consequent obligation to pay compensatory interest, pursuant to article 43, 1 and 2, of the LGT and article 61 of the CPPT.

6. Compensatory interest is, therefore, due, at the legal supplementary rate, on the amount improperly assessed and paid, calculated from the day following the day of improper payment to the date of issuance of the respective credit note.

VI. Decision

In accordance with the foregoing, this Arbitral Tribunal agrees to:

a) Judge the request for arbitral ruling as well-founded, regarding the annulment of the assessments;

b) Annul the assessments no. ...; ...; ...; ...; ...; and ...;

c) Judge the request for restitution to the Applicant of the amounts paid, in the total amount of € 2,340,000.09 (two million three hundred and forty thousand euros and nine cents), as well-founded and condemn the Tax and Customs Authority to effect this payment;

d) Judge the request for compensatory interest as well-founded and condemn the Tax and Customs Authority to pay to the Applicant, interest calculated on these amounts until their reimbursement, pursuant to articles 43, 4, and 35, 10, of the LGT, article 559 of the Civil Code and Ordinance no. 291/2003, of 8 April.

VII. Value of the Proceedings

The value of the proceedings is fixed at € 2,340,000.09, in accordance with the provisions of article 97-A of the CPPT, applicable ex vi article 29, no. 1, paragraph a), of the RJAT and article 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).

VIII. Costs

Costs charged to the Tax and Customs Authority, given that the present request was judged well-founded, in the amount of € 30,294.00, in accordance with Table I of the RCPAT, and in compliance with the provisions of articles 12, no. 2, and 22, no. 4, both of the RJAT.

Lisbon, 16 November 2018

The Arbitrators

José Poças Falcão
(President)

Mariana Vargas

Fernando Araújo