Process: 16/2017-T

Date: August 23, 2017

Tax Type: IMT

Source: Original CAAD Decision

Summary

In CAAD Arbitration Case 16/2017-T, the tribunal examined whether property acquired from an insolvency estate qualifies for IMT (Municipal Tax on Onerous Transfers of Real Property) exemption under Article 270(2) of the CIRE (Insolvency and Business Recovery Code). The Claimant company purchased mixed real property for €140,000 from the insolvency proceedings of two natural persons (a married couple) and initially received IMT exemption. However, the Tax Authority subsequently issued an additional IMT assessment, arguing that Article 270(2) CIRE exemption does not apply to acquisitions from insolvent natural persons without business activity, only to transfers of business establishments or companies. The Claimant contested this interpretation on multiple grounds: constitutional violation of Article 165(2) CRP regarding parliamentary tax reservation; breach of legitimate expectations and legal certainty principles; lack of proper reasoning in the assessment; and improper revocation beyond the statutory one-year period under Article 141 CPA. The Claimant argued the legislative intent behind CIRE's exemption regime was to incentivize creditor recovery and ensure state participation in insolvency burdens, maintaining the exemptions previously established under CPEREF Article 121(2)(c). The case raised fundamental questions about the scope of tax exemptions in insolvency contexts, the limits of tax authority discretion in revoking previously granted exemptions, and procedural safeguards for taxpayers. Additionally, the Claimant sought compensatory interest for unduly paid taxes. This decision has significant implications for real estate transactions within Portuguese insolvency proceedings and establishes important precedents regarding IMT exemption applicability and the Tax Authority's power to reverse exemption determinations.

Full Decision

ARBITRAL DECISION

1. Report

A - General

1.1. The company A…, S.A., with registered office at …, n.º…, …-… Porto, registered at the Commercial Register Office under the single registration number and legal person … (hereinafter referred to as "Claimant"), filed, on 04.01.2017, a request for the constitution of a singular arbitral tribunal in tax matters, which was accepted, seeking, on the one hand, the declaration of illegality of the tax act of additional assessment of Municipal Tax on Onerous Transfers of Real Property (hereinafter "IMT"), relating to real property which it acquired, as will be better seen below and, on the other hand, the recognition of the right to compensatory interest for the payment of an unduly paid tax obligation.

1.2. Under the terms of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of Decree-Law no. 10/2011, of January 20, in the version given to it by article 228 of Law no. 66-B/2012, of December 31 (hereinafter, "RJAT"), the Deontological Council of the Administrative Arbitration Center (CAAD) designated the undersigned as arbitrator, with the parties, after being duly notified, having raised no objection to such designation.

1.3. By order of 20.01.2017, the Tax and Customs Authority (hereinafter referred to as "Respondent") proceeded to designate Ms. Dr. B… and Ms. Dr. C… to intervene in the present arbitral proceedings, in the name and representation of the Respondent.

1.4. In accordance with what is prescribed in paragraph c) of no. 1 of article 11 of RJAT, the arbitral tribunal was constituted on 21.03.2017.

1.5. On the same day 21.03.2017 the senior official of the Respondent's services was notified to send to the Arbitral Tribunal a copy of the administrative file that might exist and, if desired, within a period of 30 days, to present a reply and request the production of additional evidence.

1.6. On 27.04.2017 the Respondent presented its reply.

B – Position of the Claimant

1.7. The Claimant, on 04.10.2011 acquired the mixed real property situated at Rua …, …, …, parish of…, municipality of Leiria, described at the … Real Property Registration Office of Leiria under number … and registered in the real property matrix of the said parish, under articles … (urban) and … (rural) (hereinafter, "Property") within the scope of the Insolvency Proceedings of D… and wife E….

1.8. The Property was acquired by the Claimant for the amount of € 140,000.00 (one hundred and forty thousand euros).

1.9. The purchase and sale deed of the Property states that the acquisition mentioned in 1.7 is beneficiary of the IMT exemption under the terms of article 270 of the Insolvency and Business Recovery Code (hereinafter, "CIRE").

1.10. The benefit of the exemption is stated in the respective IMT assessment (assessment number …).

1.11. The Claimant was, however, notified of the additional IMT assessment now being challenged, as the Respondent understands that the said acquisition cannot benefit from the said IMT exemption.

1.12. The Claimant argues that the exemption established in no. 2 of article 270 of CIRE, within the scope of the insolvency or payment plan or executed within the liquidation of the insolvent estate, exempts IMT from the transfer of real property transmitted by sale or exchange even when not integrated in the sale, exchange or assignment of the company or establishment.

1.13. Such understanding expresses the express intention of the legislator, on the one hand, to create incentives for the recovery of income for the creditors and, on the other hand, that the State should equally participate in the common sacrifice associated with an insolvency, and it is certain that the greater the tax burden in the acquisition of assets from the insolvent estate the lower the income received by the respective creditors.

1.14. Furthermore, in no. 49 of the preamble of the diploma approving CIRE it can be read that "the existing regimes in CPEREF regarding the exemption of fees and tax benefits are maintained, in essence", providing paragraph c) of no. 2 of article 121 of the Code of Special Proceedings for Business Recovery and Bankruptcy ("CPEREF") the exemption from Sisa for situations equivalent to the one now being claimed.

1.15. Thus, the interpretation that the Respondent makes of no. 2 of article 270 of CIRE is unconstitutional by violation of no. 2 of article 165 of the Fundamental Law, which is why the additional IMT assessment now being challenged is invalid.

1.16. Furthermore, the Respondent failed to prove the verification of the assumptions on which the tax liability depends, which is why there is not even any tax event, and the Respondent, by force of the Constitution, cannot create taxes.

1.17. The Claimant also advocates that the assessment immediately being challenged suffers from the vice of lack of reasoning, in violation of what is provided in no. 3 of article 268 of CRP, in articles 124 and 125 of CPA and in article 77 of LGT, also violating the principle of good faith provided for in article 59 of LGT and the legitimate expectations and guarantees of the Claimant previously established, the principles of confidence and legal certainty, peculiar to a Rule of Law, as well as the principles of tax legality, non-retroactivity of tax law and legal certainty to which articles 12 of LGT, 12 of the Civil Code and 103 of CRP appeal.

1.18. Lastly, the Claimant notes that the Respondent promoted the revocation of the exemption and that such revocation could only be accomplished within 1 year after it was granted (articles 141, no. 1 of CPA and 58 of CPTA).

C – Position of the Respondent

1.19. The Respondent understands that the acquisition of the Property by the Claimant is not exempt from IMT as no. 2 of article 270 of CIRE does not cover acquisitions made from insolvents who are natural persons and who do not engage in any business activity.

1.20. The argument that we are dealing with an illegal revocation by violation of articles 140 and 141 of CPA also does not proceed, since there is no act creating rights, as the legal assumptions on which the granting of the exemption depends are not met, therefore the tax authority could not but require the missing tax, provided that the deadline for the expiration of the right to assessment was met, which is what happened.

D – Conclusion of the Report and Case Management

1.21. By order of 17.07.2017 the Arbitral Tribunal dispensed with the hearing provided for in article 18 of the Legal Regime of Arbitration in Tax Matters (RJAT), as it understood that the Parties had already brought to the proceedings the necessary and sufficient factual elements for the pronouncement of the decision, which was expected to take place by 17.09.2017, with the parties being invited to present, if they wished, their arguments, which both did without minimally altering the positions assumed in the pleadings previously presented by each party.

1.22. The arbitral tribunal is materially competent, under the terms of what is provided in articles 2, no. 1, paragraph a) of RJAT.

1.23. The Parties enjoy legal personality and capacity and have standing under the terms of article 4 and no. 2 of article 10 of RJAT, and article 1 of Order no. 112-A/2011, of March 22, not suffering the proceedings from any nullity.

1.24. The joinder of claims made in the present request for arbitral ruling, in homage to the principle of procedural economy, is justified once article 3 of RJAT, by expressly allowing the possibility of "joinder of claims even if relating to different acts", accommodates, without hermeneutic abuse, the consideration of a claim that derives, in necessary terms, from the judgment that the arbitral tribunal sustains regarding the validity of the assessment immediately being challenged.

2. Factual Matters

2.1. Established Facts

2.1.1. The facts referred to in 1.7 to 1.11 are established.

2.1.2. The Property, at the date of acquisition by the Claimant, belonged to a natural person and was devoted to housing, the owner not being an individual entrepreneur who engaged in industrial, commercial or agricultural activity, in whose business the Property was integrated.

2.1.3. The Claimant paid the assessment referred to in 1.1 on 22.07.2016, in the amount of €2,283.84 (two thousand, two hundred and eighty-three euros and eighty-four cents), as evidenced by the document attached to the request for arbitral ruling as doc. 4 – sheet 2.

2.2. Unestablished Facts

There are no facts relevant to the appreciation of the merits of the case that have been established as unproven.

2.3. Reasoning for the Determination of Factual Matters

The facts were established on the basis of the documents submitted to the file by the Parties and the positions assumed by them in the pleadings presented.

3. Legal Matters

3.1. Issues to be Decided

It results from what has been said above that the issues to be considered are, essentially, two:

a) Whether the acquisition of the Property, having been accomplished within the scope of the insolvency proceedings of a non-entrepreneur and non-holder of a business in whose assets the Property was integrated, is or is not exempt from IMT under the terms of what is provided in no. 2 of article 270 of CIRE; and

b) To clarify whether, should the claim for declaration of illegality of the rejection of the administrative claim presented by the Claimant be judged founded with the consequent annulment of the IMT assessment immediately being contested, the Claimant, within the scope of the present arbitral proceedings may obtain the condemnation of the Respondent to pay compensatory interest relating to the amount it delivered to satisfy the tax obligation illegally required by it.

3.2. The IMT Exemption and Article 270 of CIRE

By Law no. 39/2003, of August 22, the Assembly of the Republic authorized the Government to approve the Insolvency and Business Recovery Code, repealing the Code of Special Proceedings for Business Recovery and Bankruptcy. In no. 3 of article 9 of the authorization diploma it can be read:

"3 — The Government is finally authorized to exempt from municipal transfer tax on real property the following transfers of real property, integrated into any insolvency or payment plan or carried out within the scope of the liquidation of the insolvent estate:

a) Those intended for the constitution of a new company or companies and the realization of its capital;

b) Those intended for the realization of the increase in capital of the debtor company;

c) Those arising from the assignment to third parties or the sale of shareholdings representing the capital of the company, the performance in satisfaction of company assets and the assignment of assets to creditors, the sale, exchange or assignment of the company, establishments or elements of its assets, as well as long-term leases;"

Consequently, and without affecting the said legislative authorization, article 270 of CIRE, with the wording at the date of acquisition of the Property, under the heading "Benefit relating to the municipal tax on onerous transfers of real property", provided as follows:

"1 - The following transfers of real property, integrated into any insolvency or payment plan, are exempt from municipal tax on onerous transfers of real property:

a) Those intended for the constitution of a new company or companies and the realization of its capital;

b) Those intended for the realization of the increase in capital of the debtor company;

c) Those arising from the performance in satisfaction of company assets and the assignment of assets to creditors.

2 - The acts of sale, exchange or assignment of the company or of its establishments integrated within the scope of an insolvency or payment plan or carried out within the scope of the liquidation of the insolvent estate are equally exempt from municipal tax on onerous transfers of real property."

The Parties, as has been seen, base their positions on the interpretation to be given to no. 2 of article 270 of CIRE.

It appears to result from the text of the norm to which we have been referring that the exemption from IMT is granted only to sales of real property of companies or of their establishments, provided they are integrated in the insolvency or payment plan or carried out within the scope of the liquidation of the insolvent estate, which excludes sales of real property that do not form part of the assets of companies, namely those that are the property of natural persons, not entrepreneurs or holders of companies.

A different interpretation, even if defensible from the point of view of law to be created, has no support in the literal content of the applicable provision, and therefore cannot be accepted.

It is worth noting the doctrine expounded in this regard in the Judgment of the Supreme Administrative Court of 25.09.2013, handed down in case no. 866/13, even though regarding Stamp Duty but with full application to the issue to be decided:

"In the case in question, we are only concerned with knowing whether the sale of a real property, which does not belong to a company nor was intended for the exercise of any business activity, but which was the property of a natural person and destined for housing, there being no evidence of its allocation to any business activity, can benefit from exemption from IS due to the fact that it was carried out in an insolvency process. The answer, in our view, can only be negative, as the situation is not subsumable to the provision of paragraph e) of article 169 of CIRE, which refers exclusively to the sale of 'elements of the company's assets'."

Thus, the learned judgment concludes that "I - In accordance with what is provided in article 269, paragraph e), of CIRE, sales of 'elements of the company's assets' are exempt from IS. II - Therefore, the said exemption does not cover the sale of urban real property intended for housing that belongs to a natural person, the fact that these are acts of sale carried out within the scope of the liquidation of the insolvent estate not being sufficient to benefit from that exemption, but rather it must be demonstrated that the sold property forms part of the assets of a company".

An identical understanding has equally been upheld in the decisions of CAAD, as can be verified from those handed down in cases 649/2015, 558/2015, 136/2016, 106/2016, 368/2016, 512/2016, 514/2016, 518/2016, 15/2017 and 23/2017. This is also the position of the arbitral tribunal.

The arbitral tribunal also does not see in what way one can argue that the interpretation that the Respondent makes of the norm in question, coinciding as was said with that assumed by this arbitral tribunal, constitutes the creation of a true tax or special contribution not permitted by law, since it is precisely in the law that such interpretation correctly finds its foundation.

Likewise, from the elements contained in the administrative file attached to the file, the arbitral tribunal understands that there is no lack of reasoning that can affect the act of assessment immediately being challenged, nor is there any evidence, minimal as it may be, that the principle of good faith, the previously established legitimate expectations and guarantees of the Claimant, the principles of confidence and legal certainty, as well as the principles of tax legality, non-retroactivity of tax law and legal certainty to which the LGT, the Civil Code and the Fundamental Law itself appeal, could have been affected. The Respondent, as was said, interprets correctly, and without any abusive extrapolations, no. 2 of article 270 of CIRE.

Finally, the Claimant understands that the revocation of the exemption could only be accomplished within 1 year after it was granted (articles 141, no. 1 of CPA and 58 of CPTA). It happens that we are not, in the proper sense, dealing with the revocation of an exemption. The tax benefit provided for in no. 2 of article 270 of CIRE is automatic, under the terms of what is provided in article 5 of EBF, being subject to inspection by the Directorate-General of Taxes and other competent entities, for control of the verification of the respective assumptions. That is precisely what the tax and customs authority did, under the combined terms of article 7 of EBF and no. 2 of article 31 of the Code of Municipal Tax on Onerous Transfers of Real Property.

3.3. Regarding Compensatory Interest

The act being challenged, as was attempted to be demonstrated, does not suffer from any illegality. Thus, the assumptions for compensatory interest to be paid do not exist.

Decision

In the terms and with the grounds exposed, the arbitral tribunal decides:

a) To judge the claim for declaration of illegality of the rejection of the administrative claim presented as unfounded, therefore maintaining the act of IMT assessment that gave rise to it;

b) To judge the claim for condemnation of the Respondent to pay compensatory interest as unfounded.

Value of the Proceedings

In accordance with what is provided in no. 2 of article 306 of CPC, in article 97-A of CPPT and also in no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at € 2,283.84 (two thousand, two hundred and eighty-three euros and eighty-four cents).

Costs

For the purposes of what is provided in no. 2 of article 12 and in no. 4 of article 22 of RJAT and in no. 4 of article 4 of the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is fixed at € 612.00 (six hundred and twelve euros), in accordance with Table I attached to the said Regulation, to be borne entirely by the Claimant.

Lisbon, August 23, 2017

The Arbitrator

_______________________________
(Nuno Pombo)

Text prepared by computer, under the terms of no. 5 of article 131 of CPC, applicable by referral of paragraph e) of no. 1 of article 29 of Decree-Law no. 10/2011, of January 20 and with the spelling prior to the said Orthographic Agreement of 1990.

Frequently Asked Questions

Automatically Created

Is the acquisition of property in insolvency proceedings exempt from IMT under Article 270 of CIRE?
Under Article 270(2) of CIRE, IMT exemption applicability depends on the interpretation of the provision's scope. The Tax Authority contends the exemption only applies when property transfers involve business establishments or companies, not acquisitions from insolvent natural persons without commercial activity. However, claimants argue the exemption should apply to all property sales within insolvency proceedings to facilitate creditor recovery and align with the legislative intent expressed in CIRE's preamble (paragraph 49) maintaining CPEREF's exemption regime. The arbitral tribunal must determine whether the exemption extends beyond business-related transfers to include all insolvency asset liquidations.
What are the conditions for IMT exemption when purchasing real estate from an insolvent estate in Portugal?
IMT exemption for insolvency property acquisitions requires: (1) the transfer occurs within formal insolvency proceedings under CIRE; (2) the sale is conducted through the insolvency administrator or approved payment plan; and (3) potentially, based on Tax Authority interpretation, the property must be integrated in a business establishment or company transfer rather than isolated asset sales from non-commercial insolvent debtors. The exemption aims to maximize creditor recovery by reducing transaction costs. However, disputes arise regarding whether acquisitions from individual insolvent debtors qualify, creating uncertainty for purchasers in insolvency auctions.
Can the Portuguese Tax Authority revoke an IMT exemption previously granted under the CIRE insolvency code?
The Tax Authority can challenge previously granted IMT exemptions through additional assessments if it determines the legal requirements were not met. However, this power faces several limitations: (1) formal revocation of administrative acts creating rights generally must occur within one year under Article 141 CPA; (2) principles of legal certainty, legitimate expectations, and good faith (Article 59 LGT) protect taxpayers who relied on initial exemption determinations; and (3) the Authority must provide adequate reasoning under Article 77 LGT. If no rights were actually created because legal prerequisites were absent, the Authority may issue corrective assessments within the standard limitation period, though taxpayers can challenge whether this constitutes improper retroactive application.
How does CAAD arbitration work for disputes over IMT tax assessments on insolvency property transfers?
CAAD (Administrative Arbitration Center) provides specialized arbitration for tax disputes under RJAT (Legal Regime of Arbitration in Tax Matters). For IMT assessment challenges: (1) taxpayers file arbitration requests within statutory deadlines; (2) the Deontological Council appoints an arbitrator; (3) the Tax Authority submits the administrative file and may present a defense within 30 days; (4) the tribunal is constituted once parties accept the arbitrator; (5) parties may request evidence and submit legal arguments; and (6) the arbitrator issues a binding decision within the prescribed timeframe. CAAD arbitration offers faster resolution than judicial courts and allows joinder of related claims, including compensatory interest requests, promoting procedural economy.
Are taxpayers entitled to compensatory interest when an unlawful additional IMT assessment is annulled?
Yes, taxpayers are entitled to compensatory interest when additional tax assessments are declared illegal and annulled. Under Portuguese tax law, when the Tax Authority collects taxes not legally due and courts or arbitral tribunals subsequently invalidate the assessment, the State must pay compensatory interest for the period the taxpayer was deprived of those funds. The interest rate and calculation method are established by LGT (General Tax Law). This right to compensatory interest represents an essential guarantee against unlawful taxation and compensates taxpayers for the financial burden of challenging erroneous assessments, serving as an accountability mechanism for improper tax administration actions.