CAAD 186/2018-T: Stamp Tax on Credit Assignment Under Verba 17.1 – Arbitral Decision

ARBITRAL DECISION

I. REPORT

1. The taxpayer A... - SGPS, S.A., with tax identification number ... (hereinafter referred to as "Claimant"), with registered office at Rua do..., n.º..., ..., filed, in accordance with the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011 of 20 January, i.e., Legal Framework for Arbitration in Tax Matters ("LFATM"), a request for constitution of an Arbitral Court to declare illegal the rejection of the Administrative Appeal filed with a view to annulling the Stamp Duty assessment for the fiscal year 2013, with the Tax and Customs Authority ("Respondent" or "TCA") as defendant.

A) Constitution of the Arbitral Court

1. In accordance with the provisions of paragraph (a) of Section 2 of Article 6 and paragraph (b) of Section 1 of Article 11 of the LFATM, the Ethics Council of the Administrative Arbitration Centre ("CAAD") appointed the undersigned as arbitrator of the singular court, who communicated acceptance of the appointment within the applicable period, and notified the parties of this appointment on 5 June 2018.

2. Thus, in compliance with the requirement set forth in paragraph (c) of Section 1 of Article 11 of the LFATM, and by means of communication from the President of the Ethics Council of CAAD, the Singular Arbitral Court was constituted on 25 June 2018.

B) Procedural History

1. In the request for arbitral decision, the Claimant petitions for the illegality of the rejection of the Administrative Appeal filed with a view to annulling the Stamp Duty assessment No. 2017..., together with the respective assessment of compensatory interest, which total the amount of Euro 1,866.14, issued in respect of the fiscal year 2013, and also petitions for reimbursement of the amount paid, as well as payment by the TCA of indemnification interest.

2. The TCA submitted a response, petitioning, in turn, for the dismissal of the request for arbitral decision, on the grounds that there is no violation of law, requesting that the tax act under analysis, as it does not violate any legal or constitutional provision, be maintained in the legal system.

3. By order of 23 November 2018, the Singular Arbitral Court, pursuant to the provisions of paragraph (c) of Article 16 of the LFATM, decided, without objection from the parties, that it was not necessary to hold the meeting referred to in Article 18 of the LFATM, as a result of the simplicity of the issues in question, and considering that it had at its disposal all the necessary elements to make a clear and impartial decision.

4. Having both parties, in the context of exercising the right of contradiction, opted to timely submit their additional pleadings, to which, however, no reference is required, as they merely reinforce the position already stated in the documents already submitted and under consideration by this Arbitral Court (i.e., the Request for Arbitral Decision and the Response).

5. The present Arbitral Court decided, in accordance with Section 2 of Article 18 of the LFATM, that oral arguments were not necessary, as the parties' positions were clearly defined in their respective pleadings, and it also dispensed, for the same reason, with the hearing of the witnesses cited by the Claimant.

6. Taking into account the above, this Arbitral Court set the deadline for the arbitral decision as 21 December 2018.

7. The Arbitral Court was regularly constituted and is competent to examine the issues indicated (Article 2, Section 1, paragraph (a) of the LFATM), the parties have legal personality and capacity and have full standing (Articles 4 and 10, Section 2 of the LFATM and Article 1 of Ordinance No. 112-A/2011 of 22 March). No nullities have occurred and no exceptions were raised, so nothing prevents judgment on the merits.

8. Thus, this proceeding is in a position to have a final decision rendered therein.

II. ISSUE TO BE DECIDED

1. The central issue to be examined and decided regarding the merits of the case, as it emerges from the parties' procedural documents, is whether Stamp Duty is due on the amount of the credit subject to assignment.

III. DECISION ON FACTUAL MATTERS AND ITS JUSTIFICATION

1. Having examined the documentary evidence produced, this court finds as established, with relevance to the decision of the case, the following facts:

I. The Claimant is a joint-stock commercial company whose activity concerns the management of equity interests in other companies, as an indirect form of conducting economic activities, being the parent entity of a group of companies.

II. The entities in which the Claimant holds interests are as follows: B... SGPS, S.A., C... – SGPS, S.A. and D... – SGPS, S.A.

III. In the context of an external audit with general scope, concerning the fiscal year 2013, the TCA found that two credit assignment contracts dated 30/09/2013 and 28/10/2013 were executed, in which the Claimant appeared as assignee.

IV. From the contract executed on 30/09/2013, it resulted that the now Claimant acquired a credit against the subsidiary B..., SGPS, S.A. in the amount of Euro 5,000,000 and a credit against E..., S.A. (an entity in which the now Claimant does not hold an interest), in the amount of Euro 1,327,709.50.

V. Following the aforementioned audit procedure, the Claimant was notified of the Draft Audit Corrections Report and reacted timely by exercising the Right to Prior Hearing against the corrections presented therein.

VI. Disregarding the arguments presented by the now Claimant in the Prior Hearing, the TCA proceeded to issue the Final Audit Report, from which corrections resulted in Corporate Income Tax ("CIT") and Stamp Duty.

VII. As justification for the corrections in Stamp Duty, the TCA argued, in summary, that the now Claimant should have assessed Stamp Duty on the amount of the credit assigned against E..., S.A., as this was not covered by any of the exemptions provided for financial operations in Article 7 of the Stamp Duty Code.

VIII. In this context, considering it to be a current account credit, the TCA applied the rate of 0.04% to the monthly average obtained by adding the amounts owed determined daily and dividing by 30.

IX. Not accepting the aforementioned assessments, the Claimant filed an administrative appeal, which was rejected.

X. Choosing to regularize her situation with the TCA, the Claimant made full payment of the unpaid tax, notwithstanding the fact that she is now requesting this Arbitral Court to decide on the illegality of the order rejecting the Administrative Appeal filed with a view to annulling the Stamp Duty assessment and respective compensatory interest, mentioned above, requesting reimbursement of the payment made plus indemnification interest.

1. The conviction of this court regarding the facts found as established resulted from documents attached to the file and from the uncontested allegations of the parties, as specified in the factual matters outlined above.

2. There are no material facts relevant to the decision of the case found as unproven.

IV. ON THE LAW

A) Legal Framework

1. Given that the legal issue to be decided in this proceeding requires interpretation of the relevant legal texts, it is necessary first to list the norms that compose the relevant legal framework as of the date of occurrence of the facts.

2. In this regard, given the subject matter of this case, attention must be paid to the wording of item 17.1 of the General Table of the Stamp Duty Code, which provided, as of the date of the facts, as follows:

"For the use of credit, in the form of funds, goods and other values, by virtue of the granting of credit in any manner except in the cases referred to in item 17.2, including credit assignment, factoring and treasury operations when they involve any type of financing to the assignee, adherent or debtor, considering, always, as new granting of credit the extension of the contract period - on the respective value, depending on the period:

(...)

17.1.4 - Credit used in the form of current account, bank overdraft or any other form in which the period of use is not determined or determinable, on the monthly average obtained by adding the amounts owed determined daily, during the month, divided by 30."

1. Indeed, the disputed issue in this case, as we shall set out below, concerns primarily the interpretation of the aforementioned normative provision in light of the specific case, in order to assess whether the present credit assignment falls within the scope of item 17.1 of the General Table of the Stamp Duty Code.

2. Keeping this legislative framework in mind, we shall now examine the arguments presented by the Parties.

B) Arguments of the Parties

1. In this Request for Arbitral Decision, the Claimant argues, in summary, that the Stamp Duty assessment that is now sought to be annulled suffers from illegality due to error in factual assumptions and violation of law, since no Stamp Duty is due on the amount of the credit subject to assignment to the now Claimant (the assignee in the contract).

2. Supporting her position, the Claimant contends that the credit assignment operation is not subject to Stamp Duty, in that the contract in question did not involve any type of financing to the assignee – the Claimant.

3. Additionally, there was no utilization of the credit by E..., S.A. either.

4. In parallel, the Claimant maintains that, even if it were understood that the credit assignment operation would be subject to Stamp Duty, this subjection would be for the use of the credit by the beneficiary (E..., S.A.), not for the granting of the credit.

5. The Claimant argues that "Indeed, in the credit assignment in question there was no financial flow (financing), but merely the assignment of a right to credit (...), with no current account credit existing between the Claimant and E..., S.A.." (Articles 20 and 21 of the Request for Arbitral Decision).

6. Thus, the now Claimant concludes that item 17.1 applies only when there is actual use of funds by the respective credit beneficiary (E..., S.A.), a circumstance that did not occur.

Therefore,

1. The Stamp Duty assessment reclaimed here suffers from error in factual assumptions and violation of law.

2. Finally, and on the grounds that an error attributable to the services occurred, the now Claimant requests that indemnification interest be charged to the TCA on the amount of tax paid.

3. For its part, the Respondent, duly notified for that purpose, submitted its Response in which, in summary, it maintained that the legislator intended to tax, under Stamp Duty, the credit, by virtue of its granting in any manner, including the assignment of credits.

4. The Respondent contends that, in credit assignment, the intention was to extend taxation "to the assignee, not excluding the assignor, whenever the assignment involves financing to one or the other as the case may be". Thus, the taxable event is not the assignment, but the financing associated with that financial operation." (Article 21 of the Response).

5. In this context, the Respondent understands that "when the assignor (D..., SGPS, S.A.) assigned to the Claimant (assignee) the credit in the amount of € 1,327,709.50, which it held against E... S.A. (debtor), and which the latter accepted, as mentioned in the contract of 30/09/2013, the Claimant obtained the right to receive from E... S.A. that amount, as mentioned in point III.2.1 of the audit report." (Article 26 of the Response).

6. The Respondent further notes that the credit is part of the Claimant's assets and is recorded under the heading "Other Financial Assets" in current account #27840001, therefore it is understood that in this credit assignment contract, there is an effective granting of a credit, subject to Stamp Duty.

7. Additionally, the Respondent states that, in light of paragraphs (g), (h) and (i) of Article 7 of the Stamp Duty Code, only financial operations are exempt from Stamp Duty when carried out by capital holders in favor of entities in which they hold a direct participation in the capital of at least 10%, which is not the case of the now Claimant regarding E..., S.A.

8. Finally, the Respondent concludes that the act of additional assessment in dispute in these proceedings does not suffer from any defect that jeopardizes its legality and validity, which is why there is no place for the payment of any indemnification interest.

C) Court's Assessment

1. As mentioned, in the view of this Arbitral Court, the issue to be decided concerns determining whether Stamp Duty is due on the amount of Euro 1,327,709.50, concerning the amount of the credit subject to assignment to the now Claimant, held against the company E..., S.A.

2. To answer this question, it will be necessary for this Arbitral Court to assess whether the aforementioned credit assignment is, or is not, within the scope of subjection of item 17.1 of the General Table of the Stamp Duty Code.

3. As a preliminary matter, it is necessary to clarify certain concepts. Thus, the assignment of credits, provided for in Articles 577 et seq. of the Civil Code, is legally defined as a gratuitous or onerous transaction, by which the creditor of an obligation (assignor) transfers, in whole or in part, to a third party (assignee), regardless of the consent of the debtor (obligor), his position in the obligational relationship, with all accessories and guarantees, save otherwise provided, without the extinction of the obligational bond.

4. This legal figure is not to be confused with subjective novation, since the assignment of credits does not create a new obligation, that is, the credit contract initially executed remains in force during the assignment.

5. There is, therefore, no place for a new credit, there is merely a succession of the right to credit, in the sense that the creditor of the obligation becomes a third party (the assignee) who acquires the right to the value of the assignor's patrimony.

6. In this sense, the debtor proceeds to fulfill his obligation toward the assignee, the already existing obligational relationship remaining and only the identity of the creditor changing.

7. Analyzing the contract provided in the file, this Arbitral Court understands that we are undoubtedly dealing with a credit assignment contract, in which the Claimant substitutes itself in the position of the original creditor, coming to hold a credit in the amount of Euro 1,327,709.50 against the company E..., S.A.

8. It is necessary to list, for the sake of clarity, that the credit assignment operation involves three parties:

i. The assignor is the company D..., SGPS, S.A. (entity wholly owned by the Claimant),

ii. The assignee is the Claimant, and, finally,

iii. The beneficiary of the credit is the company E..., S.A. (an entity not held by the Claimant.

1. In this context, from the reading of the aforementioned credit assignment contract, it is the understanding of this Arbitral Court that there was a financial movement in the account reconciliation between the Claimant and the assignor, namely:

i. Initially, the Claimant held a receivable account from the assigning entity,

ii. The assigning entity executes the credit assignment contract in the amount of Euro 1,327,709.50,

iii. The receivable account held by the Claimant from the assigning entity is reduced by the amount of the credit assigned;

iv. The Claimant comes to hold a receivable account from the beneficiary entity (the company E..., S.A.).

1. Keeping in mind the factuality established, it is now necessary to verify whether the credit assignment will be subject to taxation in accordance with item 17.1 of the General Table of the Stamp Duty Code.

2. In this regard, it is the general understanding of the TCA that the legislator intended to tax under Stamp Duty the act of granting credit, in any manner, including, therefore, in the legal provision of item 17.1, the act of credit assignment, factoring and treasury operations, when they constitute financing.

3. Indeed, Circular 15/2000 of 5 July 2000 clarifies the TCA's understanding regarding certain points of the Stamp Duty Code, establishing in its Article 24 that item 17.1 of the General Table of the Stamp Duty Code intends to tax "the use of credit, by virtue of its granting in any manner" (emphasis ours).

4. Additionally, the aforementioned Circular further emphasizes that "the enumeration contained in that norm is merely exemplificative and not exhaustive", meaning, therefore, that whenever the substance of a contract is based on financing, Stamp Duty will be due.

5. It should be noted that, although the Circulars issued by the TCA are not binding on third parties, having only force to bind the TCA itself, these prove to be useful instruments for the interpretation of law, provided that such interpretation, of course, is carried out within the limits of the very letter of the law and the spirit of the legislator, which we consider, in the specific case, occurs.

6. In the specific case of credit assignment, the legislator intended to extend taxation to the assignee, not excluding the assignor, whenever the assignment involves financing to one or the other, as the case may be.

7. In this context, the taxable event is not the assignment per se, but rather the financing associated with it.

Now,

1. It is to be considered that a credit assignment may constitute financing if the contract is executed with possibility of recourse, that is, when the assignee retains the right to receive from the assignor the value of the credit, should the debtor fail to pay the amount owed.

2. Applying this legislative thinking to the specific case, and after careful analysis of the credit assignment contract in the file, this Arbitral Court concludes that no mention is made of the possibility of recourse, and should therefore be understood that this is not expressly excluded or established by the parties.

Now,

1. Given the above, it is necessary, at this stage, to determine who, under the Law, had the obligation to prove whether the present credit assignment contract constituted, or did not constitute, financing to the now Claimant.

2. In this context, it should first be noted that, as results from Section 1 of Article 74 of the General Tax Law ("LGT"), "the burden of proof of facts constituting the rights of the tax administration or taxpayers lies with whoever invokes them".

3. With the purpose of clarifying the aforementioned norm, the assistance of the authors Diogo Leite Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa is sought, who, regarding that premise, clarify that "the tax administration shall bear the burden of proof of the assumptions of the facts constituting the rights it intends to exercise in the proceeding, while taxpayers shall bear the burden of proving the facts that may serve as support for the realization of those rights"[1] (emphasis ours).

4. It should be noted that those authors go even further in advocating, on the basis of Article 58 of the LGT, that the TCA should not merely "seek to carry into the proceeding evidence of facts that favor its position, for in that matter, it maintains its duty, derived from the inquisitorial principle, to conduct all necessary steps to discover the truth (...)" (emphasis ours).

5. It is thus important to note that this appears to have been the understanding adopted by the majority of doctrine that has addressed the subject. Indeed, see, for example, what António Lima Guerreiro advocated on the present matter: "in the absence of special rules, that is, except for a presumption legally established, it is thus to the tax administration that it falls to demonstrate the factual assumptions of its action, namely the existence of the tax facts on which the tax assessment that were not declared by the taxpayer are based"[2] (emphasis ours).

6. And jurisprudence has ruled to the same effect. Indeed, note the Decision No. 00624/05 of the Central Administrative Court of the North, in which it was established that "it falls to the Tax Administration the duty to demonstrate the legal (binding) assumptions of its action, namely if aggressive (positive and unfavorable), while, in turn, on the administered the presentation of sufficient proof of the illegitimacy of the act falls, when these assumptions are shown to be met".

7. In these terms, and in relation to the present issue, this Arbitral Court can already conclude that it fell to the TCA the burden of demonstrating, with the means at its disposal, whether the present credit assignment contract constituted, or did not constitute, financing to the now Claimant.

8. It should be noted, moreover, that the TCA had ample opportunity to make this proof, since the corrections here contested resulted from an audit proceeding instituted against the now Claimant, in the context of which any facts could have been inquired into that would make it possible to demonstrate, unequivocally, that the credit assignment contract was a financing transaction.

9. In this regard, in the opinion of this Arbitral Court, the TCA did not comply with such legal obligation, failing to demonstrate with facts such presumption.

10. Finally, it should be added that, under Article 75 of the LGT, in cases where the TCA does not question the credibility and truthfulness of the accounting of taxpayers, the tax declarations of the same shall benefit from the presumptions of truthfulness and good faith, falling, subsequently, to the former (TCA) to rebut such presumptions.

11. In this context, this premise reinforces the argument previously advanced, in the sense that, in the case in question, it was incumbent on the TCA, before making any adjustments to the Claimant's tax result, to demonstrate that, in the absence of express reference in the credit assignment contract on the possibility, or not, of recourse, this contract constituted actual financing to the now Claimant.

12. Which this Arbitral Court understands, in light of the means of proof present in the file, the Respondent failed to do.

Given this,

1. This Arbitral Court cannot agree with the position taken by the Respondent, since, in light of the means of proof available, the Respondent failed to demonstrate that the credit assignment here in dispute was a financing transaction and, therefore, subject to item 17.1 of the General Table of the Stamp Duty Code.

2. It remains to examine, under the provisions of Article 24, Section 5 of the LFATM, the request for payment of indemnification interest in favor of the Claimant.

3. Under Article 43, Section 1 of the LGT, indemnification interest is due when it is determined, in administrative appeal or judicial challenge, that there was an error attributable to the services resulting in payment of the tax debt in an amount greater than legally due.

4. It is therefore a necessary condition for the award of such interest the demonstration of the existence of error attributable to the services.

5. In this context, as cannot but be concluded from the facts presented by the parties, this Arbitral Court considers that there is error attributable to the TCA, given that it carried out the act of assessing Stamp Duty illegally on its own initiative, without seeking to demonstrate by the means at its disposal that the credit assignment contract was financing.

Therefore,

1. It is concluded that the aforementioned request for payment of indemnification interest in favor of the Claimant has merit.

2. Based on the foregoing, this arbitral court understands that:

A) The rejection of the Administrative Appeal suffers from a violation of law due to error regarding legal and factual assumptions and should be annulled and, consequently,

B) The Stamp Duty assessment No. 2017..., together with the respective assessment of compensatory interest, which total the amount of Euro 1,866.14, should be annulled, with all legal consequences.

V. DECISION

1. For these reasons, this Arbitral Court decides:

A) To find the request for arbitral decision well-founded and, accordingly, declare illegal and annul the Stamp Duty assessment act mentioned above, by reference to 2013,

B) To order the reimbursement of the sum of Euro 1,866.14;

C) To condemn the Respondent, under Article 43, Section 1 of the LGT and Article 61, Sections 2 and 5 of the Tax Code of Procedure and Process ("TCPP"), to payment of indemnification interest, at the rate resulting from Section 4 of Article 43 of the LGT, calculated on the amount paid of Euro 1,866.14, from the day on which the aforementioned assessments were paid and until the day of full reimbursement of the amount referred to; and

D) To condemn the Respondent in the costs of the proceeding.

VI. VALUE OF THE PROCEEDING

1. The value of the proceeding is set at Euro 1,866.14, in accordance with Article 97-A, Section 1, paragraph (a) of the TCPP, applicable by virtue of paragraphs (a) and (b) of Section 1 of Article 29 of the LFATM and Section 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings ("RCPAT").

VII. COSTS

1. In accordance with the provisions of Article 22, Section 4 of the LFATM, the arbitration fee is set at Euro 306, in accordance with Table I of the aforementioned Regulation, chargeable to the Respondent, given the merit of the request.

Let notice be given.

Lisbon, CAAD, 20 December 2018

The Arbitrator

(Sérgio Santos Pereira)

[1] See Diogo Leite Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, in "General Tax Law annotated and commented", 4th edition, 2012

[2] See António Lima Guerreiro, in "General Tax Law Annotated", Rei dos Livros, 2001