IRC Tax Corrections on Real Estate Transfer Values Under Article 64 CIRC – CAAD Ruling 187/2016-T

ARBITRAL DECISION

The arbitrators Hon. Jorge Manuel Lopes de Sousa (arbitrator-president), Prof. Doctor Gustavo Courinha and Prof. Doctor Jorge Júlio Landeiro de Vaz (arbitrator-members), designated by the Deontological Council of the Administrative Arbitration Center to form the Arbitral Tribunal, constituted on 13-06-2016, agree as follows:

1. Report

A..., S.A., corporate entity no. ..., with registered office at ..., Street ..., no. ..., ..., ...-... (hereinafter "Applicant"), pursuant to the provisions of Article 95 of the General Tax Law ("LGT"), Article 99, paragraph a), of the Code of Tax Procedure and Process ("CPPT"), Article 137, n. 1, of the Code of Corporate Income Tax ("CIRC"), and Article 10, n. 1, paragraph a), and n. 2, of the Legal Regime of Arbitration in Tax Matters ("RJAT"), requested the constitution of an Arbitral Tribunal with a view to declaring the illegality and consequent annulment of the additional assessment of Corporate Income Tax ("IRC") and compensatory interest n. 2015..., dated 26 October 2015.

The Respondent is the TAX AND CUSTOMS AUTHORITY.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 11-04-2016.

Pursuant to the provisions of paragraph a) of n. 2 of Article 6 and paragraph b) of n. 1 of Article 11 of the RJAT, in the version introduced by Article 228 of Law n. 66-B/2012, of 31 December, the Deontological Council designated as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the appointment within the applicable period.

On 25-05-2016 the parties were duly notified of this appointment, having not manifested any intention to refuse the appointment of the arbitrators, in accordance with Article 11, n. 1, paragraphs a) and b) of the RJAT and Articles 6 and 7 of the Code of Ethics.

Thus, in accordance with the provisions of paragraph c) of n. 1 of Article 11 of the RJAT, in the version introduced by Article 228 of Law n. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 13-06-2016.

The Tax and Customs Authority responded by arguing that the request should be judged unfounded.

By order of 05-09-2016 it was decided to dispense with a hearing and that the proceedings would continue with written submissions.

The Parties submitted arguments.

The arbitral tribunal was regularly constituted, in accordance with the provisions of Articles 2, n. 1, paragraph a), and 10, n. 1, of Decree-Law n. 10/2011, of 20 January.

The parties are duly represented, possess legal personality and capacity, are legitimate and are represented (Articles 4 and 10, n. 2, of the same decree-law and Article 1 of Order n. 112-A/2011, of 22 March).

The proceedings do not suffer from nullities and no exceptions were invoked nor is there any obstacle to consideration of the merits of the case.

2. Factual Matters

2.1. Proven Facts

Based on the elements contained in the proceedings and the administrative proceedings attached to the file, the following facts are considered proven:

a) The Applicant began its activities in 2006, within the scope of its corporate purpose, namely conducting and managing credit securitization operations, through the acquisition, management and transfer of credits and the issuance of securitized bonds for payment of acquired credits (document no. 4 attached with the request for arbitral decision, the content of which is hereby reproduced);

b) The Applicant carries out the activity of "Other diverse financial services activities, N.E.C., except insurance and pension funds" – CAE...;

c) In compliance with Service Order n. OI2013..., the Tax and Customs Authority conducted an inspection action on the now Applicant, for tax facts verified in fiscal year 2013;

d) For purposes of Corporate Income Tax, the Applicant falls under the general regime, by virtue of paragraph a) n. 1 of Article 2 of the CIRC;

e) During the year 2013, the Applicant proceeded to alienate the immovable properties described in point III.1 of the Tax Inspection Report (RIT), which is contained in document no. 4 attached with the request for arbitral decision, the content of which is hereby reproduced;

f) As a result of the assessment carried out under Articles 37 et seq. of the Municipal Property Tax Code (three-yearly updating carried out under Article 138 of the said Code, the general assessment carried out under Article 15-A, article added by Law n. 60-A/2011, of 30/11), the property values contained in Chapter III.1 n. 2 of the RIT were assigned;

g) In situations where the Applicant was notified of the assessments, it was informed that it could request a second assessment under Article 76 of the Municipal Property Tax Code, within 30 days from the notifications (if it disagreed with the stated value), a right that the Applicant did not exercise;

h) The Applicant submitted on 31-01-2014, a request for revision under n. 1 of Article 139 of the CIRC, which gave rise to the revision procedure, a copy of which is contained in document no. 10 attached with the request for arbitral decision, the content of which is hereby reproduced. In this procedure, the Legal Substitute of the Director of Finance of Lisbon rendered a decision on 30-03-2015, deciding to maintain, for purposes of determining the taxable matter for fiscal year 2013, the property values for tax purposes that served as the basis for Municipal Property Tax assessments, by understanding, among other things, the following:

Having analyzed the request for proof of effective prices in the transfers of the immovable properties, submitted by the taxpayer and considering the positions taken by the experts in their reports, the following facts become evident:

Report of the Revision Procedure

In the request for proof of effective prices in the transfers of the Immovable Properties, the taxpayer merely refers that the units are contained in the following tables on pages 2 to 5 and attaches to it: copies of purchase and sale deeds (references ...001 to ...129) and documents authorizing access to the company's banking information and that of its respective administrators.

Following the adversarial debate

The Expert appointed by the Taxpayer, in his report, refers, in summary, as follows:

• A... is a credit securitization company that acquires credits from banking entities, a large number of which are in default;

• In a perspective of resolution of these credits, it attempts through a service provider company, B..., to reach agreement with debtors for full payment of the debt;

• Agreements can take the form of payment by dation with full or partial payment of the debt;

• If the agreement is partial, there is an agreement associated with the property which may subsist and in this case, payments concern payment of the remaining value;

• In the absence of agreement, or not being able to contact debtors, A... promotes judicial sale of the property and as holder of the credit is exempt from deposit of the price and in most cases, exempt from Municipal Property Tax payment;

• In judicial sales it is the court that decrees the sale value of the property, which will be the highest between the property value or the value of the assessment carried out by the expert appointed by the court;

• Although the sale value can be higher than the current market sale value, A... does not challenge this value judicially, given the court's response time, so it acquires the property at the judicially decreed value;

• After acquisition at the judicially decreed value, an assessment is carried out of the property, conducted by an external company that will decree the sale value;

• These external companies are certified by CMVM;

• The value of this assessment (carried out by external company) is communicated to real estate companies (with whom contracts are concluded), and appears on the lusi website, and the property is put up for sale;

• Most properties are sold by Real Estate Companies and in the request made under Article 139° of the CIRC, the contracts, invoices and receipts are always attached;

• There is a price rescission policy that is communicated to mediating companies, through e-mail, or through the website and contracts are not reviewed, nor are they subject to amendments, as there are no legal provisions for this;

• A... has a minimum commission policy, whereby for low values, the commission percentage is higher than the standard;

• The minimum commission is approved and is practiced by all real estate companies and currently applies to properties with sale value below €35,000.00;

• Most properties have been vacant for about 5/10 years, present reduced habitability conditions and require work, factors that influence their sale values and mean they are higher after work carried out by the purchasers;

• At the accounting level, the following is noted:

• In cost centers there may be values before and after the sale of the property;

• These values relate to payment of the remaining value (in the case of payments made after dation) and/or values paid still within the scope of the agreement between A... and the debtor in order to minimize the debt);

• Agreements are signed and filed by process and in some cases there are previous payments, but in many cases, the debtor ceases payment and therefore proceeds to dation or judicial sale.

Considers that the claimant presented all justifications for it to be considered that proof was made, that the declared values are effectively the sale values of the Properties.

The Expert of the Public Treasury, in his report, states that, following the adversarial debate between the experts, it was not possible to establish the agreement provided for in n. 1 of Article 92 of the G.T.L., referring, in summary, as follows:

• That Article 64 of the CIRC has the nature of a special anti-abuse clause and its objective is to lead taxpayers to adopt conduct ensuring that prices practiced in the alienation of properties effectively reflect market values;

• The difference verified between the alienation values of the properties and their respective property values totals € 2,433,702.72 (€ 8,302,222.72 - € 5,869,520.00);

• That the request presented concerns properties distributed throughout the country and to which copies of the sale deeds were attached with indication of the references for each property (...001 to ...129) and also authorizations for access to the accounts of the applicant and the administrators;

• Having analyzed the grounds invoked in the request and those presented by the expert representing the taxpayer, it is to be noted:

• The applicant is a Credit Securitization Company, whose actual supervision falls to the Securities Market Commission (CMVM);

• Has as its object the carrying out of credit securitization operations, through the acquisition, management, transfer of credits and the issuance of securitized bonds for payment of acquired credits, which are in litigation;

• The credits are guaranteed by properties that are awarded to the applicant through judicial proceedings or payment by dation at a later date;

• Each property acquired by A... is directly related to one or more credits acquired by it within the scope of its securitizations, so its acquisition represents in practice/operationally the receipt in kind of total or partial settlement of those credits;

• The acquisition values of the credits are lower than the adjudicated and judicially claimed values;

• The entry of amounts (including deposits, reinforcements) are only recorded in accounting when the sale of the property is carried out;

• In the current economic situation, properties are sold at prices substantially lower than the tax property value;

• Ownership of the properties is not recorded in the company's Balance Sheet;

• All acquired credits have a reference, which functions as a "cost center", where all collections, expenses (such as court costs, attorney fees for enforcement, registrations, notary offices, real estate commissions, etc.) and gains (credit income), inherent to that credit, are recorded with the associated reference.

• Having analyzed the request, the documents attached to it and those presented from the first meeting until 30.12.2014 (date when the last ones were presented), the expert of the tax administration sought to validate the values of real rights over Properties and whether these effectively reflected market values practiced in that period. In this respect, the accounting movements made in the transactions of the Properties (acquisition of credits, sales) were verified, as were the contracts for promise of sale and purchase, the contracts of sale and purchase, the means of payment, the contracts made with real estate companies (invoices/receipts and means of payment) and elements available in the information system of the Tax Administration (AT). The expert verified:

1. The absence of some promise of purchase and sale contracts;

2. In some cases, the promise of purchase and sale contracts presented, the purchaser named in them, is not the one who purchases the property, for example:

In the cost center, only the total value of the public deed of purchase and sale is recorded. The expert indicated by the taxpayer reported that in some cases, they are not effectively concluded with the person who signed the contract, but the deposit is not returned, the deed containing the total value, serving as receipt to the purchaser.

1. There are values in the promise of purchase and sale contracts, different from those mentioned in the public deeds, in the case of the following properties, without any explanatory amendment:

[property references]

1. The documents proving the purchasers' deposits are mostly copies of ATM receipts of value and cash deposits, transfers or bank deposit slips, without identification of the purchaser; no receipt acknowledgments are issued and in some cases the deposits are made by check, identifying the issuer, who in some cases is not the subsequent purchaser.

2. Not all sales involve real estate mediators and there are contracts concluded with real estate companies, without the existence of any amendments, where values appear higher than those mentioned in the public purchase and sale deeds, in the case of the following properties:

[property references]

1. The contracts with real estate companies are concluded on dates very close to the deed and there are cases where they are concluded later, for example in the following properties:

[property references]

1. Regarding the Properties indicated below, commissions were paid to Real Estate Companies, but the real estate mediation contracts were not attached:

[property references]

1. The commissions paid to Real Estate Companies vary between 4% to 20%, without justifications having been presented for this purpose and there are cases where the discrepancies occur with the same real estate company and within the same district.

The value paid in commissions represents about 8% of the value of the corresponding sales (€ 358,607.00)

By way of example of these situations, are the following properties:

[property references]

The contract of the real estate company presented regarding the property with reference ...029, is a copy of the contract presented regarding the Property with reference ...072.

1. Invoices issued by Real Estate Companies were exhibited in December, when the sales took place in earlier months, in the case of the following Properties:

[property references]

1. There are public deeds where there is no record of a real estate mediation contract having been concluded, but commissions were nevertheless paid, in the case of the following properties:

[property references]

1. There are contracts concluded with the real estate companies, where the properties are not indicated or are not signed:

[property references]

1. Regarding the properties indicated below, they were not identified in the invoices:

[property references]

1. In the statements (cost centers) presented per acquired credit (mostly in 2006), the accounting of the sale is carried out in accordance with the amounts inscribed in the public deeds in 2013. However, in some cases, other charges are verified to have been accounted for, of constant or non-constant value, from the beginning of the acquisition of the credit and even after the sale (during fiscal year 2014) and the debtor of the acquired credit is not always the purchaser, although the same name always appears.

The urban building registered in the urban real property register of the parish of..., municipality of Santa Maria da Feira, was alienated for € 70,000.00, a loan of 68,500.00 having been requested and the credit was of 35,665.05.

There is a difference between the amounts declared in the public deeds and the amounts charged and recorded in the cost center in the amount of € 276,211.25. The total of credits acquired, guaranteed by the Properties, in 2006, was € 6,970,635.66 and the total of collections accounted for in relation to the credits securitized by the Properties in question, total € 6,167,422.12 (until 2014), revealing a difference of € 816,401.34.

In judicial sales the assessment value for purposes of Municipal Property Tax between 2010 and 2012, was € 8,640,949.00.

1. The assessment value of the properties adjudicated through judicial proceedings and through payment by dation is substantially higher than the credit acquisition and the value contained in the public purchase and sale deeds, at the time of sale of the properties by A... Being that the period between its acquisition and alienation is not as great as alleged.

2. The authorizations for access to bank accounts were not used taking into account that the managers are non-resident.

The Expert of the Tax Administration concludes that, in the absence of evidence presented that refutes the correction provided for in Article 64 of the CIRC, it was not possible to establish an agreement between the experts. Therefore it is of the opinion that the tax property values should be maintained, for purposes of taxation on Corporate Income Tax.

For the foregoing and the elements contained in the proceedings, request for revision and the positions of the experts involved in the adversarial debate, which are hereby fully reproduced and which were addressed above, it is incumbent upon us to decide.

Article 64 of the CIRC establishes that:

"1 - The transferors and transferees of real rights over immovable property must adopt, for purposes of determining taxable profit (...), normal market values that cannot be lower than the final tax property values that served as the basis for the assessment of the municipal tax on onerous transfers of immovable property (IMT) (...).

2 - Whenever, in the onerous transfers provided for in the previous number, the value contained in the contract is lower than the final tax property value of the property, it is this value that shall be considered by the transferor and transferee, for determining taxable profit (...)."

Notwithstanding what is established in this provision, the legislator does not in any way restrict the possibility of the transferor, if he wishes, to prove that the prices actually practiced in the transfers of real rights over immovable property were lower than the tax property values that served as the basis for the Municipal Property Tax assessments, as determined in n. 1 of Article 139 of the same decree-law.

Such proofs must be carried out in proceedings initiated by request directed to the competent Director of Finance and is governed by the provisions of Articles 91 and 92 of the General Tax Law (G.T.L.) (n.s 3 and 5 of Article 139 of the CIRC).

The transferor taxpayer intends to prove that the prices actually practiced in the transfers of the properties identified on pages 1 to 4, were lower than the property values fixed in accordance with the rules established in the Code of the Municipal Tax on Onerous Transfers of Immovable Property (CIMT).

From the relation of properties for which the revision procedure is in effect, it appears that the total value declared in the public purchase and sale deeds is € 5,869,520.00 and that the total of the tax property value of the same properties is € 8,303,222.72.

The reference made in n. 5 of Article 139 of the CIRC to the procedural means of Articles 91 and 92 of the G.T.L., encompasses the need for promotion of a meeting of experts, with the purpose of obtaining an agreement on the prices actually paid by the transferee of the immovable property, based not only on elements resulting from access to banking secrecy, but also on the examination of the special or normal market conditions that surrounded the transfer.

The burden of proof, that the prices actually practiced in the transfers of the properties were lower than the tax property values, falls to the taxpayer.

The proof that the effective prices correspond to the values contained in the contracts depends, therefore, on the justification of the abnormal market conditions in which the transfers were carried out, which resulted in the fixing of prices lower than the final tax property values of the immovable property.

Taking into account all the arguments presented and the documents exhibited, it appears that it was not demonstrated by the taxpayer, nor by his expert, that the prices actually practiced in the onerous transfers in question, were lower than the tax property values fixed, as determined in n. 1 of Article 139 of the CIRC.

This position is also defended by the Expert of the Tax Administration, contained in his report that: "(...) There is no sufficient evidence to refute the correction provided for in Article 64 of the CIRC (...) the respective tax property value should thus be maintained for purposes of determining the taxable matter for Corporate Income Tax".

Item 11 of Circular Notice N. 20136 of 11.03.2009 of the Department of Corporate Income Tax Services further determines that the promotion of a meeting of experts, with the purpose of obtaining an agreement on the prices actually paid by the transferee of the property, should not be based solely on elements of access to banking secrecy, but also on the examination of the special or normal market conditions that surrounded the transfer.

In the adversarial debate held on 10.02.2015 in the revision procedure and from the documents exhibited by the applicant it was proven:

Ø That the taxpayer has as its object the carrying out of credit securitization operations, through the acquisition, management, transfer of credits and the issuance of securitized bonds for payment of acquired credits, which are in litigation;

Ø The credits are guaranteed by properties that are awarded to the applicant through judicial proceedings or payment by dation at a later date;

Ø Each property acquired by A... is directly related to one or more credits acquired by it within the scope of its securitizations, so its acquisition represents in practice/operationally the receipt in kind of total or partial settlement of those credits;

Ø The acquisition values of the credits are lower than the adjudicated and judicially claimed values;

Ø The entry of amounts (including deposits, reinforcements) are only recorded in accounting when the sale of the property is carried out; Ownership of the properties is not recorded in the company's Balance Sheet; In some cases, the promise of purchase and sale contracts presented, the purchaser named in them, is not the one who purchases the property, as stated in n. 2;

Ø That in the cost center appears recorded the total value of the public deed of purchase and sale, and that the purchaser is not the one who signed the contract, without the deposit being returned and that it is the deed that serves as receipt to the purchaser; There are values in the promise of purchase and sale contracts, different from those mentioned in the public deeds, as stated in n. 3, with no supporting documents (amendments) being drafted for these facts, because, as the expert representing the taxpayer alleges, there is no legal requirement;

Ø The documents proving the purchasers' deposits are mostly copies of ATM receipts of value and cash deposits, transfers or bank deposit slips, without identification of the purchaser; no receipt acknowledgments are issued and in some cases the deposits are made by check, identifying the issuer, who in some cases is not the subsequent purchaser; Contracts were concluded with real estate companies, without the existence of any amendments, where values appear higher than those mentioned in the public purchase and sale deeds, in the case of the Properties referred to in n. 5;

Ø The contracts with real estate companies are concluded on dates very close to the deeds and there are cases where they are concluded later, in the case of the properties referred to in n. 6;

Ø Regarding the properties indicated in n. 7, commissions were paid to Real Estate Companies, but the real estate mediation contracts were not attached;

Ø That within the same district and with the same real estate agency, commissions are paid that vary between 4% to 20%, without justifications having been presented;

Ø Invoices issued by the Real Estate Companies were exhibited in December, when the sales took place in earlier months - January, February, March and August, whose properties are identified in no. 9;

Ø Public deeds were concluded where there is no record of real estate mediation contracts having been concluded, but commissions were nevertheless paid, in the case of the properties referred to in n. 10;

Ø As stated in no. 11, there are contracts concluded with the real estate companies, where the properties are not indicated or are not signed and there are also invoices in which the properties are not identified, see no. 12;

Ø In the statements (cost centers) presented per acquired credit, the accounting of the sale is carried out in accordance with the amounts inscribed in the public deeds, notwithstanding other charges being accounted for, of constant or non-constant value, from the beginning of the acquisition of the credit and even after the sale (during fiscal year 2014) and the debtor of the acquired credit is not always the purchaser;

Ø The assessment value of the properties adjudicated through judicial proceedings and through payment by dation is substantially higher than the credit acquisition and the value contained in the public purchase and sale deeds, at the time of sale of the properties by A... and the period between its acquisition and alienation is not large;

Ø That the expert himself indicated by the taxpayer, admits in his report, to verify that at the accounting level, in cost centers there may be values before and after the sale of the property and that these values relate to payment of the remaining value (in the case of payments made after dation) and/or values paid still within the scope of the agreement between A... and the debtor in order to minimize the debt).

The Circular Notice mentioned above, and in particular its n. 15, determines that the proof of effective price corresponding to the value contained in the contract depends on 2 requirements, which must be cumulatively fulfilled:

• The justification of the abnormal market conditions in which the transfer was carried out, which resulted in the fixing of a price lower than the final tax property value of the transferred property;

• The express waiver by the applicant and the administrators or managers of the protection afforded by banking secrecy.

That Decision n. 301/12, of 23.05.2012 of the Supreme Administrative Court, states as follows: "A transaction occurring within the scope of a public tender is a unique and non-repeatable phenomenon, without a reference standard, taking into account especially the specific purpose that presided over the adjudication of a good within the scope of a tender, so, it not being possible to repeat the transaction to be able to conclude whether there is a gap between the market value of the property and the price practiced, the market value of that good must therefore correspond to the adjudication price".

Now, in the case at hand:

Ø It was not demonstrated clearly and unequivocally that the values contained in the public purchase and sale deeds correspond to the prices actually practiced;

Ø The abnormal market conditions in which the transfers were carried out, which resulted in the fixing of prices lower than the final tax property values of the transferred properties, were not unequivocally justified;

In view of the foregoing, for purposes of determining the taxable matter for fiscal year 2013, I maintain the final tax property values that served as the basis for the assessments of the Municipal Tax on Onerous Transfers of Immovable Property (IMT), pursuant to n. 1 of Article 64 of the Corporate Income Tax Code, and the suspension of assessment should cease in the portion corresponding to the value of the positive difference provided for in n. 2 of Article 64 of the CIRC - Field 416 of Table 11 of Declaration Form 22 for fiscal year 2013 - pursuant to the provisions of n. 4 of the same article, in the amount of € 2,433,702.72.

i) In the Tax Inspection Report, it further refers to the following:

III.2 - Purely arithmetic corrections

1 - From the foregoing point, we can verify that, after the assessment/updating, there are positive differences between the values contained in the contracts and the tax property values of the transferred properties, as demonstrated:

[tables with property references and values]

2 - Therefore, by force of Article 64 of the Code of Personal Income Tax (CIRC), the positive difference in value in the amount of €2,370,549.28 contributes to the determination of taxable profit for fiscal year 2013, unless the taxpayer proves that the effective price actually practiced in the transfer of the property was lower than the tax property value that served as the basis for the assessment of the Municipal Tax on Onerous Transfers of Immovable Property (n. 1 of Article 139 of the CIRC).

3 - In this sense, the taxpayer submitted on 31-01-2014 the Request for Revision under n. 1 of Article 139 of the CIRC, in which it raises the examination of the tax property values of the properties (Annex III).

From the revision procedure - Request for Proof of Effective Price in the Transfer of Properties, it resulted that:

It was not demonstrated clearly and unequivocally that the values contained in the public purchase and sale deeds correspond to the prices actually practiced;

The abnormal market conditions in which the transfers were carried out, which resulted in the fixing of prices lower than the final tax property values of the transferred properties, were not unequivocally justified.

4 - There being no agreement between the expert of the taxpayer and the expert of the Public Treasury, it was decided by the competent body of the Tax Administration that, for purposes of determining the taxable matter for fiscal year 2013, the final tax property values that served as the basis for the assessments of the Municipal Tax on Onerous Transfers of Immovable Property (IMT) are maintained, pursuant to n. 1 of Article 64 of the Corporate Income Tax Code, as decided and communicated to the taxpayer on 31-03-2015 (Annex IV).

5 - The value mentioned in the revision procedure - Article 139 of the CIRC by the expert of the Tax Administration for purposes of correction in the amount of €2,433,702.72 is different from the amount determined in the table of point 1 of the present chapter of €2,370,549.28. The difference verified of €63,153.44 results from:

• €6,158.64 referring to article ...-F - the tax property value presented by the taxpayer is 641,981.36, when the tax property value contained in the assessment sheet is €48,140.00;

• €28,740.00 referring to article ... - the tax property value presented by the taxpayer is €87,470.00, when the tax property value contained in the assessment sheet is €58,730.00;

-€31,808.32 referring to article... - the tax property value presented by the taxpayer is €55,688.32, when the tax property value contained in the assessment sheet is €23,860.00;

€8,313.86 referring to article ...-L - the tax property value presented by the taxpayer is €65,706.26, when the tax property value contained in the register at the date of alienation is €57,394.50;

• €450.00 referring to article ...-B - the tax property value presented by the taxpayer is €54,720.00, when the tax property value contained in the assessment sheet is €54,270.00.

6 - Thus, as stated we will proceed with the purely arithmetic correction of the taxable matter in the amount of €2,370,549.28, so the taxable profit presented by the taxpayer of €1,025.33 will be changed to €2,371,574.51, determined pursuant to Article 17 and n.s 2 and 3 of paragraph a) of Article 64, both of the CIRC.

(...)

IX Right to be heard - Grounds

As already mentioned in the previous point, the taxpayer was notified of the draft corrections, through official letter no. ... of 19-08-2015, with the registration n. RD...PT (Annex V).

The taxpayer exercised the right to be heard (Annex VI) pursuant to Article 60 of the General Tax Law (LGT) and Article 60 of the Supplementary Regulation of Tax and Customs Inspection Procedure (RCPITA). From the right to be heard presented, the documents identified in the table on pages 73 to 76 (assessment reports for each Property) are not attached, the same being filed in the proceedings.

A - Grounds presented by the taxpayer:

The taxpayer comes to request "... the waiver of the increase to the taxable matter in the value of €2,368,203.65, resulting from the adjustment of the positive difference between the tax property value and the effective sale value...", based on the grounds it presented, which are divided into 2 parts, one related to the nature of the company, another with the request for proof of price.

Regarding the nature of the company, the taxpayer comes to refer that:

"...This company has as its object the carrying out of credit securitization operations through the acquisition, management and transfer of credits and the issuance of securitized bonds for payment of the acquired credits, in accordance with what is identified in Article 39 of Decree-Law n. 453/99, of 5 November...";

"... The credits acquired from various national credit institutions and securitized by the company, are mostly activated judicially (litigation) ...";

"... In the context of the resolution of these credits in litigation, the properties that guarantee them (mortgaged to guarantee payment of such credits) are adjudicated to the company through judicial proceedings ...";

"... It is important to note, so that there is no doubt on this matter, that the alienation of the properties in question relates to securitization operations and not to any ancillary activity of the company...";

As for the proof of transfer price of the properties:

"... In an attempt to, once again, demonstrate the effective transfer price of the properties identified in the PCRI now notified, let us proceed to the individualized analysis of the transfer process of each of the properties considered for purposes of reviewing the total sale price, in order to, once again, demonstrate the effective sale price."

B - Analysis of the grounds presented:

Taking into account the facts described by the taxpayer and referred to above (part A), we proceed to clarify the following:

In a first part the taxpayer comes to inform/explain a series of concepts referring to the activity developed and its framing.

The taxpayer refers that the object of its activity is the securitization of credits, which is developed through the acquisition, management and transfer of credits and the issuance of securitized bonds.

In fact we can note, by consultation of the permanent certificate that the taxpayer has been exercising the activity of credit securitization since the year 2006, whose activity is regulated by decree-law 453/99.

We draw attention to the fact that, in the course of the report, the activity developed by the taxpayer was not called into question.

On the other hand, the taxpayer refers that it does not develop any ancillary activity, with respect to the alienation of properties.

In fact the activity developed by the taxpayer does not constitute the buying and selling of immovable property. However, in the course of its activity, the taxpayer ends up acquiring the right of property of immovable property and subsequently proceeds to its alienation.

Notwithstanding that this is not an activity of buying and selling as corporate purpose, this does not exclude the application of Article 64 of the Corporate Income Tax Code, which we now transcribe for better understanding.

(...)

From reading Article 64 of the Corporate Income Tax Code, nothing states that it only applies to companies that develop an activity of buying and selling, on the contrary, it applies to all companies that proceed to alienate real rights over immovable property, regardless of its corporate purpose.

In the second part of the right to be heard, the taxpayer comes to refer to the proof of transfer price of properties, enumerating article by article, culminating its presentation with a summary table of alienations, in which the total of tax property values appears as the amount of €8,237,723.65.

The amount referred to by the taxpayer differs from that contained in the table of the report, mentioned on page 13 - €8,240,069.26, which after being analyzed it was verified that:

– It was mentioned, in the draft report, the amount of €50,750.00 as the property value of article..., unit J, when the correct value is €50,570.00, so we will proceed with the necessary correction;

– In the table mentioned by the taxpayer, on page no. 74 of the right to be heard, is mentioned the amount of €57,750.00 as the property value of article ...E, when the property value at the date of alienation is €59,915.63, as the value mentioned was changed on 31/12/2012, by application of the updating factor pursuant to Article 138 of the Municipal Property Tax Code and already mentioned on page 13/234 of the draft report.

Thus, the tax property value mentioned in the draft report (point 1 of Chapter III.1) changed from €6,240,069.28 to €8,239,869.26, so the correction is changed to €2,370,369.28.

As for the presentation made regarding the proof of price, it will not be subject to analysis, due to the fact that it has already occurred, in a revision procedure, presented by the taxpayer under Article 139 of the Corporate Income Tax Code.

Once again, we refer that from the revision procedure - Request for Proof of Effective Price in the Transfer of Properties, it resulted that:

– It was not demonstrated clearly and unequivocally that the values contained in the public purchase and sale deeds correspond to the prices actually practiced.

– The abnormal market conditions in which the transfers were carried out, which resulted in the fixing of prices lower than the final tax property values of the transferred properties, were not unequivocally justified.

So, there being no agreement between the expert of the taxpayer and the expert of the Public Treasury, it was decided by the competent body of the Tax Administration that, for purposes of determining the taxable matter for fiscal year 2013, the final tax property values that served as the basis for the assessments of the Municipal Tax on Onerous Transfers of Immovable Property (IMT) are maintained, pursuant to n. 1 of Article 64 of the Corporate Income Tax Code, as decided and communicated to the taxpayer on 31-03-2015 (Annex IV).

In view of the foregoing, the proposed correction of taxable profit mentioned in the draft corrections in the amount of €2,370,549.28 is changed to €2,370,369.28.

Thus, the taxable profit presented by the taxpayer of €1,025.33 is changed to €2,371,394.61.

The elements of the Corporate Income Tax Correction Document (IRC) will be inserted, the competent report of findings will be drawn up and the taxpayer will be notified of the acts resulting from the inspection action, pursuant to Article 77 of the LGT and Article 62 of the RCPITA.

j) With the request to prove the effective price practiced in the sales of the properties, the Applicant presented authorizations for access to its bank accounts and those of its administrators C..., D... and E..., as well as copies of their Tax Identification Numbers and ID cards (administrative proceedings of the revision request, part of "pp. 2 to 82");

k) Regarding the administrators of the Applicant it was indicated that they had professional domicile at Street..., no...., ...-, … Lisbon;

l) The Tax and Customs Authority, both in the procedure to prove the effective prices actually practiced and in the tax inspection, did not make use of the authorizations for access to the bank accounts of the Applicant or its administrators;

m) For placing the acquired properties on the market, the Applicant orders for each property a market and assessment study - carried out by external companies certified by CMVM - which, in addition to a detailed description and analysis of the property, seeks to assess the most appropriate sale price sometimes considering other recent transactions in the same region of properties with similar characteristics, as an indication of values for medium/long-term and short-term sales (document no. 12 attached after the presentation of the request for arbitral decision);

n) Following the inspection the Tax and Customs Authority issued Corporate Income Tax assessment n. 2015..., dated 26-10-2015, and prepared the account reconciliation statement, copies of which are contained in documents nos. 1 and 2 attached with the request for arbitral decision, whose contents are hereby reproduced;

o) On 16-02-2016, the Applicant provided a bank guarantee to suspend the fiscal enforcement proceedings n...., instituted for coercive collection of the assessed amount (document no. 13 attached with the request for arbitral decision, whose content is hereby reproduced);

p) On 28-03-2016, the Applicant submitted the request for constitution of the arbitral tribunal which gave rise to the present proceedings.

2.2. Unproven Facts

There are no facts relevant to the decision of the case that have not been proven.

2.3. Grounds for fixing the factual matter

The proven facts are based on the documents attached by the Applicant with the request for arbitral decision and on the administrative proceedings.

3. Legal Matters

Article 64 of the CIRC establishes that "the transferors and transferees of real rights over immovable property must adopt, for purposes of determining taxable profit in accordance with this Code, normal market values that cannot be lower than the final tax property values that served as the basis for the assessment of the municipal tax on onerous transfers of immovable property (IMT) or that would be applicable in the case of there being no occasion for assessment of this tax" (n. 1) and that "whenever, in the onerous transfers provided for in the previous number, the value contained in the contract is lower than the final tax property value of the property, it is this value that shall be considered by the transferor and transferee, for determining taxable profit" (n. 2).

Article 139, n. 1, of the CIRC establishes that "the provision of n. 2 of Article 64 is not applicable if the taxpayer proves that the effective price actually practiced in the transfers of real rights over immovable property was lower than the tax property value that served as the basis for the assessment of the municipal tax on onerous transfers of immovable property".

In this same article a special procedure is provided for the taxpayer to prove that the effective price actually practiced in the transfers of real rights over immovable property was lower than the tax property value that served as the basis for the assessment of the municipal tax on onerous transfers of immovable property. The article further provides, among other things, the following:

3 – The proof referred to in n. 1 must be carried out in proceedings instituted by request directed to the competent director of finance and submitted in January of the year following that in which the transfers occurred, in the case that the tax property value is already definitively fixed, or within 30 days after the date on which the assessment became final, in the remaining cases.

4 – The request referred to in the previous number has suspensive effect of the assessment, in the portion corresponding to the value of the positive difference provided for in n. 2 of Article 64, which, in the case of total or partial rejection of the request, falls to the jurisdiction of the General Directorate of Taxes.

5 – The procedure provided for in n. 3 is governed by the provisions of Articles 91 and 92 of the General Tax Law, with the necessary adaptations, with the provision of n. 4 of Article 86 of the same law being equally applicable.

6 – In case of presentation of the request for demonstration provided for in this article, the tax administration may access the banking information of the applicant and the respective administrators or managers relating to the taxation period in which the transfer occurred and the previous taxation period, and for this purpose the corresponding authorization documents must be attached.

In the case at hand, the Applicant used this procedure, presenting proofs with a view to demonstrating that the values of the transfers of properties it made in the year 2013 were lower than the tax property value of the properties. Specifically, the Applicant presented the deeds of sale of the properties in question, in which the sale prices are referred to, the documents authorizing access to its banking information as well as that of its three administrators and copies of their respective tax identification numbers and identification documents.

The Applicant also presented the studies it ordered from an external entity for assessment of the properties and indication of the possible sale prices in the short and medium/long term.

In the procedure referred to, meetings were held, with the Expert indicated by the Applicant presenting documents regarding the payments received, as deposits and payments, namely copies of checks, bank transfers and payments via ATM.

The Tax and Customs Authority, in the said special procedure, invoking Circular Notice N. 20136 of 11-03-2009 of the Department of Corporate Income Tax Services, understood that, in order for the proof of effective price to be realized, it is necessary to fulfill two cumulative requirements:

– justification of the abnormal market conditions in which the transfer was carried out, which resulted in the fixing of a price lower than the final tax property value of the transferred property;

– express waiver by the applicant and the administrators or managers of the protection afforded by banking secrecy.

In the case of the present proceedings this second requirement was fulfilled, as the Applicant and its three administrators presented declarations authorizing the Tax and Customs Authority to access their banking information.

However, the Tax and Customs Authority did not use these authorizations and, without access to the banking information referred to, concluded that:

– it was not demonstrated clearly and unequivocally that the values contained in the public purchase and sale deeds correspond to the prices actually practiced;

– the abnormal market conditions in which the transfers were carried out, which resulted in the fixing of prices lower than the final tax property values of the transferred properties, were not unequivocally justified.

3.1. Issues of violation of the principle of material truth and error in the quantification of the taxable fact

3.1.1. Positions of the parties

The Applicant argues, in summary, the following:

– in the procedure provided for in Article 139 of the CIRC, only the verification of the effective price actually practiced in the sale is at issue, with no account taken of any criteria of a subjective nature or any margin of discretion of the decision-maker of the procedure since this is not about an assessment of the value of goods, but only the proof of a price;

– since the request for demonstration of the effective price established in Article 139 of the CIRC is nothing more than the proof of the price practiced, regardless of what the market value of the property is and whether or not it is observed, the grant of the request for proof of the effective price must suffice with the demonstration that the declared price corresponds to the actual price;

– it results from the documentary evidence presented, from the outset in the course of the tax procedure that preceded the present arbitral proceedings, that the effective prices practiced by the Applicant in the sale of the 128 properties in question were those expressly contained in the deeds of alienation, whose values are corroborated by the evidence of the payments received;

– both the Applicant and its administrators proceeded to authorize the waiver of banking secrecy, making possible the demonstration of the absence of any other banking movements of payments and receipts, beyond those underlying the declared values, but, although the Tax Administration was bound by the principle of material truth, it did not perform any investigative action in this respect, not undertaking any action in the sense of verifying banking movements, and it is certain that the legislator himself considered this means an effective means to obtain proof of the amount of the sale price;

– the demonstration of the existence of abnormal market conditions is manifestly impertinent, useless and unnecessary since, in light of the disputed issue, what is essential to ascertain is the real sale price;

– the assessments of the properties presented were carried out on the basis of the comparative method of market values, that is, they took into account concrete transactions of similar properties that occurred in the same geographic zone and by reference to a nearby temporal period;

– the market value of a property derives from its concrete characteristics, which entails, from the outset, a case-by-case assessment and not merely based on general and objective rules, but also and very clearly on the market conditions verified at the date of the transaction;

– it is notoriously true that there was an abrupt fall in the real estate market since 2008 and particularly acute during the year 2013;

– the Applicant proved the values of the sales, or, at least, created a situation of doubt in which the rule of Article 100, n. 1, of the CPPT should be applied.

The Tax and Customs Authority, after referring to the positions taken in the procedure referred to, argues, in summary, the following:

– it was not demonstrated by the taxpayer, nor by its expert, that the effective prices actually practiced in the onerous transfers in question, were lower than the tax property values fixed, as determined in n. 1 of Article 139 of the CIRC;

– this position is also defended by the Expert of the Tax Administration;

– it further determines in n. 11 of Circular Notice N. 20136 of 11-03-2009 of the Department of Corporate Income Tax Services, that the promotion of a meeting of experts, with the purpose of obtaining an agreement on the effective prices actually paid by the transferee of the property, should not be based solely on elements of access to banking secrecy, but also on the examination of the special or normal market conditions that surrounded the transfer;

– Circular Notice referred to above, in particular in its n. 15, determines that the proof of effective price corresponding to the value contained in the contract depends on 2 requirements, which must be cumulatively fulfilled:

• the justification of the abnormal market conditions in which the transfer was carried out, which resulted in the fixing of a price lower than the final tax property value of the transferred property;

• the express waiver by the applicant and the administrators or managers of the protection afforded by banking secrecy;

• it was not demonstrated clearly and unequivocally that the values contained in the public purchase and sale deeds correspond to the prices actually practiced;

• the abnormal market conditions in which the transfers were carried out, which resulted in the fixing of prices lower than the final tax property values of the transferred properties, were not unequivocally justified.

3.1.2. Decision on the issue of violation of the principle of material truth and error in the quantification of the taxable fact

The principle of material truth, invoked by the Applicant, is set out in Article 58 of the LGT which provides that "the tax administration must, in the procedure, carry out all necessary measures to satisfy the public interest and the discovery of material truth, and is not subordinate to the initiative of the petitioner".

In the same manner, Article 6 of the Supplementary Regulation of Tax Inspection Procedure establishes that "the tax inspection procedure aims at the discovery of material truth, and the tax administration must adopt on its own initiative the appropriate measures to this end".

In the case at hand, the Applicant imputes to the Tax and Customs Authority a violation of this principle by not having performed any investigative action to verify the banking documentation, to which access the Applicant and its administrators expressly authorized and is legislatively considered an effective means to obtain proof of the sale prices.

In fact, the fact that n. 6 of Article 139 expressly provides the obligation for taxpayers wishing to prove the effective prices of the transfer of properties to authorize access to their banking information unequivocally expresses that, in the legislative perspective, banking documentation is a privileged means of proof of the real values of real estate transactions, which has clear justification, as usually financial operations of large amounts, as real estate normally are, are carried out with the use of banking payment methods.

Therefore, having the Applicant presented the authorizations referred to, it was, in principle, a mandatory action for the Tax and Customs Authority to fulfill the obligation imposed on it by Article 58 of the LGT to carry out all necessary measures to discover material truth, to seek to obtain banking information intended to confirm or refute the payments referred to in the deeds of sale of the properties.

It is said "in principle", as the fulfillment of this obligation can be dispensed with in the event that its fulfillment is not necessary (as can be inferred from the reference in Article 58 to "necessary measures") or if it can be foreseen that the measures would be futile, as follows from the duty of abstention from performing futile acts, established in Article 57, n. 1, of the LGT.

But, beyond the decision of the procedure provided for in Article 139, the entity that rendered it did not itself indicate what the reason was why it did not access the banking documentation of the Applicant and its administrators. The only explanation that appears is that given by the expert indicated by the Tax and Customs Authority, who states that "the authorizations for access to bank accounts were not used taking into account that the managers are non-resident".

However, it is manifest that this "explanation" does not constitute an acceptable reason for non-compliance with the obligation to access the banking documentation.

Indeed, we are not faced with a situation of unnecessary performance of measures, as the Tax and Customs Authority did not establish that the sale prices were not those contained in the deeds, only understanding that the Applicant did not prove that they were those indicated therein and, therefore, material truth consists of the determination of the actual prices, which remain to be ascertained.

Furthermore, it cannot be foreseen that the measures referred to would be futile.

In fact, first of all, the possibility of the "managers" being non-resident would not explain the non-performance of any measure to verify the banking documentation of the Applicant itself, which is a company with registered office in Portugal.

Moreover, all administrators of the Applicant have professional domicile in Portugal, so the possibility of residing abroad (one of them is even holder of a Portuguese identification document), does not allow the conclusion that they do not have bank accounts in Portugal, but rather justifies a prediction to the contrary, as it is probable that they have bank accounts in the country where they conduct professional activity. And, in any case, it should be stressed that there are increasing international instruments for the exchange of this type of information.

It is true that the fact that two of the Applicant's administrators are non-resident clearly points to the possibility of their having bank accounts abroad, but this is also a possibility that applies to any resident in Portugal, as it is not prohibited for citizens resident to have bank accounts abroad.

Therefore, it is manifest that there was no ground to foresee the hypothetical futility of access to the banking documentation of the Applicant and its administrators.

Thus, it must be concluded that the Tax and Customs Authority did not fulfill the obligation to carry out all necessary measures to ascertain material truth, in which those intended to ensure knowledge of banking documentation assumes a relevant role, in the face of the law.

Moreover, the non-performance of these measures necessarily affects the assessment that the Tax and Customs Authority made of the evidence presented by the Applicant, as it did not confront the elements presented with the banking data that could corroborate or refute them.

Without these measures, one cannot but remain in a situation of founded doubt about the quantification of the Applicant's taxable matter that could be made if they were performed.

Indeed, it would be poorly understood that, relying on Article 64, n.s 1 and 2, of the Corporate Income Tax Code, the Tax and Customs Authority could confine itself to an exclusively passive attitude in the matter of gathering evidence, limiting itself to contesting any and all evidence less than fully presented by the taxpayer who would wish to avail itself of the faculty of Article 139 of the Corporate Income Tax Code.

Thus, by virtue of the provision of Article 100, n. 1, of the CPPT, the evidentiary issue must be procedurally valued in favor of the Applicant, justifying the annulment of the challenged assessment.

3.2. Illegality of the assessment of compensatory interest

The assessment of compensatory interest is premised on the assessment of Corporate Income Tax, so that the illegality of the latter entails the illegality of the former, for the same reasons.

3.3. Issues of prejudicial knowledge

Since the request for arbitral decision is to be judged well-founded on the ground of the defect of error in the quantification of the taxable fact, it is rendered prejudicial, as it becomes futile, the consideration of the remaining questions relating to the legality of the challenged assessment.

4. Indemnification for undue guarantee

The Applicant makes a request for recognition of the right to indemnification for the provision of an undue guarantee.

As results from item o) of the factual matters fixed, the Applicant provided a bank guarantee, to obtain suspension of the fiscal enforcement proceedings regarding the collection of the assessed amount.

In accordance with the provision of paragraph b) of n. 1 of Article 24 of the RJAT, the arbitral decision on the merits of the claim to which there is no recourse or challenge binds the tax administration from the end of the period provided for recourse or challenge, and the latter must, in the exact terms of the well-foundedness of the arbitral decision in favor of the taxpayer and until the end of the period provided for the voluntary execution of the sentences of the judicial tax courts, "restore the situation that would exist if the tax act which is the subject of the arbitral decision had not been performed, adopting the acts and operations necessary for this purpose".

Regarding the request for condemnation to the payment of indemnification for the provision of an undue guarantee, Article 171 of the CPPT establishes that "the indemnification in case of a bank guarantee or equivalent unduly provided will be requested in the proceeding in which the legality of the collectable debt is disputed" and that "the indemnification must be requested in the complaint, challenge or appeal or in case its ground being subsequent within 30 days after its occurrence".

Thus, it is unequivocal that the judicial challenge proceeding encompasses the possibility of condemnation to the payment of undue guarantee and even is, in principle, the adequate procedural means to formulate such request, which is justified by obvious reasons of procedural economy, as the right to indemnification for undue guarantee depends on what is decided on the legality or illegality of the assessment act.

The request for constitution of the arbitral tribunal and for arbitral decision has as a corollary that it is in the arbitral proceeding that the "legality of the collectable debt" will be discussed, so, as results from the express wording of that n. 1 of the said Article 171 of the CPPT, it is also the arbitral proceeding that is adequate to consider the request for indemnification for undue guarantee.

The regime of the right to indemnification for undue guarantee is contained in Article 52 of the LGT, which establishes the following:

Article 53

Guarantee in case of undue provision

1. The debtor who, to suspend enforcement, offers a bank guarantee or equivalent shall be indemnified in whole or in part for the damages resulting from its provision, if he has maintained it for a period exceeding three years in proportion to the success in administrative recourse, judicial challenge or opposition to enforcement that have as their object the guaranteed debt.

2. The period referred to in the previous number does not apply when it is verified, in gracious complaint or judicial challenge, that there was error attributable to the services in the assessment of the tax.

3. The indemnification referred to in number 1 has as its maximum limit the amount resulting from the application to the guaranteed value of the rate of indemnificatory interest provided for in this law and can be requested in the actual process of complaint or judicial challenge, or autonomously.

4. Indemnification for the provision of an undue guarantee will be paid by deduction from the revenue of the tax in the year in which the payment was made.

In the case at hand, it is manifest that the defect affecting the act of assessment of Corporate Income Tax and compensatory interest is attributable to the tax administration, as it was the tax administration that omitted the performance of measures necessary for the correct ascertainment of material truth and the Applicant in no way contributed to the occurrence of that omission.

Therefore, the Applicant is entitled to indemnification for the guarantee provided.

There being no elements that make it possible to determine the amount of indemnification, the condemnation must be made with reference to what comes to be assessed in execution of this decision (Articles 609, n. 2, of the Code of Civil Procedure and 565 of the Civil Code).

5. Decision

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

a) Judge the request for arbitral decision well-founded;

b) Annul the assessment of Corporate Income Tax and compensatory interest n. 2015...;

c) Judge the request for arbitral decision well-founded regarding the recognition of the right to indemnification for undue guarantee and condemn the Tax and Customs Authority to pay the amount to be determined in execution of this decision.

6. Value of the proceedings

In accordance with the provision of Article 306, n. 2, of the Code of Civil Procedure of 2013, Article 97-A, n. 1, paragraph a), of the CPPT and Article 3, n. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the proceedings are assigned the value of € 650,790.67.

7. Costs

Pursuant to Article 22, n. 4, of the RJAT, the amount of costs is fixed at € 9,792.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.

Lisbon, 31-10-2016

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(Gustavo Courinha)

(Jorge Júlio Landeiro de Vaz)