IMT Exemption for Property Resale: CAAD Arbitral Decision 191/2017-T

Arbitral Decision[1]

The arbitrators Dr. Jorge Manuel Lopes de Sousa (arbitrator-president, chosen by the other Arbitrators), Dr. Paulo Ferreira Alves and Dr. Sílvia Oliveira, designated, respectively, by the Claimant and the Respondent, to form the Arbitral Tribunal, constituted on 16-06-2017, agree as follows:

1. Report

A…, S.A., with registered office at Rua …, nº…, parish of…, municipality of Porto - TAX OFFICE OF PORTO –… (…) -, holder of the unique identification number for legal entities and registration number … (hereinafter referred to as "Claimant"), filed a request for arbitral decision seeking the annulment of the Additional Assessment to IMT 2011/… .

Subsidiarily, the Claimant argues that the value of the real property to be considered is less than that which was considered to determine the tax assessed.

The Respondent is the TAX AND CUSTOMS AUTHORITY.

The Claimant designated as Arbitrator Dr. Paulo Ferreira Alves, pursuant to the provisions of article 6º, no. 2, paragraph b), of the RJAT.

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 23-03-2017.

Pursuant to the provisions of paragraph b) of no. 2 of article 6º and no. 3 of the RJAT, and within the deadline provided for in no. 1 of article 13º of the RJAT, the highest official of the Tax Administration service designated as Arbitrator Dr. Sílvia Oliveira.

The Arbitrators designated by the Parties indicated to preside over the Arbitral Tribunal Counsel Jorge Lopes de Sousa, who accepted the appointment.

Pursuant to and for the purposes of the provisions of no. 7 of article 11º of the RJAT, the President of CAAD informed the Parties of this designation on 24-05-2017.

Thus, in accordance with the provisions of no. 7 article 11º of the RJAT, after the deadline provided for in no. 1 of article 13º of the RJAT had elapsed without the Parties making any submissions, the Collective Arbitral Tribunal was constituted on 16-06-2017.

The Tax and Customs Authority filed a Response, in which it argued that the request for arbitral decision should be judged unfounded.

By order of 04-09-2017, a hearing was dispensed with and it was decided that the proceedings would continue with written submissions.

On 14-09-2017, the Tax and Customs Administration filed in the proceedings a "print" obtained from its computer system, with a list of historical values of the real property registered with article …, of the Parish of …, in Vila Nova de Famalicão.

The Parties made no submissions.

The Arbitral Tribunal was duly constituted and is competent.

The parties are properly represented, have legal personality and capacity and are legitimated (articles 4º and 10º, no. 2, of the same statute and article 1º of Ordinance no. 112-A/2011, of 22 March).

There are no nullities nor obstacles to the consideration of the merits of the case.

2. Statement of Facts

2.1. Proven Facts

The following facts are considered proven:

• The Claimant is a company whose purpose is "purchase, in particular for resale, the sale, construction and rental of rural or urban real property, including the establishment and negotiation of property fractions in horizontal ownership, the promotion and negotiation of subdivision projects and the urbanization and administration of properties, the provision of consultancy services in the scope of the aforementioned activities and the administration of condominiums of own or third-party properties";

• In the year 2011, the Claimant normally exercised its activity, and therefore benefited from the exemption from IMT payment in the purchase for resale of real property, under the provisions of article 7º of the CIMT;

• On 21-12-2011, the Claimant purchased from B…, S. A., the "urban real property, located in Lugar de …, parish of …, municipality of Vila Nova de Famalicão composed of two buildings linked to each other, intended for industry and outbuilding, with a total area of thirty-six thousand six hundred and nine point five square meters, with the currently covered area of fourteen thousand one hundred and forty-two point four square meters, described in the Commercial Registry Office of Vila Nova de Famalicão under number ... (…), currently registered in the matrix under article..." (document no. 9 attached to the request for arbitral decision, whose contents are given as reproduced);

• In the deed of the purchase and sale contract it was stated that the acquired real property was intended for resale;

• The Claimant benefited from said IMT exemption in the acquisition of the real property;

• The property was acquired for the price of €2,745,000.00, with the Claimant obtaining for such acquisition and improvements financing of €5,267,500.00 carried out by Bank C…, guaranteed with a mortgage on the aforementioned property (documents nos. 8 and 9 attached to the request for arbitral decision, whose contents are given as reproduced);

• The tax asset value of this property, in the year 2011, was €3,573,210.00 (document filed by the Tax and Customs Administration on 14-09-2017);

• On 23-03-2013, in the context of a financial restructuring of a group of companies predominantly controlled by a director and, indirectly, major shareholder of the Claimant, various autonomous legal transactions were contractually executed, which were based in part on a transfer of bank credits from Bank C…, to a third entity, D…, NIF…, subject to various conditions;

• Among the conditions fixed, was the transfer to E… (…) (i) of the ownership of the urban real property, composed of two buildings linked to each other, intended for industry and outbuilding, located in Lugar de …, parish of…, municipality of Vila Nova de Famalicão under number …, of that parish, registered in the respective matrix under article …(…)" (document no. 10 attached to the request for arbitral decision, whose contents are given as reproduced, in particular Clause 2nd of the Supplementary Document);

• On 27-03-2013, the Claimant and the company E…, SA, NIPC…, executed a deed of "Payment in Kind," a copy of which is contained in document no. 12 attached to the request for arbitral decision, whose contents are given as reproduced, in which the representatives of the Claimant declare:

"That, by this present deed, for payment of the credit in the value of five million two hundred and eighty-nine thousand five hundred and forty-nine euros, of which E… is the holder against A… (the "E… Credit"), they give in payment to the aforementioned E…, on the present date:

a) Urban real property located in Lugar de …, parish of …, municipality of Vila Nova de Famalicão, described in the Land Registry Office of Vila Nova de Famalicão under number …, of said parish, with the acquisition registered in favor of A… by the registration resulting from the Annotation … of 2011/12/14, registered in the respective matrix under article…, with the tax asset value of €3,707,205.38 (the "property"), to which they attribute the value of three million seven hundred and seven thousand two hundred and five euros and thirty-eight cents;

That on the property there is a voluntary mortgage registered in favor of Bank C…, by the registration resulting from Annotation 74 of 2011/12/14, which was transferred in favor of E…, as a result of a deed of transfer of credits executed in this Office on twenty-three March two thousand and thirteen, at folio …, and by deed executed today in this Office at folios immediately preceding these.

That on the property there is a burden of non-subdivision, for a period of ten years counting from sixteen December two thousand and three, registered by the registration resulting from Annotation … of 2004/05/04.

b) The credit of which A… is the holder against the company F…, SA, NIPC and registration number in the Commercial Registry Office …, with registered office at Rua …, number…, in Porto, with share capital of one million nine hundred and fifty thousand euros (the "F…"), in the value of one million five hundred and eighty-two thousand three hundred and forty-three euros and sixty-two cents, to which they attribute identical value (the "A… Credit").

• In the referred payment in kind deed it was declared by the representatives of E…, that "pursuant to and for the purposes of the provisions of article 837º of the Civil Code, they accept the payment in kind of the Property and the A… Credit, in the terms set out above, and with this they declare the E… Credit definitively and immediately extinguished and, consequently they declare, for all due purposes, the aforementioned A… totally and definitively released from the obligation arising from the same, expressly and irrevocably excluding the presumption contained in article 840º of the Civil Code";

• E…, S.A., legal entity no.…, at the moment of the execution of the aforementioned deed of transfer of credits, did not hold any credit against the Claimant;

• With the execution of the payment in kind deed in the terms aforementioned, E…, S.A., legal entity no. … considered that all its credits against the Claimant, acquired at the moment immediately prior to the execution of the aforementioned deed, were completely extinguished;

• The Tax and Customs Administration carried out a tax inspection of the Claimant, under Service Order no. OI2014…;

• In that tax inspection a draft of the Tax Inspection Report was prepared which is in the administrative process, whose contents are given as reproduced, in which it is stated, among other things, the following:

From the analysis of the elements of the taxpayer's accounting we detected the following irregular situations:

Real Estate Transfer Tax - IMT

Pursuant to no. 1 of article 7º of the IMT Code, acquisitions of real property for resale are exempt from IMT.

A… benefited from said exemption in the acquisition of the real property with article …, of the Parish of …, in Vila Nova de Famalicão, an acquisition which was carried out on 21 December 2011, for the amount of €2,745,000.00, obtaining for such acquisition and improvements financing of €5,267,500.00.

The tax asset value of this property, in the year 2011, was €3,573,210.00.

On 27 March 2013, A… and "E…, SA", NIPC…, executed a deed of Payment in Kind, in which the representatives of A… declare:

(...)

Thus, through the deed described here, on twenty-seven March 2013, A… gave in payment, for payment of a debt, to E…, the real property with article …, of the Parish of …, in Vila Nova de Famalicão, which had been acquired, on 21 December 2011, an acquisition that benefited from the IMT exemption, exemption established by no. 1 of article 7º of the IMT Code which exempts from that tax the acquisition of real property for resale.

However, it must be noted that no. 5 of article 11º of the same legal statute provides that the acquisition referred to in article 7º shall cease to benefit from exemption as soon as it is verified that the real property acquired for resale was given a different destination or that they were not resold within the period of three years or were resold again for resale.

Now, in the case at issue, we have that the real property which enjoyed this exemption was the subject of a payment in kind, and since it is the traditional understanding of our jurisprudence that payment in kind constitutes an operation distinct from resale, we are faced with the situation of a real property which was given a different destination which, consequently, leads to the loss of the IMT exemption that it had benefited from when its acquisition took place. In this same sense pronounced itself the Supreme Administrative Court, through the Judgment of 4 October 2000, Proceeding 024923, from which we highlight:

(...)

Thus, verifying that, in the terms already explained, that:

• In 2013, A… gave in payment, for payment of a debt, to E…, the real property with article …, of the Parish of …, in Vila Nova de Famalicão, which had been acquired, on 21 December 2011, for the amount of €2,745,000.00;

• That acquisition benefited from the exemption established by no. 1 of article 7º of the IMT Code, which exempts from this tax the acquisition of real property for resale;

• Payment in kind constitutes - as per the aforementioned Supreme Administrative Court judgment - an operation distinct from resale.

It follows, in accordance with the provisions of said no. 5 of article 11º of the IMT Code, that the acquisition in question ceased to benefit from exemption, because it was verified that, to the real property acquired for resale, a different destination was given, which, as prescribed in article 34º and no. 6 of article 36º of the same Code, the taxpayer should have proceeded with the regularization of the situation, requesting the assessment of the IMT that should be due, as a consequence of the cessation of the prerequisites that determined the exemption of the transaction in question.

Thus, considering that the company gave to the real property acquired for resale a destination different from that which originated the granting of the exemption and, having not provided for the fulfillment of what is established in article 34º of the IMT Code (Lapse of Exemption - Request for Assessment) and no. 6 of article 36º of the same Code, it is proposed the assessment of IMT on its acquisition value.

Corrections to the taxable matter for purposes of IMT: €3,573,210.00.

• The Claimant exercised the right of hearing regarding the draft of the Tax Inspection Report, following which an information was prepared, dated 03-05-2016, which is in the administrative process, whose contents are given as reproduced, in which it is stated, among other things, the following:

Of the Law

- The right of hearing was submitted within the deadline established in article 60º of the LGT;

In the context of IMT:

- On 13-12-2011 the IMT assessment no. … was carried out with exemption granted under article 7º of the respective code which preceded the deed of purchase and sale executed on the 21st of that month;

- The real property in question was transferred by deed of payment in kind which, according to the traditional understanding of our jurisprudence, constitutes an operation distinct from resale.

- Thus, we are faced with the situation of a real property which was given a different destination, which, as established in no. 5 of the aforementioned article 11º, determines the lapse of the IMT exemption that benefited it when its acquisition took place. The transfer of this property by means of a payment in kind deed does not comply with the objective that was underlying its acquisition and that justified the exemption, nor can it be considered that it was carried out in the scope of the activity of purchase of real property for resale to which the taxpayer is dedicated and under the exercise of which he acquired it.

- With respect to the taxable asset value to be considered for purposes of IMT assessment, no. 2 of article 18º of the said statute clarifies that "If the lapse of exemption occurs, the rate and the value to be considered in the assessment shall be those in force on the date of assessment", reporting this to the date on which assessment should have been requested, as per clarification of the IMT Services Directorate of 26-11-2014. That is, since the lapse of exemption occurred - on 27-03-2013, the asset value to be considered shall be that which was in force on the date of 26-04-2013 (30 days after the lapse of exemption), in view of the provisions of no. 1 of article 34º of the IMT Code, that is, €3,707,205.38 EUR.

(...)

Conclusion

Thus, in light of the foregoing, the request should be denied.

• On 03-05-2016, an order was issued manifesting agreement with this information and denying the request for annulment of the assessment formulated in the exercise of the right of hearing;

• The Tax Office of Vila Nova de Famalicão - … issued the additional IMT assessment no. 2011/…, with the following content:

TAXPAYER: A… S A, NIPC …

ADDITIONAL ASSESSMENT TO IMT 2011/…

The amount of €240,968.35 of I.M.T. is due in relation to the deed of purchase and sale executed on 21-12-2011, at the notarial office of G…, by reason of having benefited from IMT exemption for resale, under article 7º of the IMT Code and having given the property a different destination, thus occurring the lapse of exemption, under no. 5 of article 11º of the said code, in relation to the following real property:

1) Urban real property with allocation of Warehouses and industrial activity, registered in the matrix of the parish of…, of this municipality under article…, with the taxable asset value, on the date of lapse of exemption, of €3,701,205.38 and declared value of €2,745,000.00;

The asset value shall serve as the basis for the assessment, in accordance with no. 1 of article 12º. The rate of 6.5% provided for in paragraph d) of no. 1 of article 17º of the CIMT is applied.

Assessment: €3,707,205.38 X 6.5% = €240,968.35

Compensatory interest counted in accordance with article 33º of the CIMT (27-04-2013 to 12-06-2015) = €20,492.21

DATE OF LAPSE OF EXEMPTION: 2013-03-27

Assessment carried out following the information given in proceeding OI2014…, of the Finance Directorate of Porto.

• On 06-10-2016, the Claimant filed a gracious appeal of the aforementioned assessment, regarding which the Tax and Customs Administration prepared a draft decision, which is in the administrative process, dated 13-10-2016, whose contents are given as reproduced;

• The Claimant exercised the right of hearing regarding the draft decision denying the gracious appeal;

• On 13-12-2016, the Chief of Finance of Famalicão…, issued the order denying the gracious appeal which is in the administrative process, whose contents are given as reproduced, in which it is stated, among other things, the following:

A. REPORT

The Taxpayer identified above, notified by official letter no. … on 14 November 2016, presented a defense on 28 November, where he alleges in the context of prior hearing, not to agree with the draft denial, because it was not properly reasoned, particularly with respect to payment in kind not being able to fit within the concept of resale.

The company now appealing, through the deed executed on twenty-seven March 2013, A… gave in payment, for payment of a debt, to E…, the real property with article …, of the Parish of…, in Vila Nova de Famalicão, which had been acquired, on 21 December 2011, an acquisition that benefited from the IMT exemption, exemption established by no. 1 of article 7º of the IMT Code, which exempts from that tax the acquisition of real property for resale.

However, it must be noted that no. 5 of article 11º of the same legal statute provides that the acquisition referred to in article 7º shall cease to benefit from exemption as soon as it is verified that the real property acquired for resale was given a different destination, or that they were not resold within the period of three years, or were resold again for resale.

In the case at issue, we have that the real property which enjoyed this exemption was the subject of a payment in kind, and since it is the traditional understanding of our jurisprudence that payment in kind constitutes an operation distinct from resale, we are faced with the situation of a real property which was given a different destination which, consequently, leads to the loss of the IMT exemption that it had benefited from when its acquisition took place.

In this same sense pronounced itself the Supreme Administrative Court, through the Judgment of 4 October 2000, Proceeding 024923, from which we highlight:

(...)

Thus, verifying in the terms already explained, that:

• In 2013, A… gave in payment, for payment of a debt, to E…, the real property with article …, of the Parish of…, in Vila Nova de Famalicão, which had been acquired, on 21 December 2011, for the amount of €2,745,000.00;

• That acquisition benefited from the exemption established by no. 1 of article 7º of the IMT Code, which exempts from this tax the acquisition of real property for resale;

• Payment in kind constitutes - as per the aforementioned Supreme Administrative Court judgment - an operation distinct from resale.

It follows, in accordance with the provisions of said no. 5 of article 11º of the IMT Code, that the acquisition in question ceased to benefit from exemption, because it was verified that, to the real property acquired for resale, a different destination was given, which, as prescribed in article 34º and no. 6 of article 36º of the same Code, the taxpayer should have proceeded with the regularization of the situation, requesting the assessment of the IMT that should be due, as a consequence of the cessation of the prerequisites that determined the exemption of the transaction in question.

Thus, considering that the company gave to the real property acquired for resale a destination different from that which originated the granting of the exemption and, having not provided for the fulfillment of what is established in article 34º of the IMT Code (Lapse of Exemption - Request for Assessment) and no. 6 of article 36º of the same Code, IMT should be assessed on its acquisition value.

In light of the foregoing, there are neither were any other relevant elements added, capable of altering the draft decision.

B. DECISION

In accordance with the legislative context already notified to the appellant in the context of prior hearing, the present Gracious Appeal (…2016…) is decided, making the draft decision notified to the appellant definitive and consequently declares the request unfounded.

Please note that you may, if you wish, file a hierarchical appeal within 30 days (article 66 no. 2 of the CPPT), or appeal judicially within three months (article 102 of the CPPT), or request the constitution of an Arbitral Tribunal within 90 days (article 10 no. 1 a) of Decree-Law 10/2011 of 20 January).

• On 21-03-2017, the Claimant filed the request for constitution of an arbitral tribunal that gave rise to the present proceedings.

2.2. Unproven Facts and Reasoning of the Factual Decision

The proven facts are based on documents attached to the request for arbitral decision and in the administrative process, being not subject to controversy.

3. Legal Issues

3.1. Questions that are subject of the proceedings and Positions of the Parties

The Claimant is engaged in the activity of acquisition of real property for resale and acquired a property in 2011, declaring that it intended it for resale, benefiting from the IMT exemption provided for in article 7º of the CIMT, which establishes the following:

Article 7º
Exemption for the acquisition of real property for resale

1 - Acquisitions of real property for resale are exempt from IMT, in accordance with the following number, provided that it is verified that the declaration provided for in article 112º of the Code of Personal Income Tax (IRS) or in paragraph a) of no. 1 of article 109º of the Code of Corporate Income Tax (IRC) was submitted before the acquisition, as the case may be, relating to the exercise of the activity of buyer of real property for resale.

2 - The exemption provided for in the previous number does not prejudice the assessment and payment of the tax, in general terms, unless it is recognized that the acquirer normally and habitually exercises the activity of buyer of real property for resale.

3 - For purposes of the provisions in the final part of the previous number, it is considered that the taxpayer normally and habitually exercises the activity when he proves its exercise in the previous year by certificate issued by the competent tax office, and it must always be stated in that certificate whether, in the previous year, any property was acquired for resale or resold previously acquired for that purpose.

4 - When the property has been resold without being again for resale, within a period of three years, and tax has been paid, this shall be annulled by the chief of finance, upon request of the interested party, accompanied by a document proving the transaction.

In 2013, the Claimant gave in payment by which it transferred the said property to company E…, SA, for payment of a credit which that company held.

The Tax and Customs Authority understood, invoking jurisprudence of the Supreme Administrative Court, that, with this payment in kind, a different destination was given to the property, which, therefore, the exemption lapsed, in accordance with no. 5 of article 11º of the CIMT which establishes that "the acquisition referred to in article 7º shall cease to benefit from exemption as soon as it is verified that the real property acquired for resale was given a different destination or that they were not resold within a period of three years or were resold again for resale".

The Claimant understands that the lapse did not occur because, in sum, it transferred the ownership of the property within the period of three years provided for in this no. 5 of article 11º, and that payment in kind is equivalent to resale, for this purpose.

Subsidiarily, the Claimant argues that the value on which the IMT was assessed is not correct.

3.2. Question of the Lapse of Exemption

The position defended by the Tax and Customs Authority is in line with the understanding adopted by the Supreme Administrative Court in the judgment of 04-10-2000, rendered in proceeding no. 024923 [2], regarding an identical exemption that was provided for in articles 11º, no. 3, 13º-A and 16º of the Code of Municipal Transfer Tax and the Tax on Succession and Donations.

In that judgment, the Supreme Administrative Court refers to the following:

An essential premise of the appealed decision was the understanding that the "resale provided for in the CIMSISSD (as not causing the lapse) is that of a commercial nature, that which is carried out with profit intent by a person who exercises commercial activity and is, for that purpose, tax-recorded" for it to fit the ratio legis of the exemption, because "such exemption was justified by the fact that such real property, integrating the mobilized assets of the company and being resold as merchandise with achievement of profits, are subject to another fiscal burden - industrial contribution - judged more perfect than taxation in transfer tax, because it takes into account the respective revenues and costs, taxing real profit".

The exemption here in question is provided for in the law (no. 3 of article 11º of the CIMSISSD) according to the following terms "Acquisitions of real property for resale, in accordance with article 13º-A, provided that it is verified that the declaration provided for in article 105º of the Code of Tax on Natural Persons (IRS) or in paragraph a) of no. 1 of article 94º of the Code of Tax on Income of Persons Collective (IRC) was submitted before the acquisition, as the case may be, relating to the exercise of the activity of buyer of real property for resale".

And on its part in article 16º no. 1 of the same Transfer Tax Code it is established that they shall cease to benefit from exemption as soon as it is verified "that the real property acquired for resale was given a different destination or that they were not resold within a period of three years or were resold again for resale".

It is evident - and on this understanding no one disagreed in the proceedings - that the exemption provided for in no. 3 of article 11º of the CIMSISSD has as its reason for being the circumstance that it is not reasonable to tax in transfer tax the economic operations that concern goods - in case real property and only thereby subject to this taxation - which constitute the merchandise whose sale constitutes the object of the normal activity of the taxpayer and for whose profits he is subject to income tax (IRS or IRC depending on individual taxpayer or legal entity or equivalent).

We are faced with a tax exemption clearly intended by the legislator who subjected it, however, to the conditions of lapse in article 16º and not faced with any tax-legal inevitability, since, from the point of view of structuring the transfer tax, there would be no obstacle to the acquisition remaining always subject to transfer tax, applying the cost rule in income tax the value of the tax borne (...)

Thus, the question comes down to determining whether the case of lapse of the exemption provided for in no. 1 of article 16º of the CIMSISSD occurs "of the real property acquired for resale having been given a different destination", since all others pointed there are manifestly inapplicable to the situation and it was not on the basis of them that the exemption was declared affected by lapse.

So, everything comes down to knowing whether the payment in kind of the real property for whose acquisition V2 became exempt from transfer tax corresponds to a different destination than that of resale.

And we can already state that the answer can only be affirmative.

In the first place, by the verbal terms of the law: not being unaware the tax legislator of the figures close to those of sale and resale, it must be understood that he will have used the term "resale" in the sense that it has in the branch of law from which it comes.

This is a principle of interpretation today openly stated in article 11º no. 2 of the General Tax Law, otherwise it would not directly follow from the tax law.

Being thus, only those legal figures in which it is possible to find the same elements of the legal type and, notably, its economic functionality or the specific business purpose proper to the type of business should be considered as equivalent to resale.

It is in this sense that it could be argued that the figure of expropriation could fall within such concept, as this SAC has already understood in the judgment cited by the appellant.

But surely payment in kind does not fall within it, because, on the one hand, it is limited to a legal type whose object can cover both real property and movable property or rights of credit.

And more important than all this because it does not aim to create bilateral obligations of subjectively desired balance of performances, but rather to extinguish obligations whose source may not even be contractual, but extracontractual, being a cause of extinction of obligations (although contractual) with multiple causes.

But the truly decisive argument is that which is drawn from the very terms of the provision that establishes the exemption and from its ratio legis.

The use as resale can only be translated into an act that realizes the purpose that was underlying its acquisition or purchase and that justified the exemption.

The destination of resale shall have to consist of a transfer of ownership for a price carried out within and still in execution of the activity of purchase of real property for resale to which the taxpayer is dedicated and under the exercise of which he acquired it.

Put in the simplest way suggested by the Honorable Magistrate of the M.P. in his opinion: if the exemption is based on the circumstance that such real property constitute the merchandise of the activity to which the company is dedicated, the disposal of the real property must also occur as an act of sale of merchandise carried out in the exercise of the same activity of purchase of real property for resale.

Now, such does not surely happen with payment in kind in which no profit corresponding to the price ends up being received, only a situation being verified in which the taxpayer's net equity ends up being more favorable, whether it is still negative or positive.

In this way, as the appealed decision well concluded, the case of lapse provided for in the first part of no. 1 of article 16º of the CIMSISSD was verified and, consequently, the transfer tax that was assessed was due, with the act of assessment not suffering from the illegality that was charged to it.

The interpretation here effected by the Supreme Administrative Court appears to be correct.

In fact, on the one hand, the reference to "resale" within the period of three years as a condition of consolidation points, in its literalness, to only the sale of the property being relevant and not any other form of transfer of ownership.

Indeed the natural meaning of the word "resell" is that of "sell again" [3].

Selling is one of the legal forms of transfer of ownership, so the use of this word instead of a word with generic scope, such as "transact" or "alienate" points to it having been intended that only that form of alienation be relevant for the purpose of maintaining the exemption.

A confirmation that in the CIMT the expression "resell" was intentionally used instead of "transact" or "alienate" is found in article 11º itself of the CIMT, in which in two consecutive provisions both terms are employed, with regard to the lapse of two exemptions:

5 - The acquisition referred to in article 7º shall cease to benefit from exemption as soon as it is verified that the real property acquired for resale was given a different destination or that they were not resold within the period of three years or were resold again for resale.

6 - The acquisitions referred to in article 8º shall cease to benefit from exemption, if the real property are not alienated within the period of five years from the date of acquisition.

Thus, as the legislator must be presumed to have known how to express his thought in adequate terms, as required by article 9º, no. 3, of the Civil Code, "so that, lacking elements that lead to the election of a less immediate sense of the legal text, the interpreter must opt, in principle, for that sense which best and most immediately corresponds to the natural meaning of the verbal expressions used. [4]

That is, it must be concluded that in using the word "resale" one is alluding only to that form of alienation and not to any other.

Another confirmation, chronologically more distant, but even more expressive, that it was intended to restrict the maintenance of the exemption only to cases in which the "resale" is concretized within the deadline and that the same effect is not attributed to other forms of transaction, is found in the equivalent regime relating to the exemption from transfer tax in acquisition of real property acquired for resale.

In fact, in the initial wording of the Code of Transfer Tax and the Tax on Succession and Donations, approved by Decree-Law no. 41.969, of 24-11-1958, the exemption from transfer tax was provided for "acquisitions of real property for resale, when made by an entity taxed on industrial contribution for the exercise of the respective commerce" (article 11º, no. 3).

And in article 16º, no. 1, of the same Code, it was provided that the transfers referred to therein "shall cease to benefit from exemption as soon as it is verified, respectively" "that the real property acquired for resale were not transacted within two years".

With the wording given to no. 1 of the referred article 16º by Decree-Law no. 757/75, of 31 December, the reference was maintained:

1st That the real property acquired for resale were not transacted within the period of two years or were resold again for resale, except for justification accepted by order of the Minister of Finance, which may extend this period up to a maximum of two more years.

But, with the wording introduced by Decree-Law no. 263/79, of 1 August, this no. 1 of article 16º came to have the following wording:

1st That the real property acquired for resale were not resold within the period of two years or were resold again for resale, except for justification accepted by order of the Minister of Finance and Planning, which may extend this period up to a maximum of two years;

The substitution of the expression "were not transacted" by "were not resold" imposes the conclusion that it was intended to restrict to resale the forms of transaction relevant for the maintenance of the exemption.

The relevance of this literal argument is especially accentuated in the cases of provisions on benefits in which, as the Supreme Administrative Court has been uniformly understanding, a strict or declarative interpretation should be adopted, which follows from its exceptional or anti-systematic nature.

In this sense, precisely regarding the interpretation of this concept of "resale" used in article 11º, no. 5, of the CIMT, the judgment of the Supreme Administrative Court of 28-11-2012, rendered in proceeding no. 0529/12, can be seen, in which it is stated, following NUNO SÁ GOMES and SÉRGIO VASQUES:

Indeed tax benefits, among which exemption from taxation, are, by nature, of an exceptional character, as they contain a derogation from the general principles governing taxation, because they, in a certain way, derogate from the principles of tax capacity, generality and equality of taxation and only find justification in the protection of constitutionally relevant public interests, superior to those of taxation itself, whether of a political, economic, social or cultural character (Manual of Tax Law, 11th edition with addenda, 2000, pages 323/326, Nuno de Sá Gomes...)

The rules on tax benefits thus merit autonomous treatment because they are by definition anti-systematic provisions, being in permanent tension with the principle of tax capacity, which they derogate as a standard in tax distribution (See Sérgio Vasques, Manual of Tax Law, page 312.).

And it is this circumstance that legitimizes that a principle of strict or declarative interpretation (strict interpretation), founded precisely on its exceptional or anti-systematic nature, is sustained with respect to them.

Hence it is understood that exemption from tax, insofar as it goes against the principles of generality and equality of taxation, is not susceptible of application to cases that have not been expressly contemplated in the benefit granted.

Thus, in a strict interpretation of the provision (article 11º, no. 5 of the CIMT) it must be understood that, in the case of the exemption of real property acquired for resale, the Law requires, without further, the effectuation of resale as an essential prerequisite of the exemption, without equating it to any other type of act or contract.

This has also been the traditional understanding of our jurisprudence in the context of the Code of Municipal Transfer Tax and the Tax on Succession and Donations, whose regime is, in this respect, very similar to the regime of the CIMT – cf. Judgments of 6/3/1985, proceeding no. 2732, of 19.06.1985, proceeding no. 002841, of 13.10.1993, proceeding no. 15334, of 28.01.2008, proceeding no. 642/08 and of 07.03.2012, proceeding 01141/11.

As was stated in the Judgment of 13.10.1993, cited above (published in the Appendix to the Official Gazette, of 20/5/1996, pp. 3279 to 3282) "faced with the text of the applicable law and the legal intent of, with the granting of this exemption, avoiding successive taxation, in transfer tax of the same goods, in a short period of time, it will not be concluded that the legislator said less than he intended, but rather it is to be recognized that the terms used translate the will clearly expressed there, in the sense that only the act of "resale" of the property in question is relevant, for the purpose pointed there".

And also regarding the concept of resale it was also stated in the aforementioned Judgment 1141/11 that "reselling is selling again, or selling what one had bought, even if not for that purpose, and it becomes far too evident that only through the sale is resale operated, and not by simple exchange or barter of the goods originally acquired (…) Thus only resale has relevance for purposes of transfer tax exemption, which exchange or barter does not have" (Doctrinal Judgments, no. 257, page 644).

This strict interpretation of the expression "resale" has been uniformly reaffirmed by the most recent jurisprudence of the Supreme Administrative Court, as can be seen from the following judgments: of 15-02-2017, rendered in proceedings nos. 01243/16 and 01244/16; of 21-6-2017, rendered in proceeding no. 456/17; of 22-2-2017, rendered in proceeding no. 1245/16.

On the other hand, the reason which explains that this exemption is recognized to companies which have as their normal activity the commercialization of real property for resale and not to any others, is that the profits obtained from the exercise of commercial activity should preferentially be taxed in the context of income tax, in accordance with the constitutional principle that the taxation of companies should fundamentally focus on their real income (article 104º, no. 2, of the CRP).[5]

Therefore, as the scope of the provisions should come down to the limits defined by their reason for being ([6]) the field of application of the exemption should be restricted to situations in which the real property remains assigned to the activity of intermediation between the supply and demand of real property, in which the commercial activity of purchase of real property for resale in which the revenues are taxed in the context of income tax is embodied.

Thus, it must be concluded, based on elements of a literal, historical, rational and teleological nature of legal interpretation, that the exemption provided for in article 7º of the CIMT is only maintained if the property is resold within a period of three years and lapses if alienation occurs by another means, outside the commercial activity of intermediation between supply and demand in which the "exercise of the activity of buyer of real property for resale" is embodied, which justifies the granting of the exemption.

In the case at issue, the Claimant gave the property in payment, for extinction of a debt, which does not constitute "resale" nor is it part of the exercise of the activity of intermediation between supply and demand, thus a situation in which the real property acquired "for resale was given a different destination" is verified, in which the lapse of exemption occurs.

Furthermore, the transfer was carried out to satisfy the "need to financially restructure a group of companies predominantly controlled by a Director and, indirectly, major shareholder of the claimant (as it itself refers in article 18º of the request for arbitral decision), so it was manifestly carried out outside its activity of commercialization of real property for resale.

Therefore, the assessed tax assessment deserves no censure as it is premised on the lapse of exemption.

3.3. Question of the Value of the Property to be Considered in the Assessment

Subsidiarily, the Claimant argues that the value of the property that should be considered in the assessment, in 2011, is €3,573,210.00, and not that of €3,707,205.38 contained in the Assessment, since the value considered for purposes of the deed was not higher than the Taxable Asset Value.

The Tax and Customs Authority suggests that this Arbitral Tribunal does not have competence to alter the value in question, but it is obvious that the use of a value different from that which should be used to calculate the tax constitutes a vice of violation of law, by error regarding the factual or legal prerequisites, whose assessment clearly falls within the competencies of the arbitral tribunals functioning in CAAD, since it is a question that has to do with illegality of assessment acts.

The Claimant intends that the taxable asset value which the property had in 2011, which was €3,573,210.00, be considered for the purpose of assessment, arguing that "the value considered for purposes of the deed was not higher than the Taxable Asset Value".

The Tax and Customs Authority argues that "no. 2 of article 18º of the CIMT clarifies that "if the lapse of exemption occurs, the rate and the value to be considered in the assessment shall be those in force on the date of assessment", reporting this to the date on which assessment should have been requested. That is, since the lapse of exemption occurred on 27-03-2013, the taxable asset value to be considered shall be that which was in force on the date of 26-04-2013 (30 days after the lapse of exemption), in view of the provisions of no. 1 of article 34º of the CIMT, that is €3,707,205.38".

Article 18º, no. 2, of the CIMT establishes that "if the lapse of exemption occurs, the rate and the value to be considered in the assessment shall be those in force on the date of assessment".

This shall not be the case only when, after the acquisition of the goods, facts have occurred that alter the nature of the property, in which case the tax shall be assessed on the basis of the rates and values in force on the date of transfer, as results from no. 3 of the same article 18º.

The "date of assessment" is, for this purpose, the "date on which, by force of the lapse, assessment should be requested" ([7]), which is the date on which the tax event occurs, the date of the verification of the prerequisites that determine that it should occur and not the date on which the Tax and Customs Authority carries it out or the date on which the taxpayer must request that it be carried out.

In fact, the tax legal relationship is constituted with the tax event and its essential elements cannot be altered by the will of the parties (article 36º, nos. 1 and 2, of the LGT).

In cases of lapse of exemption, the tax event occurs on the date on which the exemption ceases to have effect, as is inferred from no. 1 of article 35º of the CIMT.

The lapse of exemption occurs "as soon as it is verified that the real property acquired for resale was given a different destination", as results from the provision of article 11º, no. 5, of the CIMT.

In the case at issue, the lapse of exemption occurred on 23-03-2013, the date on which the financial restructuring was agreed upon in whose conditions the obligation to transfer the ownership of the property to E… was included and, consequently, the property ceased to be intended for resale, within the scope of the Claimant's commercial activity.

Thus, the value to be considered is that which the property had on 23-03-2013.

By the document filed by the Tax and Customs Authority with the submissions, it is concluded that the taxable asset value of the property on the date of 23-03-2013, was that of €3,707,205.38, fixed on 28-12-2012.

It was this value that was considered to carry out the assessment, so it is concluded that this does not suffer from the vice that the Claimant attributes to it, with regard to the value considered.

4. Decision

In these terms, the Arbitral Tribunal agrees to:

a) Judge the request for arbitral decision unfounded;

b) Acquit the Tax and Customs Authority of the claims.

5. Value of the Proceeding

In accordance with the provisions of article 306º, no. 2, of the CPC and 97º-A, no. 1, paragraph a), of the CPPT and 3º, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceeding is fixed at €240,968.35.

Lisbon, 10-10-2017

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(Paulo Ferreira Alves)

(Sílvia Oliveira)

[1] Text prepared by computer, in accordance with article 138º, no. 5, of the Code of Civil Procedure (CPC), applicable by cross-reference of article 29º, no. 1, paragraph e), of the Legal Framework of Tax Arbitration (RJAT), with blank verses and reviewed by us, and respecting the orthography prior to the 1990 Orthographic Agreement, except as regards the transcriptions made, in which the orthography of the original was maintained.

[2] Available at https://dre.pt/application/conteudo/4083348.

[3] Priberam Dictionary, available at https://www.priberam.pt/dlpo/revenda and Infopédia Dictionary (Porto Editora), available at https://www.infopedia.pt/dicionarios/lingua-portuguesa/revender

[4] BAPTISTA MACHADO, Introduction to Law and Legitimizing Discourse, page 182.

[5] As, moreover, is clarified by the explicit text of article 11º, no. 3, of the Code of Transfer Tax and the Tax on Succession and Donations, by making reference to "entity taxed on industrial contribution for the exercise of the respective commerce".

[6] "Where the reason for the law ceases, its provision ceases (where the reason for the law ends its scope ends)" (BAPTISTA MACHADO, Introduction to Law and Legitimizing Discourse, page 186.

[7] Judgment of the Supreme Administrative Court of 09-09-2015, proceeding no. 0244/15, in which it is stated: "It appears to have been the option of the legislator that, when the lapse of exemption is verified in these situations, without the asset having suffered any alteration the tax shall be determined taking into account the rate and value in force on the date of assessment. But, when there is an alteration, the assessment will take into account the rates and values in force on the date of the transfer that occurred, naturally, before any alteration to the nature of the asset".