Summary
Full Decision
ARBITRAL DECISION
The arbitrators Counsel Jorge Lopes de Sousa (arbitrator-president), Dr. Augusto Vieira and Dr. Rui Ferreira Rodrigues (arbitrators-members) appointed by the Ethics Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 29-05-2019, agree as follows:
1. Report
A... - BRANCH IN PORTUGAL (formerly designated B... - BRANCH IN PORTUGAL), Portuguese branch of a Société Civile de Placement Immobilier, constituted under French law, with Portuguese collective entity number ..., and tax domicile at ..., no. ..., ... floor, ...-... Lisbon, hereinafter designated as "Applicant", came, pursuant to Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT"), to request the constitution of an Arbitral Tribunal, with a view to declaring the illegality and annulment of self-assessment acts of Personal Income Tax ("IRC") and municipal and state levies relating to the financial year 2015, embodied in Form Declarations 22 of IRC no. ... (which was submitted on 31 May 2016 and was not processed by the tax authority), no. ... (which was submitted on 1 June 2016) and no. ... (which was submitted on 22 June 2016 and gave rise to the liquidation statement no. 2016...), as well as the decision rejecting the gracious claim no. ...2018...
The Applicant also requests restitution of the amount paid, plus compensatory interest.
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 20-03-2019.
Pursuant to the provisions of point a) of no. 2 of article 6 and point b) of no. 1 of article 11 of the RJAT, the Ethics Council appointed as arbitrators the signatories, who communicated acceptance of the assignment within the applicable period.
On 10-05-2019, the parties were duly notified of this appointment and did not manifest a desire to refuse the appointment of the arbitrators, pursuant to the combined provisions of article 11, no. 1, points a) and b) of the RJAT and articles 6 and 7 of the Ethics Code.
Thus, in accordance with the provisions of point c) of no. 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 29-05-2019.
The Tax and Customs Authority responded, defending the inadmissibility of the request and asking that the proceedings be suspended to effect a referral for a preliminary ruling to the CJEU.
The Tax and Customs Authority further stated that "the value, in case of success on the merits, corresponds to the value of € 199,617.20, that is, the tax due on the profit calculated in the period between 01.01.2015 and 30.06.2015 and which, allegedly, will be excluded from taxation through the application of Art. 22 of the EBF".
By order of 08-07-2019, the meeting provided for in article 18 of the RJAT was dispensed with and it was decided that the proceedings should continue with arguments, "including for the Parties to indicate the terms in which they understand that any request for a preliminary ruling should be made".
The arbitral tribunal was regularly constituted, in accordance with the provisions of articles 2, no. 1, point a), and 10, no. 1, of Decree-Law no. 10/2011, of 20 January, and is competent.
The Parties are properly represented, have legal personality and capacity, are legitimate and are represented (articles 4 and 10, no. 2, of the same instrument and article 1 of Ordinance no. 112-A/2011, of 22 March).
The proceedings do not suffer from nullities.
2. Factual Matter
2.1. Proven Facts
A) The Applicant is the Portuguese branch of A... (formerly designated B...) - an open real estate collective investment body constituted in France, in the form of a Société Civile de Placement Immobilier ("SCPI") for the purpose of carrying out the activity of acquisition and management of real estate assets intended for lease (documents 6 to 9 attached with the request for arbitral pronouncement, whose contents are hereby incorporated by reference);
B) A... is a civil partnership with variable capital, governed by articles 1832 and following of the French Civil Code, by articles L.214-86 to L.214-120 and R.214-130 to R.214-160 of the Monetary and Financial Code and by the General Regulation of the Financial Markets Authority (document no. 8 attached with the request for arbitral pronouncement, whose content is hereby incorporated by reference);
C) The Applicant is engaged in collective investment in real estate assets, through the contribution of various investors, in accordance with the investment policy defined by its respective management company and in compliance with a principle of risk distribution (Docs. 6 to 9, 10 and 11 attached with the request for arbitral pronouncement, whose contents are hereby incorporated by reference);
D) The Applicant's activity is subject to authorization from the competent regulator, the Autorité des Marchés Financiers ("AMF"), which issued it with the "SCPI visa no. ...-...", of 24 July 2012 (Document no. 12, attached with the request for arbitral pronouncement, whose content is hereby incorporated by reference);
E) The Applicant is managed by an investment fund management company – C..., registered in the Trade and Company Register of Paris under no. ..., authorized and subject to the supervision of the said AMF (Documents 3 to 12 attached with the request for arbitral pronouncement, whose contents are hereby incorporated by reference);
F) The Applicant performs the same economic role as hetero-managed variable capital real estate investment companies ("SIICAV"), competing with them for the attraction of investment of the same nature and offering its clients the same type of market conditions (documents nos. 8 to 10 attached with the request for arbitral pronouncement, whose contents are hereby incorporated by reference);
G) On 31 May 2016, the Applicant submitted its first Form 22 IRC declaration relating to the financial year 2015 (declaration no. ...), (Document no. 2 attached with the request for arbitral pronouncement, whose content is hereby incorporated by reference);
H) On 01-06-2019, the Applicant submitted its second Form 22 declaration relating to the financial year 2015 (declaration no. ...), by means of which it substituted the original declaration, calculating IRC, the state levy and the municipal levy in accordance with the general terms applicable to the taxation of non-resident taxpayers with permanent establishment in Portugal, subjecting all income obtained in this territory to taxation (Document no. 3 attached with the request for arbitral pronouncement, whose content is hereby incorporated by reference);
I) In this self-assessment act, the Applicant calculated: (i) taxable income not exempt in the amount of € 1,507,655.15; (ii) IRC in the amount of € 316,007.58; (iii) state levy in the amount of € 229.65; and (iv) municipal levy in the amount of € 22,614.83 (tables 09 and 10 of document no. 3);
J) On 22-06-2016, the Applicant submitted its third Form 22 declaration relating to the financial year 2015 (declaration no. ...), which replaced the previous ones, maintaining the subjection to taxation of income obtained in Portugal, in accordance with the general regime of IRC (document no. 4 attached with the request for arbitral pronouncement, whose content is hereby incorporated by reference);
K) In this declaration, the Applicant calculated taxable profit in the amount of € 1,507,655.15, IRC collection in the amount of € 316,007.58, state levy of € 229.65, and municipal levy of € 0.00, which gave rise to liquidation no. 2016 ... of 01-07-2015 (document no. 4 attached with the request for arbitral pronouncement, whose content is hereby incorporated by reference);
L) On 01-07-2016, the Tax and Customs Authority issued the liquidation statement no. 2016..., in accordance with the values calculated by the Applicant in its third self-assessment (document no. 5 attached with the request for arbitral pronouncement, whose content is hereby incorporated by reference);
M) The Applicant calculated taxable profit in accordance with the general regime provided for in IRC, but, understanding that the special regime set out in article 22 of the Tax Benefits Statute (EBF) should apply to it, submitted a gracious claim against the self-assessment;
N) The gracious claim was rejected on the grounds set out in document no. 1 attached with the request for arbitral pronouncement, whose content is hereby incorporated by reference, which states, among other things, the following:
III. Allegations
The Claimant invokes, in summary:
a) That it is the Portuguese branch of a Collective Investment Body (OIC) for real estate, an open-ended entity constituted in France, for the purpose of carrying out the activity of acquisition and management of real estate assets intended for lease in France and in the Euro Zone.
b) That it is engaged in collective investment in real estate assets, has its activity subject to authorization from the competent regulator, the Autorité des Marchés, and is managed by an investment fund management company – C... . As such, it is an entity comparable to variable capital real estate investment companies hetero-managed (SIICAV) constituted in Portugal, pursuant to the provisions of Law no. 16/2015, of 24/02.
c) That, beyond the manifest legal identity, the Claimant shares with the SIICAV the same economic role, competing with them for the attraction of investment of the same nature and offering its clients the same type of market conditions.
d) Thus, it considers that it should not have calculated taxable profit, IRC and levies, in accordance with the general regime provided for in IRC, but rather in accordance with the special regime provided for in article 22 of the EBF, which it considers applicable to OICs that are constituted and operate in Portugal, and also to all European entities that, like it, are legally and economically equivalent to these bodies, whereby the tax acts are vitiated by error.
e) That, if it is true that interpreted literally, no. 1 of article 22 of the EBF is applicable to investment funds and investment companies "that are constituted and operated in accordance with national legislation", it is also true that this regime must be considered applicable to all entities that have been constituted and operate in accordance with the legislation of another Member State of the EU,
f) under penalty of violation of the principle of non-discrimination on the basis of nationality, freedom of movement of capital and freedom of establishment, principles protected by European Union law.
g) To reinforce such understanding, it invokes CJEU case law, namely the judgments delivered in cases C-107/94 (Asscher), C-118/96 (Safir), C-55/98 (Vestergaard), C-190/12 (Emerging Markets Series of DFA Investment Trust Company), C-338/11 to C-347/11 (Santander Asset Management SGIIC) and C-387/11 (Commission/Belgium).
h) That article 63 of the TFEU prohibits all restrictions on the movement of capital between Member States and between them and third countries and, although this rule does not define the concept of movement of capital, this is found in Directive no. 88/361/EEC, invoking that the CJEU considers that the provision in point a) of no. 1 of article 65 of the TFEU must be subject to strict interpretation.
i) Thus, it argues that, being equivalent to its national counterparts, both as to its legal nature and as to its economic nature, there is no acceptable justification for sustaining less favorable treatment, that is, for not applying to it the regime provided for in article 22 of the EBF.
j) Further invoking that the Tax Authority has the duty to apply the provisions of European Union law, in accordance with the primacy of European Union law, provided for in article 8 of the CRP.
k) For the foregoing, it requests the annulment of the aforementioned tax acts of IRC for the financial year 2015, and consequently the restitution of the tax paid in excess, with the other consequences.
(...)
V. Analysis of the Request and Opinion
1- The Claimant, not tax resident in Portugal with permanent establishment, is a taxpayer subject to IRC, pursuant to the provisions of point c) of no. 1 of article 2 of the CIRC, with the tax falling on the profit attributable to its permanent establishment (Branch) pursuant to point c) of no. 1 of article 3 and article 5, both of the CIRC, which is determined in accordance with the provisions of article 55 of the CIRC.
As to the application to the Claimant of the benefits provided for in nos. 3 and 6 of article 22 of the EBF, as regards the calculation of taxable profit and exemption from municipal and state levies, the following must be stated.
2- By Decree-Law no. 7/2015, of 13 January 2015, the taxation regime of Collective Investment Bodies (OIC) was reformed, altering, of interest for the case at hand, the wording of article 22 of the EBF, applicable to income obtained by real estate investment funds and real estate investment companies that are constituted and operate in accordance with national legislation, as results from no. 1 of article 22 of the EBF, and Circular no. 6/2015''.
3- With the new wording, the legislator established, for these IRC taxpayers, an exclusion in the calculation of taxable profit of capital income, real estate income and gains referred to in articles 5, 8 and 10 of the IRS Code, as results from no. 3 of the aforementioned article 22 of the EBF and an exemption from municipal and state levies, pursuant to no. 6 of the aforementioned legal provision.
4- A taxation regime not applicable to the claimant - a legal entity under French law -, due to lack of fit with the provisions of no. 1 of article 22 of the EBF, which is contested in this request, for the reasons already listed in point III of this opinion.
5- The establishment of freedom of movement of capital and, consequently, the prohibition of adopting measures restrictive thereof, is enshrined in articles 63 and following of the TFEU, implementation of article 18 of the TFEU, and is applicable both between Member States and between Member States and third States, that is, those not part of the EU.
6- However, as results from point a) of no. 1 of article 65 of the TFEU, it is permitted that Member States apply "(...) the relevant provisions of their tax law that establish a distinction between taxpayers who are not in an identical situation with regard to their place of residence or the place where their capital is invested", taking into account their fiscal sovereignty, provided that no. 3 of the aforementioned legal provision is met.
7- Making evident that, unlike what occurs with VAT, there is no provision in the TFEU concerning the harmonization of income taxes or direct taxation, although, in an attempt to approximate the legislation of Member States, the same finds some expression in articles 114 and 115 of the said Treaty.
8- It should be noted that it is not incumbent on the TA to assess the conformity of internal rules with those of the TFEU, nor to assess their constitutionality, emphasizing that, in line with the understanding adopted by recent case law emanating from the Supreme Administrative Court, taking into account the provisions of articles 266 of the CRP and 55 of the LGT, the Tax Authority must act in accordance with the law, and may not, as a rule, fail to apply a tax rule contained in a legal instrument, due to alleged unconstitutionality, unless the Constitutional Court has already declared the unconstitutionality with binding general force, pursuant to article 281 of the CRP.
9- And, on the other hand, the TA cannot directly and automatically accept the interpretative orientations of the CJEU when these do not, in their origin, have an assessment of the compatibility between the provisions of Portuguese domestic law and European law.
10- The case law brought to the discussion by the Claimant concerns legal rules of other legal systems, and no decisions of the CJEU are known to have concluded that article 22 of the EBF, in the wording given by Decree-Law no. 7/2015, of 13/01, is inconsistent with the TFEU.
11- However, it will always be said that, according to Paula Rosado Pereira, (...) in the Schumacker Case, the Court of Justice accepted that differentiated tax treatment of residents and non-residents is not discriminatory, provided that each finds itself in different situations (...)" the author considering that "The analysis of the case law of the Court of Justice reveals, thus, that from the perspective of this body, in general terms, the use of residence as a connection element, as well as tax differentiation between resident and non-resident taxpayers, both in the internal legislation of the States and in Tax Treaties, is acceptable and does not contradict the freedoms of movement enshrined in the TFEU.
12- For the foregoing, this request should be rejected.
O) Not applying the special regime, the Applicant calculated IRC/levies in the total amount of € 316,237.23 and if it had applied the regime provided for in article 22 of the Tax Benefits Statute and the transitional regime enshrined in article 7 of Decree-Law no. 7/2015, of 13 January, it would have calculated a global collection of only € 199,617.20, all relating to profit from the first half of 2015, when the special regime was not yet applicable (agreement of the Parties: article 23 of the Applicant's allegations and article 4 of the Tax and Customs Authority's allegations);
P) On 19-03-2019, the Applicant submitted the request for arbitral pronouncement that gave rise to the present proceedings.
2.2. Unproven Facts and Justification of the Factual Matter
The facts were proven based on the documents attached with the request for arbitral pronouncement and on the administrative proceedings.
There is no controversy regarding the facts that were proven.
There are no unproven facts relevant to the decision of the case.
3. Legal Matter
Article 22 of the Tax Benefits Statute (EBF), in the wording introduced by Decree-Law no. 7/2015, of 31 January, establishes the following:
Article 22
Collective Investment Bodies
1 – The following are taxed in IRC, in the terms provided for in this article: real estate investment funds, real estate investment companies that are constituted and operated in accordance with national legislation.
2 – The taxable profit of the IRC taxpayers referred to in the previous number corresponds to the net result of the financial year, calculated in accordance with the accounting rules legally applicable to the entities referred to in the previous number, without prejudice to the provisions of the following number.
3 – For the purposes of calculating taxable profit, the income referred to in articles 5, 8 and 10 of the Personal Income Tax Code are not considered, except when such income comes from entities with residence or domicile in a country, territory or region subject to a clearly more favorable tax regime listed in an ordinance approved by the government member responsible for the financial area, the expenses linked to that income or provided for in article 23-A of the Personal Income Tax Code, as well as income, including deductions, and expenses relating to management commissions and other commissions that revert to the entities referred to in no. 1.
4 – The tax losses calculated in a given tax period in the terms provided for in the previous numbers are deducted from taxable profits, where applicable, from one or more of the 12 subsequent tax periods, with the provisions of no. 2 of article 52 of the Personal Income Tax Code applying.
5 – On the taxable income corresponding to the taxable profit minus the tax losses, as calculated in the terms of the previous numbers, the general rate provided for in no. 1 of article 87 of the Personal Income Tax Code applies.
6 – The entities referred to in no. 1 are exempt from municipal and state levies.
7 – The mergers, divisions or contributions in kind between the entities referred to in no. 1, including those without legal personality, are subject, with the necessary adaptations, to the provisions of articles 73, 74, 76 and 78 of the Personal Income Tax Code, with the provision of asset contributions provided for in no. 3 of article 73 of the said Code being applicable to contributions in kind.
8 – The autonomous taxation rates provided for in article 88 of the Personal Income Tax Code apply, with the necessary adaptations, to this regime.
9 – The IRC due on the income of the entities to which this regime applies is due for each tax period, which coincides with the calendar year, although it may be less than one calendar year:
a) In the year of commencement of activities, which is constituted by the period elapsed between the date on which activities begin and the end of the calendar year;
b) In the year of cessation of activities, which is constituted by the period elapsed between the beginning of the calendar year and the date of cessation of activities.
10 – There is no obligation to effect the withholding of IRC with respect to income obtained by the taxpayers referred to in no. 1.
11 – The assessment of IRC is effected through the income statement referred to in article 120 of the Personal Income Tax Code, with the provisions of article 89, no. 1 of article 90, article 99 and articles 101 to 103 of the said Code applying, with the necessary adaptations.
12 – Payment of the tax must be made by the last day of the deadline set for submission of the income statement, with the provisions of articles 109 to 113 and 116 of the Personal Income Tax Code applying, with the necessary adaptations.
13 – The entities referred to in no. 1 are further subject, with the necessary adaptations, to the obligations provided for in articles 117 to 123, 125 and 128 to 130 of the Personal Income Tax Code.
14 – The provision of no. 7 applies to the operations mentioned therein that involve entities with seat, effective management or domicile in Portuguese territory, in another Member State of the European Union or, also, in the European Economic Area, in the latter case provided that there is an obligation of administrative cooperation in the field of exchange of information and tax collection assistance equivalent to that established in the European Union.
15 – The management entities of the companies or funds referred to in no. 1 are jointly and severally liable for the tax debts of the companies or funds whose management falls to them.
16 – In the case of entities referred to in no. 1 divided into autonomous property compartments, the rules provided for in this article are applicable, with the necessary adaptations, to each of the said compartments, also being applicable to them the provisions of Decree-Law no. 14/2013, of 28 January.
Pursuant to article 7 of that Decree-Law no. 7/2015, "the rules provided for in article 22 of the EBF, in the wording given by this decree-law, are applicable to income obtained after 1 July 2015".
The Applicant is the Portuguese branch of a real estate collective investment body, an open-ended entity constituted in France, in the form of a Société Civile de Placement Immobilier, constituted under French law.
The Applicant performs the same economic role as variable capital real estate investment companies hetero-managed ("SIICAV"), competing with them for the attraction of investment of the same nature and offering its clients the same type of market conditions.
The statements in this sense made by the Applicant are not questioned by the Tax and Customs Authority and are corroborated by the documents presented by it.
Examining the reasoning of the decision of the gracious claim, it is concluded that the only reason why the Tax and Customs Authority rejected it is that the Applicant, by being a legal entity under French law, does not fit the provisions of no. 1 of article 22 of the EBF, as can be seen from the following excerpt:
A taxation regime not applicable to the claimant - a legal entity under French law -, due to lack of fit with the provisions of no. 1 of article 22 of the EBF, which is contested in this request, for the reasons already listed in point III of this opinion.
This understanding of the Tax and Customs Authority is confirmed in article 11 of its allegations.
3.1. Positions of the Parties
The Applicant argues as follows, in summary:
– the contested self-assessments are invalid because they embody the application of the common taxation regime for branches of foreign companies and not the special regime applicable to investment funds and investment companies provided for in article 22 of the Tax Benefits Statute;
– the regime enshrined in that rule should be subject to an interpretation in accordance with European Union law and be considered applicable, both to national collective investment bodies and to collective investment bodies (and their permanent establishments) that, like the Applicant, have been constituted in other Member States and are legally and economically equivalent to national bodies;
– if such interpretation is not deemed possible, the general regime applicable to the taxation of profit of collective investment bodies (and their permanent establishments) that, like the Applicant, have been constituted in other Member States and are legally and economically equivalent to national bodies is contrary to European Union law and violates the provisions of articles 5 and 55 of the General Tax Law and articles 13, no. 2 and 103, no. 1, of the Constitution of the Portuguese Republic;
– the Tax and Customs Authority did not put forward any substantive argument justifying the evident discrimination of the Applicant in relation to its counterparts constituted in Portugal, limiting itself to arguing that the success of the request for arbitral pronouncement determines only the partial (and not total) annulment of the contested tax acts, to argue that it cannot annul acts on the grounds of violation of the Constitution and European Union law, and to request that the issue concerning violation of European Union law be subject to a referral to the CJEU;
– it continues to understand that the contested acts are illegal and should be removed from the legal system;
– however, the Applicant does not object to the understanding of the Respondent as to the extent of the annulment and if the Arbitral Tribunal considers that the self-assessments here in question are severable, it should only annul them in the part in which they reflect the illegal application of the regime in the second half of 2015, by the difference between the total value of IRC and levy self-assessed (€ 316,237.23) and the value that would have been calculated if the self-assessments had been correctly effected (€ 199,617.20);
– the European Union law regime is sufficiently clear for the Arbitral Tribunal to annul the contested acts without referring the matter to the CJEU.
The Tax and Customs Authority maintains, in essence, the understanding adopted in the decision of the gracious claim, saying the following, in summary:
– it does not lose sight of the fact that the establishment of freedom of movement of capital and, consequently, the prohibition of adopting restrictive measures thereof, enshrined in Art. 63 and following of the TFEU, is applicable both between Member States and between Member States and third States, that is, those not part of the EU, however, point a) of no. 1 of Art. 65 of the TFEU, permits Member States to apply "(...) the relevant provisions of their tax law that establish a distinction between taxpayers who are not in an identical situation with regard to their place of residence or the place where their capital is invested", taking into account their fiscal sovereignty, provided that no. 3 of the aforementioned legal provision is met;
– the Tax and Customs Authority is bound by the principle of legality, and it is not incumbent on it to assess the non-conformity or conformity of internal rules with those of the TFEU, nor to assess their constitutionality, by force of the provisions of articles 277 and following of the CRP and article 6 of the Constitutional Court Law (Law no. 28/82, of 15 November);
– The case law brought to discussion by the Applicant concerns legal rules of other legal systems, and no decisions of the CJEU are known to have concluded that Art. 22 of the EBF, in the wording given by Decree-Law no. 7/2015, of 13/01, is inconsistent with the Treaty on the Functioning of the European Union;
– the Court of Justice accepted that differentiated tax treatment of residents and non-residents is not discriminatory, provided that each finds itself in different situations (...)" considering that in general terms, the use of residence as a connection element, as well as tax differentiation between resident and non-resident taxpayers, both in the internal legislation of the States and in Tax Treaties, is acceptable and does not contradict the freedoms of Movement of the TFEU".
– the taxation regime of Collective Investment Bodies (OIC), established in Art. 22 of the EBF, raises no doubts as to its application only to taxpayers who are constituted and operate in accordance with national legislation;
– the issue is the interpretation of a rule in light of European Union law, on which there are well-founded interpretive doubts, whereby a preliminary ruling should be made.
3.2. Assessment of the Issue
3.2.1. Duty of Courts to Assess the Compatibility of Domestic Law with European Union Law
First and foremost, it is important to clarify that, regardless of whether or not the Tax and Customs Authority has the competence to refuse to apply rules on the basis of unconstitutionality or violation of European Union law, it is unquestionable that courts do not have any such limitations.
In fact, by force of the provision in article 204 of the CRP, "in cases submitted for judgment, courts cannot apply rules that violate the Constitution or the principles enshrined therein" and among the constitutional rules is that of article 8, no. 4 of the CRP, which establishes that "the provisions of the treaties governing the European Union and the rules emanating from its institutions, in the exercise of their respective competencies, are applicable in the domestic legal order, in the terms defined by European Union law, with respect for the fundamental principles of the democratic rule of law".
3.2.2. Interpretation of Article 22, No. 1, of the EBF
Article 22 of the EBF establishes a considerably more favorable regime than the general IRC taxation regime, since, pursuant to its no. 3, "for the purposes of calculating taxable profit, the income referred to in articles 5, 8 and 10 of the Personal Income Tax Code are not considered, except when such income comes from entities with residence or domicile in a country, territory or region subject to a clearly more favorable tax regime listed in an ordinance approved by the government member responsible for the financial area, the expenses linked to that income or provided for in article 23-A of the Personal Income Tax Code, as well as income, including deductions, and expenses relating to management commissions and other commissions that revert to the entities referred to in no. 1" and exemption from state and municipal levies (no. 6).
No. 1 of article 22 of the EBF establishes that "the following are taxed in IRC, in the terms provided for in this article: real estate investment funds, real estate investment companies that are constituted and operated in accordance with national legislation", whereby it excludes from the scope of the regime provided therein companies such as the Applicant, which were not constituted in accordance with national legislation, even if they operate in accordance with national legislation, as is the case with the Applicant.
The cumulative requirement that Collective Investment Bodies have been constituted and act in accordance with national legislation leaves no room for an interpretation in the sense suggested by the Applicant that the regime referred to be applicable "both to national collective investment bodies and to collective investment bodies (and their permanent establishments) that, like the APPLICANT, have been constituted in other Member States and are legally and economically equivalent to national bodies".
In fact, Collective Investment Bodies constituted in other Member States in accordance with the legislation in force there, as is the case with the Applicant, were not constituted in accordance with national legislation.
Thus, the understanding defended by the Applicant in its first line cannot be accepted.
3.2.3. Violation of European Union Law
In accordance with the provision of article 8, no. 4 of the CRP, "the provisions of the treaties governing the European Union and the rules emanating from its institutions, in the exercise of their respective competencies, are applicable in the domestic legal order, in the terms defined by European Union law, with respect for the fundamental principles of the democratic rule of law".
The Tax Dispute Section of the Supreme Administrative Court has consistently decided in the sense of the primacy of conventional international law over domestic law, as can be seen from the judgments of 01-07-2015, delivered in case no. 0188/15, 17-06-2015, delivered in case no. 0187/15, and 25-06-2015, delivered in case no. 0464/15, in which it was understood that "pursuant to art. 8, no. 2 of the CRP, the rules of an international convention, when regularly adopted by the Portuguese State and published in the legal form, prevail over domestic law infraconstitutional in all that is conflicting with it, for which reason courts must refuse the application of a law or legal rule that violates an international treaty to which Portugal has bound itself", in the wake of GOMES CANOTILHO and VITAL MOREIRA, Constitution of the Portuguese Republic Annotated, 4th edition, page 261. ( )
The Applicant argues that the rule of article 22, no. 1 of the EBF is incompatible with the "prohibition of unjustified discrimination embodied in the Treaty on the Functioning of the European Union - freedom of movement of capital and freedom of establishment".
Article 63, no. 2 of the Treaty on the Functioning of the European Union (TFEU) establishes the rule that "all restrictions on payments between Member States and between Member States and third countries are prohibited".
Article 49 of the TFEU establishes the principle that "restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State are prohibited. This prohibition shall also include restrictions on the establishment of agencies, branches or subsidiaries by nationals of a Member State established in the territory of another Member State".
As has been peacefully understood by case law and is a corollary of the obligation to make a preliminary ruling provided for in article 267 of the TFEU (which replaced article 234 of the Rome Treaty, former article 177), the case law of the CJEU has a binding character for national courts, when it concerns issues related to European Union law (in this sense, the following judgments of the Supreme Administrative Court may be cited: of 25-10-2000, case no. 25128, published in Appendix to the Official Journal of 31-1-2003, p. 3757; of 7-11-2001, case no. 26432, published in Appendix to the Official Journal of 13-10-2003, p. 2602; of 7-11-2001, case no. 26404, published in Appendix to the Official Journal of 13-10-2003, p. 2593).
When a question of interpretation and application of European Union law arises, national courts must consider referring the matter to the CJEU by means of a preliminary ruling.
However, when community law is clear and when there is already a precedent in the case law of the CJEU, it is not necessary to resort to such consultation, as the CJEU concluded in the judgment of 06-10-1982, Case Cilfit, Proc. 283/81.
Even when the issues in question are not strictly identical (doctrine of the clarified act) and when the correct application of European Union law is so obvious that it leaves no room for any reasonable doubt as to the manner of resolving the issue of European Union law raised (doctrine of the clear act) (idem, no. 14).
3.2.3.1. Violation of the Prohibition on Restrictions on the Circulation of Capital (Article 63 of the TFEU)
It appears that there is CJEU case law that clarifies the application of article 63 of the TFEU.
Reference is made in the CJEU judgment of 10-04-2014, delivered in case no. C-190/12:
38 It should be recalled, first of all, that, although direct taxation is the responsibility of Member States, the latter must, however, exercise that responsibility in compliance with European Union law (judgment of 10 May 2012, Santander Asset Management SGIIC and others, C 338/11 to C 347/11, no. 14 and the case law cited).
39 In this respect, it is settled case law of the Court of Justice that the measures prohibited by article 63, no. 1, TFEU, as restrictions on the movement of capital, include those which are likely to dissuade non-residents from investing in a Member State or to dissuade residents of that Member State from investing in other States (judgments of 18 December 2007, A, C-101/05, Coll., p. I-11531, no. 40; of 10 February 2011, Haribo Lakritzen Hans Riegel and Österreichische Salinen, C-436/08 and C-437/08, Coll., p. I-305, no. 50; and Santander Asset Management SGIIC and others, already cited, no. 15).
40 In the present case, the tax exemption provided for by the national tax legislation at issue in the main proceedings was granted only to investment funds which exercised their activity in accordance with the Investment Funds Act.
41 It also follows from the order for reference that, under the national legislation at issue in the main proceedings, investment funds only benefit from the exemption on condition that their registered office is situated in Polish territory. Accordingly, dividends paid to non-resident investment funds could not benefit, solely on account of the place of establishment of those funds, from the exemption from withholding tax, even though those dividends could potentially be subject to a reduction in the rate of taxation under a convention for the avoidance of double taxation.
42 However, such a difference in the tax treatment of dividends between resident investment funds and non-resident investment funds is likely to dissuade, on the one hand, investment funds established in a third country from acquiring holdings in companies established in Poland and, on the other, investors residing in that Member State from acquiring holdings in non-resident investment funds (see, to this effect, judgment Santander Asset Management SGIIC and others, already cited, no. 17).
43 It follows that national legislation such as that at issue in the main proceedings is likely to lead to a restriction on the free movement of capital prohibited, in principle, by article 63 TFEU.
It appears to be clear that to the situation that arises in these proceedings applies, by parity or even by a fortiori, this CJEU case law, because, pursuant to article 22, no. 1 of the EBF, the tax benefit does not apply to the Applicant solely because its incorporation was not made in accordance with national legislation.
In fact, companies incorporated in another Member State will tend to be non-resident in Portugal (as is the case in the matter at hand), whereby this article 22, no. 1, by imposing on them a taxation regime considerably more burdensome than that applicable to companies incorporated in accordance with national legislation, has the potential to "dissuade non-residents from investing in a Member State", not least because they have to face the competition of companies that enjoy the tax benefit, which puts them in better conditions for marketing their investment products.
It is true that, as the Tax and Customs Authority says, "point a) of no. 1 of Art. 65 of the TFEU, permits Member States to apply "(...) the relevant provisions of their tax law that establish a distinction between taxpayers who are not in an identical situation with regard to their place of residence or the place where their capital is invested", taking into account their fiscal sovereignty, provided that no. 3 of the aforementioned legal provision is met".
But, as stated in no. 3 of this article 65, "the measures and procedures referred to in nos. 1 and 2 must not constitute a means of arbitrary discrimination, nor a disguised restriction on the free movement of capital and payments, as defined in article 63".
In this case, there is an arbitrary discrimination, since no basis can be discerned for such discrimination, as emerges from the decision of the gracious claim and from the position assumed in the present proceedings by the Tax and Customs Authority, in which no justification for the difference in treatment is put forward.
On the other hand, if it is true that, as the Tax and Customs Authority says, "differentiated tax treatment of residents and non-residents is not discriminatory, provided that each finds itself in different situations (...)", it is also true that in the present case, acting the Applicant in accordance with national legislation, it finds itself, as regards its activity generating IRC taxation, in a situation identical to that of companies incorporated in accordance with national law.
As understood by the Supreme Administrative Court in the judgment of 08-02-2017, delivered in case no. 0678/16, "in order for a tax regulation to be considered compatible with the provisions of the Treaty relating to the free movement of capital, it is necessary that the difference in treatment concerns situations that are not objectively comparable or is justified by overriding reasons of general interest", if "that restriction, embodied in greater taxation of a non-resident entity, cannot be neutralized, in concreto, by means of a Convention concluded between the States to avoid double taxation".
In this case, there is no provision in the Convention between Portugal and France for the Avoidance of Double Taxation and for the Establishment of Rules of Mutual Administrative Assistance in the Matter of Income Taxes, approved by Decree-Law no. 105/71, of 26 March, that would permit neutralizing the greater taxation of the Applicant in relation to companies incorporated in accordance with national legislation, which, moreover, is not even put forward by the Parties.
For the foregoing, it appears to be clear and results from precedents in European case law the interpretation of articles 63 and 65 of the TFEU, whereby the preliminary ruling is not justified on this matter.
In accordance with the foregoing, it is declared that article 22, no. 1 of the EBF is illegal insofar as it limits the regime provided for therein to companies incorporated in accordance with national legislation, excluding companies incorporated in accordance with the legislation of Member States of the European Union.
Thus, it must be concluded that the self-assessment and the decision of the gracious claim that confirmed it are vitiated by a defect of violation of law, which justifies its annulment, in accordance with the provisions of article 163, no. 1 of the Administrative Procedure Code subsidiarily applicable pursuant to article 2, point c), of the LGT.
As results from the provision of article 9 of Decree-Law no. 7/2011, of 13 January, the regime that it introduced in article 22 of the EBF only produces its effects as from 1 July 2015.
Thus, only to the part of the assessment that is based on income obtained from that date is the illegality verified, whereby the self-assessment should only be annulled in the respective part, which is quantified, in accordance with the agreement of the Parties referred to in point O) of the factual matter fixed, at € 116,620.03 (total taxation of € 316,237.23 less the tax due on profit calculated in the period between 01-01-2015 and 30-06-2015, in the amount of € 199,617.20).
3.2.4. Questions on Which Knowledge is Precluded
Being of the view that the request for arbitral pronouncement should be upheld on the basis of a defect that ensures stable and effective protection of the Applicant's interests, the knowledge of the remaining questions raised is precluded, as being unnecessary, in accordance with the provisions of articles 130 and 608, no. 2 of the CPC, subsidiarily applicable by force of the provision of article 29, no. 1, point e), of the RJAT.
4. Restitution of Amounts Paid and Compensatory Interest
The Applicant paid tax in excess, as inferred from the Liquidation Statement contained in document no. 5 attached with the request for arbitral pronouncement, in which the amount to be refunded was calculated.
The Applicant requests restitution of the tax paid unduly, plus compensatory interest.
As results from the foregoing, only as to the amount of € 116,620.03, relating to tax on profit from the second half of 2015, is annulment justified.
As regards compensatory interest, in accordance with the provisions of point b) of art. 24 of the RJAT, the arbitral decision on the merits of the claim, against which no appeal or challenge is available, binds the Tax Authority from the end of the period set for appeal or challenge, with the Authority being required, in the exact terms of the success of the arbitral decision in favor of the taxpayer and until the end of the period set for spontaneous enforcement of decisions of tax court judgments, to "restore the situation that would have existed if the tax act that is the subject of the arbitral decision had not been undertaken, by adopting the acts and operations necessary for the purpose", which is in accordance with the provisions of art. 100 of the LGT [applicable by force of the provision of point a) of no. 1 of art. 29 of the RJAT] which establishes that "the tax authority is obliged, in the event of total or partial success of a claim, judicial action or appeal in favor of the taxpayer, to immediately and fully restore the legality of the act or situation that is the subject of the litigation, including the payment of compensatory interest, where applicable, from the end of the period of enforcement of the decision".
Although art. 2, no. 1, points a) and b) of the RJAT uses the expression "declaration of illegality" to define the competence of the arbitral tribunals operating at the CAAD, making no reference to condemnatory decisions, it should be understood that the competence includes the powers which, in judicial review proceedings, are attributed to tax courts, this being the interpretation that is in accordance with the meaning of the legislative authorization on which the Government based itself to approve the RJAT, in which it proclaims, as the first guideline, that "the arbitral tax proceedings should constitute an alternative procedural means to judicial review proceedings and to the action for recognition of a right or legitimate interest in tax matters".
Judicial review proceedings, while essentially a process of annulment of tax acts, admits the conviction of the Tax Authority in the payment of compensatory interest, as can be inferred from art. 43, no. 1 of the LGT, which establishes that "compensatory interest is due when it is determined, in a gracious claim or judicial action, that there was error attributable to the services resulting in payment of the tax debt in an amount higher than legally due" and art. 61, no. 4 of the CPPT (in the wording given by Law no. 55-A/2010, of 31 December, corresponding to no. 2 in the original wording), which states that "if the decision recognizing the right to compensatory interest is judicial, the period for payment is counted from the beginning of the period for its spontaneous enforcement".
Thus, no. 5 of art. 24 of the RJAT, when it says that "payment of interest, regardless of its nature, is due in the terms provided for in the general tax law and in the Code of Tax Procedure and Process", should be understood as permitting the recognition of the right to compensatory interest in arbitral proceedings.
In the case at hand, as a consequence of the illegality of the self-assessment and of the decision of the gracious claim in the part relating to tax relating to the second half of 2015, in the amount of € 116,620.03, there is ground for refund of this amount, as a consequence of the partial annulment of the assessment, by force of the aforementioned articles 24, no. 1, point b) of the RJAT and 100 of the LGT.
The substantive regime of the right to compensatory interest is regulated in article 43 of the LGT, which establishes, to the extent relevant here, the following:
Article 43
Payment of Tax Obligation Unduly Made
1 – Compensatory interest is due when it is determined, in a gracious claim or judicial action, that there was error attributable to the services resulting in payment of the tax debt in an amount higher than legally due.
2 – Error attributable to the services is also considered to exist in cases in which, despite the assessment being made on the basis of the taxpayer's declaration, the taxpayer followed, in its completion, the general orientations of the tax authority, duly published.
- Compensatory interest is also due in the following circumstances:
(...)
d) In the event of a judgment that has become final and binding declaring or adjudging the unconstitutionality or illegality of the legislative or regulatory rule on which the assessment of the tax obligation was based and that determines its refund.
This point d) was added by Law no. 9/2019, of 1 February, and, pursuant to its article 3, "the wording of point d) of no. 3 of article 43 of the LGT, introduced by this law, also applies to judicial decisions of unconstitutionality or illegality preceding its entry into force, with compensatory interest being due for tax obligations that have been assessed after 1 January 2011".
In this case, regardless of whether the illegality is or is not attributable to the Tax and Customs Authority, the Applicant has the right to compensatory interest pursuant to this point d) of no. 3 of article 43 of the LGT.
Compensatory interest is due, pursuant to articles 43, nos. 3, point d), and 4, and 35, no. 10 of the LGT, 61, no. 5 of the CPPT, 559 of the Civil Code and Ordinance no. 291/2003, of 8 April, at the legal default rate, and is calculated from the date of 01-07-2016, on which it is considered that the unduly payment occurred (date of the assessment that calculated the amount to be refunded, contained in document no. 5 attached with the request for arbitral pronouncement), until the date of processing of the respective credit note.
5. Decision
In accordance with the foregoing, this Arbitral Tribunal agrees:
a) To reject the request for a preliminary ruling;
b) To declare illegal article 22, no. 1 of the EBF, insofar as it limits the regime provided for therein to companies incorporated in accordance with national legislation, excluding companies incorporated in accordance with the legislation of Member States of the European Union;
c) To uphold in part the request to annul the self-assessment and the decision rejecting the gracious claim, in the part relating to IRC relating to the second half of 2015, in the amount of € 116,620.03;
d) To annul the self-assessment and the decision rejecting the gracious claim in the part relating to IRC relating to the second half of 2015;
e) To uphold in part the request for refund of amount paid, as to the amount of € 116,620.03;
f) To uphold the request for compensatory interest, in the terms referred to in point 4 of this judgment;
g) To reject the request for arbitral pronouncement in the remaining part, with the Tax and Customs Authority being absolved of the request.
6. Value of the Proceedings
In accordance with the provisions of articles 296, no. 2 of the CPC and 97-A, no. 1, point a) of the CPPT and 3, no. 2 of the Regulation of Costs in Arbitral Tax Proceedings, the value of the proceedings is fixed at € 316,237.23.
In determining the value of the claim, consideration was given to "the moment at which the action is brought", pursuant to article 299, no. 1 of the CPC, subsidiarily applicable by force of the provision of article 29, no. 1, point e) of the RJAT.
7. Costs
Pursuant to article 22, no. 4 of the RJAT, the amount of the costs is fixed at € 5,508.00, pursuant to Table I attached to the Regulation of Costs in Arbitral Tax Proceedings.
The Applicant in the request for arbitral pronouncement requested the total annulment of the self-assessment and the decision rejecting the gracious claim, in the amount of € 316,237.23, and success is limited to the amount of € 116,620.03.
For the foregoing, as regards the value of the claim, the Applicant achieves success as to 36.88%.
In these terms, the division of responsibility for costs is fixed at 63.12% for the Applicant and 36.88% for the Tax and Customs Authority.
Lisbon, 19-09-2019
The Arbitrators
(Jorge Lopes de Sousa)
(Augusto Vieira)
(Rui Ferreira Rodrigues)
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