IUC Tax Liability in Financial Leasing: Lessor vs Lessee - Portuguese CAAD Arbitration Decision 222/2014-T

Arbitral Decision

Process No. 222/2014-T

I – Report

1.1. …, S.A., having been notified of 6 acts of additional IUC assessment (duly identified in the list attached as "Annex A"), relating to 3 vehicles and referring to the years 2010 to 2012, filed on 5/3/2014 a request for constitution of an arbitral tribunal and arbitral ruling, pursuant to the provisions of Articles 99 of the CPPT and 2(1)(a), and 10 et seq. of Decree-Law No. 10/2011, of 20/1 (Legal Regime of Arbitration in Tax Matters, hereinafter referred to only as "RJAT"), in which the Tax and Customs Authority (AT) is the respondent, with a view to "the declaration of illegality and consequent annulment of the 6 assessment acts relating to IUC concerning the 3 vehicles identified [...], reimbursement of the amount of €464.37, concerning tax unduly paid by the Applicant [and] payment of compensatory interest, for the deprivation of said amount of €464.37, pursuant to Article 43 of the General Tax Law".

1.2. On 12/5/2014 the present Singular Arbitral Tribunal was constituted.

1.3. Pursuant to Article 17(1) of the RJAT, the AT was served, as respondent party, to present a response, under the terms and for the purposes of the mentioned article. The AT presented its response on 11/6/2014, having argued for the total rejection of the applicant's claim.

1.4. By application of the present applicant, dated 8/7/2014, dispensation from the meeting provided for in Article 18 of the RJAT was requested. Notified of that application, the respondent expressed itself in the same sense, in an application dated 11/7/2014. The parties agreed with the dispensation of the Article 18 RJAT meeting but did not agree regarding the possible production of written pleadings.

1.5. By order of 14/7/2014, the Tribunal decided not to hold the meeting provided for in Article 18 of the RJAT, as it would not be useful, and understood, given the provisions of Articles 16(c) and (e), and 19, both of the RJAT, that there were sufficient elements in the case file, both of fact and of law, to render the decision. The parties were notified of the content of this order. The applicant expressed itself, also on 14/7/2014, for dispensation of the production of pleadings.

1.6. The Arbitral Tribunal was regularly constituted, has material jurisdiction, the process does not suffer from defects that invalidate it, and the Parties have judicial personality and capacity, being legitimately configured.

II – Grounds: The Factual Matters

2.1. The present applicant comes to allege, in its initial petition, that: a) "IUC is the tax that aims to burden taxpayers for the environmental and road cost associated with them, in a logic of equivalence and tax equality (Article 1 of the IUC Code). Thus, regarding this tax, the legislator chose to burden the taxpayer not according to (and to the extent of) their wealth - setting aside the principle of ability to pay -, but rather in the just measure of the cost to the environment and to road infrastructures that that taxpayer, through the use of motor vehicles, may generate"; b) "[In] cases of financial leasing, acquisition with reservation of ownership, etc., the legislator chose, [...], and (in the Applicant's opinion) rightly so, to burden with the tax obligation not the owners, but the individuals to whom exclusive enjoyment (potential for use) of the automobiles belongs: the financial lessees, purchasers with reservation of ownership or lessee with purchase option. That is, not their legal owners, but those to whom their economic ownership belongs"; c) "in a financial leasing contract, there is no doubt that the right to use the asset is subtracted from the respective owner - who, in this matter, assumes the role of lessor - to be integrated into the lessee's sphere. [Therefore] in financial leasing contracts [...] it is the lessee who has the exclusive enjoyment of the leased asset. [...]. This party holds the economic ownership of the asset, so to speak, the lessor having nothing more than its legal ownership"; d) "when a financial leasing contract is in force at the moment when IUC becomes payable, it is the lessee, and not the lessor (even though it is the latter who holds ownership of the vehicle), who must settle it."

2.2. The present applicant concludes that: a) the "illegality and consequent annulment of the 6 assessment acts relating to IUC concerning the 3 vehicles identified by their respective registration number in the list attached as document no. 1" must be declared; b) the right to "reimbursement of the amount of €464.37, concerning tax unduly paid by the Applicant [and] payment of compensatory interest for the deprivation of said amount [...], pursuant to Article 43 of the General Tax Law" must be recognized.

2.3. On its side, the AT comes to allege, in its defense: a) that there is "biased reading of the law" by the applicant; b) that the applicant's interpretation "does not attend to the systematic element, violating the unity of the regime [enshrined in the CIUC]"; c) that the applicant's interpretation "ignores the ratio of the regime enshrined in the article under consideration and, likewise, in the entire CIUC"; d) that, "regarding financial leasing, the Applicant could only be exonerated from the tax if it had complied with the specific obligation provided for [...] [in Article 19] of the CIUC. [...]. Since the Applicant did not comply with that obligation, it is necessary to conclude that it is the taxpayer of the tax"; e) that there is, on the part of the applicant, an "interpretation [...] contrary to the Constitution, insofar as it violates the principle of trust and legal certainty, the principle of efficiency of the tax system and the principle of proportionality"; f) that "there did not occur, in casu, any error imputable to the services [whereby] the legal requirements that confer the right to compensatory interest are not met." The Respondent concludes, in conclusion, that "the present request for arbitral ruling should be judged as unfounded, maintaining in the legal order the challenged tax assessment acts and absolving, accordingly, the Respondent entity from the request."

2.4. The following facts are considered proven:

i) A substantial part of the present applicant's activity comes down to the execution of financial leasing contracts intended for the acquisition, by companies and by individuals, of motor vehicles.

ii) The vehicles identified in the list of "Annex A" (… or "vehicle 1"; … or "vehicle 2" and … or "vehicle 3") were given in financial leasing, by the applicant, to the clients also identified there (see, also, contracts contained in docs. 4 to 6 attached).

iii) On the date of termination of the mentioned contracts, the lessees of said vehicles decided to exercise their purchase option, as legally and contractually provided. As demonstrated by the analysis of the sales invoices attached as docs. 7 to 9, the lessees became owners of the vehicles, having proceeded to payment of the respective residual value. In two of the vehicles, the purchasers were third parties to whom the previous lessees indicated that the vehicles should be transferred and the respective residual values invoiced.

iv) Given the aforementioned list of "Annex A", it is found, in summary, that, on the date of:

1. assessment …, of 2011 (registration month January), the lessee of "vehicle 1" was … (given that the sale to "…, Lda." only took place on 29/4/2011);

2. assessment …, of 2012 (January), the (new) owner of "vehicle 1" was "…, Lda." (see indicated sale date).

3. in assessment …, of 2010 (July), the lessee of "vehicle 2" was … (the sale to this party only took place on 23/4/2012);

4. assessment …, of 2012 (July), the (new) owner of "vehicle 2" (and previous lessee) was … (see indicated sale date).

5. assessment …, of 2010 (October), the lessee of "vehicle 3" was … (since the sale to "…, Lda." only took place on 19/4/2011);

6. assessment …, of 2011 (October), the (new) owner of "vehicle 3" was "…, Lda." (see indicated sale date).

v) The applicant was notified to proceed with payment of the IUC to which the additional assessment acts identified in the table contained in "Annex A" relate, having paid the amounts in question, in the global amount of €464.37, as attested by the payment receipts attached as docs. 1 to 3.

2.5. There are no unproven facts relevant to the decision of the case.

III – Grounds: The Legal Matters

In the present case, there are four controversial legal issues: 1) whether, as the AT concludes, there is, in the case under analysis here, "biased reading of the law" by the applicant; 2) whether, as the AT alleges, the present applicant's interpretation "does not attend to the systematic element, [and violates] the unity of the regime", and whether such interpretation "ignores the ratio of the regime enshrined in the article under consideration and, likewise, in the entire CIUC"; 3) whether, "regarding financial leasing, the Applicant could only be exonerated from the tax if it had complied with the specific obligation provided for [...] [in Article 19] of the CIUC"; 4) whether, in the present case, compensatory interest is due to the applicant.

Let us see, then.

1. and 2) The first two legal issues converge in the direction of interpretation of Article 3 of the CIUC, whereby it is necessary: a) to know whether the subjective incidence norm, contained in said Article 3, establishes or does not establish a presumption; b) to know whether, by considering that this norm establishes a presumption, this violates the "unity of the regime", or disregards the systematic element and the teleological element; c) to know - admitting that the presumption exists (and that it is iuris tantum) - whether rebuttal of the same was made; d) to know whether, "[in] cases of financial leasing, [...], the legislator chose [...] to burden with the tax obligation not the owners, but the individuals to whom exclusive enjoyment (potential for use) of the automobiles belongs".

a) Article 3, nos. 1 and 2, of the CIUC, has the following wording, which is reproduced here:

"Article 3 – Subjective Incidence

1 - The taxpayers of the tax are the owners of the vehicles, considering as such the natural or legal persons, of public or private law, in whose name they are registered.

2 - Equated to owners are financial lessees, purchasers with reservation of ownership, as well as other holders of purchase option rights by force of the lease contract".

The interpretation of the cited legal text is, naturally, essential for the resolution of the case under analysis. To that extent, it appears necessary to resort to Article 11(1) of the LGT, and, by reference from it, to Article 9 of the Civil Code (CC).

Now, pursuant to said Article 9 of the CC, interpretation starts from the letter of the law and aims, through it, to reconstitute the "legislative thought". This is to say (regardless of the objectivism-subjectivism dispute) that literal analysis is the basis of the interpretive task and the systematic, historical or teleological elements are orientation guides for said task.

The literal apprehension of the legal text in question does not generate - even if the separation of this from the ascertainment, even if minimal, of the respective meaning is very debatable - the notion that the expression "considering as such" means something different from "presuming as such". In fact, we would very hardly find authors who, in a task of pre-comprehension of said legal text, would "instinctively" reject the identity between the two expressions.

Confirming the non-distinction (both literal and of meaning) of the words "considering" and "presuming" (presumption), see, for example, the following articles of the Civil Code: 314, 369(2), 374(1), 376(2), and 1629. And, with special interest, the case of the expression "is considered", contained in Article 21(2) of the CIRC. As noted by Diogo Leite Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, regarding that article of the CIRC: "in addition to this norm showing that what is at stake in taxation of capital gains is ascertaining the real value (that of the market), the limitation on ascertaining the real value derived from the rules for determining the taxable value provided for in the CIS can only be considered as a presumption in matters of incidence, whose rebuttal is permitted by Article 73 of the LGT" (General Tax Law, Annotated and Commented, 4th ed., 2012, pp. 651-2).

b) These are just some examples that allow us to conclude that it is precisely for reasons related to the "unity of the legal system" (the systematic element) that one cannot affirm that only when the verb "to presume" is used is there a presumption, given that the use of other terms or expressions (literally similar) can also serve as the basis for presumptions. And, among these, the expressions "is considered as" or "considering as" assume, as was seen, prominence.

If literal analysis is only the basis of the task, it appears, naturally, essential to evaluate the text in light of the other elements (or sub-elements of the so-called logical element). Indeed, the AT also alleges that the applicant's interpretation "ignores the teleological element of interpretation of the law: the ratio of the regime enshrined in the article under consideration and, likewise, in the entire CIUC".

It is therefore justified to ascertain whether the interpretation that considers the existence of a presumption in Article 3 of the CIUC collides with the teleological element, i.e., with the purposes (or with the sociological relevance) of what was intended with the rule in question. Now, such purposes are clearly identified at the beginning of the CIUC: "The single circulation tax obeys the principle of equivalence, seeking to burden taxpayers to the extent of the environmental and road cost that they provoke, in implementation of a general rule of tax equality" (see Article 1 of the CIUC).

What can be inferred from this Article 1? It can be inferred that the close connection of IUC to the principle of equivalence (or benefit principle) does not allow the exclusive association of the "taxpayers" referred to there with the figure of owners but rather with the figure of users (or economic owners). As was well noted in Arbitral Decision no. 73/2013-T, of 5/12/2013: "in truth, the ratio legis of the [IUC] tax rather points in the direction that the users of vehicles should be taxed, the 'economic owner' in the words of Diogo Leite de Campos, the effective owners or the financial lessees, since these are the ones who have the polluting potential causing environmental costs to the community."

Indeed, if said ratio legis were otherwise, how could one understand, for example, the obligation (by entities that lease vehicles) - and for purposes of the provisions of Article 3 of the CIUC and Article 3(1) of Law No. 22-A/2007, of 29/6 - to provide to the DGI data regarding the tax identification of the users of said vehicles (see Article 19)? Could it be that where one reads "users", one should instead read, disregarding the systematic element, "owners with registration in their name"...?

c) From the above is drawn the conclusion that limiting the taxpayers of this tax only to the owners of vehicles in whose name they are registered - ignoring the situations in which these no longer coincide with the real owners or the real users of the same -, constitutes a restriction that, in light of the purposes of IUC, finds no basis for support.

The registration generates, therefore, only a rebuttable presumption, i.e., a presumption that can be set aside by means of proof to the contrary (proof that the registration no longer translates, at the moment of the tax obligation, the material truth that would have given rise to it).

It would be, moreover, unjustified to impose a kind of irrebuttable presumption, since, without an apparent reason, one would be imposing a (admittedly debatable) formal truth to the detriment of what really could and would have been proven; and, on the other hand, setting aside the AT's duty to comply with the inquisitorial principle established in Article 58 of the LGT, i.e., the duty to carry out the necessary procedures for a correct determination of the factual reality on which its decision must be based (which means, in the present case, the determination of the current and effective owner of the vehicle).

It should be added that, if the seller were not allowed to rebut the presumption contained in Article 3 of the CIUC, one would be benefiting, without a plausible reason, purchasers who, in possession of purchase contract forms correctly filled out and signed, and enjoying the advantages associated with their condition as owners, would try to exempt themselves, by way of a "registration formalism", from payment of tolls or fines.

In this regard, it is worth noting, also, that vehicle registration does not have constitutive effect, functioning, as previously stated, as a rebuttable presumption that the holder of the registration is, effectively, the owner of the vehicle. In this sense, see, e.g., the Judgment of the STJ of 19/2/2004, proc. 03B4639: "Registration does not have constitutive effect, since it is intended to give publicity to the registered act, functioning (only) as a mere presumption, rebuttable, (presumption 'juris tantum') of the existence of the right (arts. 1(1) and 7 of the CRP84 and 350(2) of the Civil Code) as well as of the respective ownership, all in the terms contained therein."

In the same sense, Arbitral Decision no. 14/2013-T stated, in this regard, in terms that are followed here: "the essential function of automobile registration is to give publicity to the legal situation of vehicles, registration not having constitutive effect, functioning (only) as a mere rebuttable presumption of the existence of the right, as well as of the respective ownership, all in the terms contained therein. The presumption that the registered right belongs to the person in whose name it is registered can be rebutted by proof to the contrary. Since the AT does not fulfill the requirements of the notion of third party for purposes of registration [circumstance that could prevent the full effectiveness of the executed sale and purchase contracts], it cannot avail itself of the absence of updating of the registration of the ownership right to call into question the full effectiveness of the sale and purchase contract and to demand from the seller (previous owner) payment of IUC due by the purchaser (new owner) provided that the presumption of the respective ownership is rebutted through sufficient proof of the sale."

Now, in the case under analysis here, it is verified that rebuttal of the presumption (by way of "sufficient proof" of the alleged sales) was accomplished (see docs. 7 to 9).

The AT sought to refute the presented invoices, arguing, in summary, that they are not "apt to prove the execution of a synallagmatic contract such as sale and purchase", and that it is required, to accomplish such proof, "the attachment of a copy of the [...] official form for registration of automobile ownership".

The present Tribunal, however, sees no reason to question the aforementioned invoices (nor were any elements presented that allow, with foundation, doubting the veracity of the same), understanding that they are clearly demonstrative that this party was not, on the tax date, the owner of the vehicles in question. As was well noted in Arbitral Decision no. 27/2013-T, dated 10/9/2013, "the presented documents, particularly the copies of the invoices that support, first of all, the sales [...] [of] vehicles referenced above, [...] embody means of proof with sufficient force and adequate to rebut the presumption based on registration, as enshrined in Article 3(1) of the CIUC, documents, those, that enjoy, moreover, the presumption of veracity provided for in Article 75(1) of the LGT."

d) Regarding the question of knowing whether the taxpayer of IUC is the lessee or the leasing entity, owner of the vehicle, in whose name the registration of the ownership right is made, the answer and justification given to an equal question in Arbitral Decision no. 14/2013-T, of 15/10/2013, is reproduced (because agreed with): "the financial lessee is equated to owner for purposes of Article 3(1) of the CIUC, that is to say to be a taxpayer of IUC (Cf. Article 3(2)). This being so, as it is, with the lessor not having by legal and contractual imposition the potential for use of the vehicle and the lessee having the exclusive enjoyment of the automobile, we reaffirm the one we had already reached that, in our understanding, the ratio legis of the CIUC mandates that pursuant to said Article 3(2) of this Code the lessee is responsible for payment of the tax, since it is the lessee who has the potential for use of the vehicle and provokes the road and environmental costs inherent to it. [...]. [...] we are of the opinion that if on the date of occurrence of the taxable event of the tax a financial leasing contract is in force that has as its object an automobile, the taxpayer of the tax is not the lessor but rather, in light of Article 3(2) of the CIUC, the lessee, which, in our view, makes complete sense, given that it is the latter who has the enjoyment of the vehicle and, as such, the inherent polluting potential, regardless of the registration of the ownership right remaining in the name of the lessor".

In view of the provisions of Article 3(2) of the CIUC, and the argumentation cited above, it is concluded that, if on the date of occurrence of the taxable event of the tax a financial leasing contract is in force, the taxpayer of the tax is the lessee indicated in said contract and not the lessor.

1. The AT also alleges that, "regarding financial leasing, the Applicant could only be exonerated from the tax if it had complied with the specific obligation provided for [...] [in Article 19] of the CIUC [...]. Since the Applicant did not comply with that obligation, it is necessary to conclude that it is the taxpayer of the tax".

On its side, the applicant states, in point 149 of the petition, that it complied with "the provisions of Article 19 of the IUC Code".

Whether or not there was compliance with Article 19 of the CIUC, the AT's conclusion does not proceed, given that, as was stated in the already cited Arbitral Decision no. 14/2013-T, of 15/10/2013, but now in a more developed manner: "[...] with the lessor not having, by legal and contractual imposition, the potential for use of the vehicle and the lessee having the exclusive enjoyment of the automobile, we reaffirm the conclusion we had already reached that [...] the ratio legis of the CIUC mandates that, pursuant to said Article 3(2) of this Code, the lessee is responsible for payment of the tax, since it is the lessee who has the potential for use of the vehicle and provokes the road and environmental costs inherent to it. The same conclusion is reached when one verifies the importance given to users of leased vehicles in Article 19 of the CIUC. Indeed, pursuant to the provisions of this article, entities that proceed, namely, to financial leasing of vehicles are obliged to provide to the AT (former DGCI), the tax identity of users of leased vehicles for purposes of the provisions of Article 3 of the CIUC (subjective incidence), as well as of Article 3(1) of the Law of its respective approval, since pursuant to this norm of Law No. 22-A/2007, if the revenue generated by IUC is incident on vehicles that are the object of long-term rental or operational leasing, it must be allocated to the municipality of residence of the respective user [...]. [However, despite that obligation, this does not prevent that,] on the date of occurrence of the taxable event of the tax, a financial leasing contract [is] in force that has as its object an automobile, for purposes of the provisions of Article 3, nos. 1 and 2, of the CIUC, [and] the taxpayer of IUC is the lessee even if the registration of the ownership right of the vehicle is made in the name of the leasing entity, provided that the latter proves the existence of said contract." (Italics ours).

Now, as proof of the existence of the contracts was made, as demonstrated by the reading of the financial leasing contracts attached to the case file (see docs. 4 to 6), the AT's allegation thus does not proceed, all the more so as it aimed to superimpose an obligation of formal character on a substantial reality that is unequivocally demonstrative of the applicant's condition as leasing entity in said contracts (and which was not contested by the AT).

1. A final note to appreciate, under Article 24(5) of the RJAT, the request for payment of compensatory interest in favor of the applicant (Article 43 of the LGT and 61 of the CPPT).

In this regard, Arbitral Decision no. 26/2013-T, of 19/7/2013 (which dealt with a situation very similar to the one now under consideration) recalled: "The right to compensatory interest to which the aforementioned LGT norm alludes presupposes that tax has been paid in an amount greater than that due and that this derives from error, of fact or of law, imputable to the AT services. [...] even if it is recognized that the tax paid by the applicant is not due, because it is not the taxpayer of the tax obligation, determining, consequently, the respective reimbursement, it is not clear that, at its origin, there is an error imputable to the services, which determines such right [to compensatory interest] in favor of the taxpayer. Indeed, by promoting the official assessment of IUC considering the applicant as the taxpayer of this tax, the AT limited itself to complying with the norm of Article 3(1) of the CIUC, which, as abundantly referred to above, attributes such quality to persons in whose name the vehicles are registered."

In view of this justification, with which one agrees, it is also concluded, in the present case, that the mentioned request for payment of compensatory interest is unfounded.

IV – Decision

In light of the above, it is decided:

• To find the request for arbitral ruling founded, with the consequent annulment, with all legal effects, of the challenged assessment acts and reimbursement of amounts unduly paid;

• To find the request unfounded in the part concerning recognition of the right to compensatory interest in favor of the applicant.

The value of the process is set at €464.37 (four hundred and sixty-four euros and thirty-seven cents), pursuant to Article 32 of the CPTA and Article 97-A of the CPPT, applicable by force of the provisions of Article 29(1)(a) and (b) of the RJAT, and Article 3(2) of the Regulation of Costs in Tax Arbitration Processes (RCPAT).

Costs charged to the respondent, in the amount of €306.00 (three hundred and six euros), pursuant to Table I of the RCPAT, given that the present request was found to be founded, and in compliance with the provisions of Articles 12(2) and 22(4), both of the RJAT, and the provisions of Article 4(4) of the cited Regulation.

Notify.

Lisbon, July 30, 2014.

The Arbitrator

(Miguel Patrício)

Text prepared on computer, pursuant to the provisions of Article 138(5) of the CPC, applicable by reference from Article 29(1)(e) of the RJAT.

The wording of the present decision is governed by the orthography prior to the Orthographic Agreement of 1990.