CAAD 224/2018-T: Stamp Tax on Pension Fund Management Companies Commissions Under CIS Article 7(1)(e)

ARBITRAL DECISION

I – Report

1. On 30.04.2018, the Claimant, A..., S.A., a company with the single registration and legal entity number ..., with registered office at ..., n.º..., in Lisbon (...-...), which falls within the geographical jurisdiction of the Tax Office of Lisbon-..., having been notified that, by order issued on 22.01.2018, the administrative appeal no. ...2017... was dismissed, which was processed in the Administrative Justice Division of the Finance Directorate of Lisbon, filed against the tax acts embodied in the self-assessments of Stamp Tax relating to the year 2015, carried out through payment slips n.º... and n.º..., dated 18.01.2016 and 22.01.2016, came forward, together with Pension Fund of B..., holder of tax identification number ..., Pension Fund C..., holder of tax identification number..., Pension Fund D..., holder of tax identification number..., Pension Fund E..., holder of tax identification number..., Pension Fund F..., holder of tax identification number..., Pension Fund G..., holder of tax identification number..., Pension Fund H..., holder of tax identification number..., Pension Fund I..., holder of tax identification number..., Pension Fund of J..., holder of tax identification number..., Pension Fund K..., holder of tax identification number..., Pension Fund of the ADMINISTRATORS AND/OR DIRECTORS OF K..., holder of tax identification number ..., Pension Fund of the ADMINISTRATORS OF L..., holder of tax identification number..., Pension Fund L..., holder of tax identification number..., Pension Fund M..., holder of tax identification number..., Pension Fund of N..., holder of tax identification number..., Pension Fund O..., holder of tax identification number..., Pension Fund P..., holder of tax identification number..., Pension Fund Q..., holder of tax identification number..., Pension Fund R..., holder of tax identification number..., Pension Fund of S..., holder of tax identification number ..., Pension Fund T..., holder of tax identification number..., Pension Fund U..., holder of tax identification number..., Pension Fund V..., holder of tax identification number..., Pension Fund W..., holder of tax identification number ... Pension Fund X..., holder of tax identification number..., Pension Fund Y..., holder of tax identification number..., Pension Fund of Z..., holder of tax identification number..., Pension Fund of AA..., holder of tax identification number..., Pension Fund BB..., holder of tax identification number..., Pension Fund of CC..., holder of tax identification number..., all with registered office at ..., n.º..., in Lisbon, and all managed at the time by the Claimant (hereinafter referred to as "Pension Funds"), to request the CONSTITUTION OF A COLLECTIVE ARBITRAL TRIBUNAL, with a view to obtaining a declaration of illegality of the aforementioned tax acts and of the said order dismissing the administrative appeal filed against them.

The Claimant, alleging that it has paid the amounts corresponding to the self-assessments that are the subject of the proceedings, further requests the condemnation of the Respondent to their restitution, plus compensatory interest.

1. The request for constitution of the arbitral tribunal was accepted by the Honorable President of CAAD and notified to the Tax and Customs Authority.

In accordance with and for the purposes of Article 6, paragraph 1 of the RJAT, by decision of the President of the Ethics Council, duly communicated to the parties within legally applicable time limits, the undersigned were appointed as arbitrators, who communicated to the Ethics Council and to the Administrative Arbitration Centre their acceptance of the appointment within the regularly applicable time limit.

The Arbitral Tribunal was constituted on 10 July 2018.

1. The grounds presented by the Claimant in support of its application for annulment were, in summary, the following:

a. It is the Claimant's understanding that the illegality of the present tax acts lies, firstly, at the level of the subjection to Stamp Tax of the management and administration commissions charged to the Pension Funds.

b. In fact, although for the Respondent there are no doubts as to the subjection of those commissions to item 17.3.4 of the TGIS, a correct interpretation of all applicable legal instruments provides that the objective element of the said tax incidence rule is not satisfied, namely the performance of a financial operation.

c. This failure to satisfy the tax incidence rule tains the present tax acts with manifest illegality, requiring their annulment.

d. Even if this were not so, and it were considered that the objective element of the said tax incidence rule is satisfied, which is admitted only out of professional duty, without conceding, it would always be necessary to conclude that the said commissions would be exempt from Stamp Tax, in accordance with the provisions of Article 7, paragraph 1, subparagraph e), of the Stamp Tax Code.

e. In fact, not only is the said rule not susceptible to being interpreted in the restrictive manner contended, but the consideration of all other interpretative elements shows that that exemption is applicable to the management and administration commissions charged by the Claimant to the Pension Funds.

f. Furthermore, also without prejudice to all that has been set out, the application of the regime provided for in Decree-Law no. 20/86 of 13 February and in Decree-Law no. 1/87 of 3 January is not to be disregarded, from which it would follow, in any case, that the management and administration commissions charged by the Claimant to the Pension Funds would also be exempt from Stamp Tax.

g. The provisions of Article 7, paragraph 7 of the Stamp Tax Code, in the wording given by the State Budget Law for 2016, are also inapplicable, as violating the constitutional principles of fiscal non-retroactivity and legal confidence and security, contrary to what is invoked by the tax administration services in the draft decision of the administrative appeal.

1. The ATA – Tax and Customs Authority, called upon to make representations, contested the Claimant's application for annulment, defending itself by way of objection, in summary, with the following grounds:

a. In order for us to conclude that the objective element of the tax incidence rule is satisfied, it is necessary to demonstrate that the operations carried out by pension fund management companies with a view to the management and administration of the funds constitute financial services, in terms and for the purposes of Item 17.3.4 of the TGIS.

b. Doctrine considers that financial activities within the scope of which financial operations are carried out encompass all those through which, directly or indirectly, capital raising and mobilization are sought in order to contribute to the financing process and the regular functioning of the economy.

c. This definition unequivocally encompasses the activities carried out by pension fund management companies, given that it is incumbent upon these entities by law to carry out all acts and operations necessary or appropriate for the proper administration and management of the fund, namely, to select and negotiate the investments that should form part of the fund's assets, in accordance with the defined policy; to represent the members, participants, contributors and beneficiaries in the exercise of their rights; to collect contributions; to guarantee the payments due to beneficiaries; to negotiate movable or immovable securities; to make bank deposits in the name of the fund; and to exercise all rights or carry out all acts that are directly or indirectly related to the fund's assets; to grant mortgage credit to its employees as well as to contract loans for liquidity purposes when acting as manager of the pension fund; to offer third parties the assets of the pension funds as security, in whatever legal form that security may take, exclusively within the scope of repurchase or lending contracts, or others, with the objective of effective portfolio management, in the terms to be defined by regulatory rule of the Institute of Insurance of Portugal; and to grant mortgage credit or credit to participants in the terms provided in the fund's constitutive contract.

d. Thus, the commissions charged to a Fund by a pension fund management company cumulatively satisfy the elements of objective and subjective nature contained in Item 17.3.4 of the TGIS, and are, accordingly, subject to stamp tax by virtue of the provisions of paragraph 1 of Article 1 of the Stamp Tax Code.

e. Subsidiarily, the Claimant argues that, even if it accepts the understanding that it is subject to stamp tax, it would be exempt from it relying on the alleged right to exemption in subparagraph e) of paragraph 1 of Article 7 of the Stamp Tax Code (STC), but here too it is not correct, since, as summarized by the judgment of the Supreme Administrative Court dated 15 June 2016 (case no. 0770/15), "[t]he exemption granted by Article 7, paragraph 1, subparagraph e) of the Stamp Tax Code, in the wording of Decree-Law no. 287/2003 of 12 November, as amended by Law no. 107-B/2003 of 31 December, has as its catalyzing element – to which interest, commissions charged, guarantees provided or their mere use refer – the credit granted in the terms mentioned in the same normative provision".

f. But if doubts could exist, these cease to have any basis when the legislator itself makes the express interpretation of the text it drafted, which occurred with the introduction of paragraph 7 to Article 7 of the Stamp Tax Code, through Law 7-A/2016 of 30 March.

g. In fact, this normative provision states that: "[t]he provisions of subparagraph e) of paragraph 1 apply only to guarantees and financial operations directly intended for the granting of credit, within the scope of the activity carried out by the institutions and entities referred to in that subparagraph", and since this is merely a clarification of a prior rule, the provision in question has an interpretative nature, not suffering from unconstitutionality.

1. The arbitral meeting provided for in Article 18, paragraph 1 of the RJAT was dispensed with.

2. The parties were notified to, within a simultaneous period of twenty days, submit written pleadings, only the Claimant having done so.

3. The tribunal is substantively competent and is regularly constituted in accordance with the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented.

The proceedings do not suffer from defects that would invalidate them.

1. It is necessary to resolve the following issues:

a) Illegality of the self-assessments that are the subject of these proceedings, due to breach of law.

b) In the event of a declaration of illegality of the self-assessments and consequent annulment thereof, the right of the Claimant to restitution of the tax paid and to compensatory interest.

II - The Relevant Facts

1. The following facts are considered proven:

2. The Claimant is a pension fund management company that carries out the activity of administration, management and representation of Pension Funds, the legal framework of which is set out in Decree-Law no. 12/2006 of 20 January.

3. In the course of its activity, the Claimant charges the Pension Funds under its management commissions aimed at remuneration for the provision of management and administration services for those Funds.

4. The Claimant, at the date of the tax facts in question, did not levy Stamp Tax on the said commissions.

5. In the year 2015, an external audit action was initiated on the Claimant's books for the years 2011, 2012, 2013 and 2014, with a view to verifying the tax classification, under Stamp Tax, of the management commissions charged to the Pension Funds, with additional Stamp Tax assessments subsequently being issued.

6. The basis for the said corrections lay, in summary, in the fact that the tax inspection services understood that the commissions charged by the Claimant to the Pension Funds under its management were subject to Stamp Tax, classified under Item 17.3.4 of the General Table of Stamp Tax (TGIS), and not exempt from it as the exemption provided for in subparagraph e) of paragraph 1 of Article 7 of the Stamp Tax Code was not applicable to them.

7. With a view to anticipating future corrections on the same basis, the Claimant opted to self-assess the Stamp Tax on the commissions in question that it charges to the Pension Funds it manages.

8. Thus, with reference to the year 2015, the present Claimant carried out self-assessments and respective payments to the State, as Stamp Tax, in the total amount of € 255,974.81.

9. The Claimant filed an administrative appeal against the self-assessments that are the subject of the proceedings.

10. On 29.01.2018, the Claimant was notified of the dismissal decision that was rendered on the said administrative appeal.

With relevance for the decision of the case, there are no unproven facts.

1. The Tribunal's conviction as to the decision on the facts is based on the documents contained in the file, as well as on the pleadings submitted, it being noted that there is complete agreement between the parties as to the factual matter, with disagreement limited to the legal matter.

III - The Applicable Law

1. With the relevant facts established, the question arises whether the commissions charged by pension fund management companies are subject to stamp tax in application of the combined provisions of items 17.3 and 17.3.4 of the General Table of Stamp Tax, following very closely the arbitral decision no. 527/2017-T.

Defending a negative opinion, the Claimant cites several reasons: (i) pension fund management companies cannot be qualified as credit institutions or financial companies in accordance with Article 8, paragraph 2 of the General Regime for Credit Institutions and Financial Companies and only commissions charged by entities of that nature can be included in item 17.3.4 of the TGIS for the purposes of tax incidence; (ii) the commissions charged to the Pension Funds are covered by the tax exemption regime referred to in Article 7, paragraph 1, subparagraph e) of the Stamp Tax Code; (iii) the interpretative rule of Article 7, paragraph 7 of the Stamp Tax Code, added by Law no. 7-A/2016 of 30 March, by limiting the scope of application of that exemption rule to financial operations directly intended for the granting of credit, is unconstitutional as violating the principles of irretroactivity of tax law, protection of confidence and legal security, when applicable to tax facts prior to its entry into force.

The Claimant also contends that it is not viable to levy and pay the tax, which instead constitutes a burden of the Pension Funds because they hold the economic interest underlying the financial operation, in addition to the fact that the impugned tax acts put into question the general orientation followed by the order of 17 March 1999, to which the Tax Authority was bound in accordance with Article 68-A of the General Tax Law, and in any case, the commissions charged to the Pension Funds would always benefit from the exemption applicable to real estate investment funds, in accordance with Article 4 of Decree-Law no. 20/86 of 13 February and Article 8 of Decree-Law no. 1/87 of 3 January.

The Claimant also deduces a subsidiary request with a view to the correction of the value of the assessed tax, in the event that it is understood that there is grounds for taxation, as it considers that part of the commissions charged are subsequently returned to the Pension Funds as participation units.

1. The first aspect to be considered with regard to the scope of application of item 17.3.4 of the TGIS, which refers to "commissions and consideration for financial services" resulting from "operations carried out by or with the intermediation of credit institutions, financial companies or other entities legally assimilated to them and any other financial institutions" (item 17.3). 8.

The Claimant maintains that the normative provision presupposes the cumulative satisfaction of an objective requirement (financial services) and a subjective requirement (financial institutions) such that only those financial operations legally reserved to financial companies that are subject to the General Regime for Credit Institutions and Financial Companies (RGICSF) could be subject to stamp tax.

For this result, the provisions of Article 6, paragraph 3 of that Regime would point, which excludes from the concept of "financial companies" insurance companies and pension fund management companies, and Article 8, paragraph 2, which defines the financial activities that credit institutions and financial companies are authorized to carry out.

1. This is not, however, the understanding uniformly upheld by arbitral case law and there is no reason seen now to alter it (see decisions delivered in Cases nos. 348/2016, 633/2016, 667/2016, 9/2017, 441/2017 and 527/2017).

The formulation used in item 17.3 of the TGIS encompasses not only "credit institutions, financial companies or other entities legally assimilated to them", but also "any other financial institutions". The reference to credit institutions and financial companies can be considered as intended to encompass the types of financial institutions whose establishment and conduct of activity process is specially regulated in the RGICSF. The mention of any other financial institutions has the unequivocal meaning of encompassing other types of institutions of that nature that are subject to special legislation and, therefore, are not encompassed in the general regime of the financial system.

Thus, the restriction contained in Article 6, paragraph 3 of the RGICSF excluding from the concept of financial companies insurance companies and pension fund management companies has no relevance. As results from the initial part of the provision, that exclusion is relevant only for the purposes of the regime provided for in that instrument, which means that insurance companies and pension fund management companies – even if they can be understood as financial companies – are not subject to the specific regulation arising from the General Regime approved by Decree-Law no. 298/92. That is, however, merely a choice of the legislator which, as the preamble of the instrument emphasizes, intended to carry out a reform of the national financial system, by transposing various European directives, referring to its own regime the insurance and pension funds sector.

1. With regard to pension funds and pension fund management companies, their establishment and operation is specially provided for in Decree-Law no. 12/2006 of 20 January, which intended to transpose into national law Directive no. 2003/41/CE of the European Parliament and of the Council of 3 June, concerning the activities and supervision of institutions for occupational retirement provision.

The law characterizes companies constituted exclusively for the management of pension funds as management companies which are incumbent to carry out all acts and operations necessary or appropriate for the proper administration and management of the fund (Articles 32, 1, and 33) and their activity is supervised by the Insurance and Pension Funds Supervision Authority (ASF), which, as an independent administrative entity, has the task of ensuring the regular functioning of the insurance market and pension funds (Articles 36 and 37 of Decree-Law no. 1/2015 of 6 January).

In any case, it is evident within the European legislative framework that institutions for occupational retirement provision are financial institutions and participate in the financial services market, and must be considered integrated in the broad concept of financial companies (recitals 1, 2 and 4 of Directive no. 2003/41/CE).

1. For all these reasons, and given the breadth of the tax incidence rule, it makes no sense to state that only commissions charged for financial services provided by entities to which the RGICSF applies are encompassed by item 17.3.4. The rule encompasses financial services of any financial institutions, regardless of the legal regime that regulates the conduct of their activity, and therefore it cannot fail to be applied to commissions that remunerate the services of pension fund management companies.

2. This first question having been resolved, it is necessary to know whether the stamp tax self-assessments carried out were based on constitutional rules, in view of the question raised whether the commissions charged to the Pension Funds are covered by the tax exemption regime referred to in Article 7, paragraph 1, subparagraph e) of the Stamp Tax Code, the interpretative rule of Article 7, paragraph 7 of the Stamp Tax Code being added by Law no. 7-A/2016 of 30 March, by limiting the scope of application of that exemption rule to financial operations directly intended for the granting of credit, violating the principles of fiscal irretroactivity, protection of confidence and legal security, when applicable to tax facts prior to its entry into force.

Indeed, the legal provisions under which the Tax and Customs Authority made the stamp tax assessment were retroactively applied to manifestations of wealth prior to the moment of the start of their entry into force.

1. Now, this conclusion implies the invalidity of the rules in question, being materially unconstitutional, by violation of the principle of non-retroactivity of fiscal incidence laws, provided for in Article 103, paragraph 3 of the Constitution.

This has been the constant case law of CAAD in analogous proceedings, and to those decisions we refer for the development of this reasoning: arbitral proceedings no. 348/2017-T, no. 352/2017-T, no. 441/2017-T, no. 633/2017-T and no. 527/2017-T. It is also worth noting that the Constitutional Court itself has recently decided in the same manner: see the Judgment of the Constitutional Court no. 644/2017.

1. The reasoning that explains this can be observed in arbitral proceedings no. 527/2017, which, being paradigmatic, we take the liberty of transcribing: "That normative solution, resulting from the combination of paragraphs 1, subparagraph e) and 7 of Article 7 of the Stamp Tax Code, as a consequence of the addition of that paragraph 7 by Article 154 of Law no. 7-A/2016, is innovative and aggravates the legal position of the taxpayer who is thus prevented from benefiting from the tax exemption regime. And, having been applied to the years 2011, 2012, 2013 and 2014, and therefore to fiscal years prior to the entry into force of the Law, this solution becomes substantially retroactive and, to that extent, incompatible with the prohibition on the imposition of retroactive taxes".

2. Following this conclusion of the invalidity of the stamp tax rules applied, with the consequences of the return of payment – which was undue – of the tax contributions of the claimant to the respondent, the further issue arises of whether, in that return, compensatory interest should be applied.

This occurs generally when a conclusion is reached that there was an undue tax contribution to the detriment of the taxpayer, in accordance with Articles 43 of the General Tax Law and 61 of the Tax Code and Procedural Rules.

1. However, in the situation at hand, it is considered that such compensatory interest is not exigible, insofar as the Tax and Customs Authority – an integral part of the Public Administration in the exercise of its administrative authority function – does not have the same access to the Constitution that is granted to courts, having no power of free non-application of rules that it might consider unconstitutional.

This assertion follows from the principle of legality, which binds the Public Administration in a specific manner to administrative legality, although this does not mean the absence of application of the superior constitutional legality.

The combination of two conflicting obediences – a legal rule in one sense and a constitutional rule in a divergent sense, the latter being hierarchically superior to the former – leads to the conclusion that it becomes necessary to find a balance as to the degree of preference on the part of the Administration between obeying the law or the Constitution.

It has been the general understanding that the principle of legality appears to be prevalent, and it is only appropriate to consider a non-application of a legal rule for unconstitutionality in administrative action in certain specific and grave cases, where crimes are being committed or the essential core of a right, freedom and guarantee is violated.

1. As these dramatic situations are not present in the case sub iudice, it is understood that the application of compensatory interest, even if it is understood that there are materially unconstitutional rules, is not considered appropriate because the Tax Authority in this case does not have the power to non-apply a rule that it might consider unconstitutional, with the principle of administrative legality strictly prevailing in relation to the principle of constitutionality.

This our understanding is supported by the position taken in several judgments delivered within the scope of CAAD, it being worth noting the paradigmatic position taken in judgment no. 507/2015-T: "As regards compensatory interest, since these are defects arising only from the application of an unconstitutional rule, it must be understood that the assessments do not suffer from any error that is attributable to the services of the Tax and Customs Authority, and therefore there is no right to compensatory interest, in view of the provision of Article 43, paragraph 1 of the General Tax Law, as uniformly decided by the Supreme Administrative Court".

In this line, see also the decision of proceedings no. 527/2017-T: "In the case at hand, the addition of the rule of paragraph 7 of Article 7 of the Stamp Tax Code was relevant for the decision that came to be adopted by the Administration, to which an interpretative nature was attributed. The Administration is subject to the principle of legality (Article 266, paragraph 2 of the Constitution), and cannot fail to comply with the provisions of the law on the pretext of its unconstitutionality, a task which, in diffuse terms, and in accordance with Article 213, is only conferred upon the courts (Gomes Canotilho/Vital Moreira, Constitution of the Portuguese Republic Annotated, vol. II, 4th edition, p. 800). Given that the arbitral decision is based on the refusal to apply a rule for unconstitutionality, the prerequisite upon which the condemnation in compensatory interest depends does not exist".

IV - Decision

1. Thus, the arbitral tribunal decides:

a) To uphold the request for arbitral pronouncement, due to invalidity, on the plane of material unconstitutionality, of the applied rules of the Stamp Tax Code;

b) To annul the stamp tax assessments applied to the claimant;

c) To condemn the respondent to refund to the claimant the stamp tax unduly paid by it;

d) To absolve the respondent from payment of compensatory interest;

e) To condemn the respondent to pay the costs of the proceedings.

Value of the action: 255,947.81 € (two hundred fifty-five thousand nine hundred forty-seven euros and eighty-one cents) in accordance with the provisions of Article 306, paragraph 2 of the Code of Civil Procedure and Article 97-A, paragraph 1, subparagraph a) of the Tax Code and Procedural Rules and Article 3, paragraph 2 of the Rules of Costs in Arbitration Proceedings.

Costs charged to the Respondent in the amount of 4,896.00 € (four thousand eight hundred ninety-six euros) in accordance with paragraph 4 of Article 22 of the RJAT.

Let it be notified.

Lisbon, CAAD, 10 January 2019.

The Arbitrator President

(José Poças Falcão)

The Arbitrator Member

(Marcolino Pisão Pedreiro)

The Arbitrator Member

(Jorge Bacelar Gouveia)