Process: 225/2014-T

Date: October 9, 2014

Tax Type: IUC

Source: Original CAAD Decision

Summary

CAAD Process 225/2014-T addressed the critical question of IUC (Imposto Único de Circulação - Unique Circulation Tax) liability for vehicles under financial leasing contracts in Portugal. BANCO A challenged IUC assessments totaling €3,398.05 for tax years 2010-2012, arguing that the Tax Authority incorrectly assessed the bank as lessor rather than the lessees who held the vehicles under financial leasing agreements. The bank contended that under Portuguese tax law, specifically Article 3, paragraph 2 of the UCUT (Unique Circulation Tax Code), the lessee in a financial leasing contract is the proper tax subject for IUC purposes, not the registered owner. The Tax Authority defended its position by arguing that Article 3, paragraph 1 of the UCUT establishes that tax subjects are those registered as owners in the Motor Vehicle Registry Office, representing a deliberate legislative policy choice. The Tax Authority further argued that determining tax liability based on registry data from the Institute for Land Transport Mobility and the Motor Vehicle Registry Office was the appropriate administrative procedure. Additionally, the Tax Authority raised that the bank failed to comply with accessory obligations under Article 19 of the UCUT, which requires lessors to provide specific information about financial leasing arrangements. The case highlights the tension between formal registration requirements and the economic reality of financial leasing contracts in Portuguese tax law. The bank also sought compensatory interest under Article 43 of the General Tax Law for the unlawful deprivation of funds. This arbitration decision provides important guidance on the subjective incidence of IUC taxation in financial leasing contexts and the responsibilities of financial institutions acting as lessors.

Full Decision

ARBITRAL DECISION

I – Report

  1. On 05.03.2014, the Claimant BANCO A, S.A., legal entity number …, with registered address at … Lisbon, requested of the CAAD the constitution of an arbitral tribunal, pursuant to article 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to as LRAT), in which the Tax and Customs Authority is the Respondent, with a view to the annulment of Official Assessments of Unique Circulation Tax ("UCT"), identified in Annex A, attached to the initial petition, relating to the taxation periods of 2010, 2011 and 2012, which total the amount of 3.398,05€.

The Claimant further petitions for the payment of compensatory interest for the deprivation of the sums corresponding to the taxes in question, pursuant to article 43 of the General Tax Law.

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

Pursuant to article 6, paragraph 1 of the LRAT, by decision of the President of the Deontological Council, duly communicated to the parties within the legally applicable periods, the undersigned was appointed arbitrator, who communicated to the Deontological Council and to the Centre for Administrative Arbitration his acceptance of the appointment within the regularly applicable period.

The Arbitral Tribunal was constituted on 12.5.2014.

  1. The grounds presented by the Claimant in support of its claim are, very briefly, as follows:

3.1. The position of the Respondent in demanding the taxes in question from the Claimant can only be based on the fact that in the months and years in which the taxes in question became due, the ownership of the corresponding motor vehicles was registered in the name of the Claimant, notwithstanding the existence of a financial leasing contract, which appears to be incorrect.

3.2. Only in this way can it be understood that, even having knowledge of the existence of financial leasing contracts – and even of the identity of the lessees – it came to assess the tax owed.

3.3. Having the Claimant entered into financial leasing contracts as lessor with respect to the motor vehicles in question, which were in force on the date of the facts giving rise to the tax obligations in question, the tax subject is the lessee and not the Claimant, and therefore the assessments made against it must be considered illegal and consequently annulled.

3.4. The Respondent knew or should have known that the vehicles in question were given in financial leasing, since the lessees were identified with the Motor Vehicle Registry Office.

  1. The ATA – Tax and Customs Administration, called upon to respond, contested the Claimant's claim, defending itself by way of objection and exception.

4.1. By exception, the Respondent argued that the cumulation of claims presented in the request for arbitral pronouncement is illegal, since, in relation to each assessment act whose annulment is sought, the Claimant invokes a distinct factual circumstance, and therefore the cumulation in question is not permitted by paragraph 1 of article 3 of Decree-Law no. 10/2011, of 20 January, since this rule requires that the merits of the claims depend essentially on the same factual circumstances.

By way of objection it argued, briefly, the following:

4.2. The tax legislator, in establishing in article 3, paragraph 1, who are the tax subjects of the UCT, expressly and intentionally established that these are the owners, considered as such the persons in whose name they are registered, this not being a presumption, but rather a clear option of legislative policy, adopted by the legislator within its legislative discretion.

4.3. For the purpose of UCT assessment, the Respondent proceeds to consult databases, both with the Institute for Land Transport Mobility, and with the Institute of Registries and Notaries/Motor Vehicle Registry Office, as a way of determining the owners or financial lessees, purchasers with reservation of ownership or holders of purchase option rights, tax subjects of the UCT in light of the provisions of article 3 of the UCUT, read together with article 6 of the same code, the tax subject being determined according to the persons in whose name the vehicle is registered with the Motor Vehicle Registry Office.

4.4. The tax legislator intended, intentionally and expressly, that persons in whose name the vehicles are registered be considered as owners, lessees, purchasers with reservation of ownership or holders of purchase option rights in long-term leasing.

4.5. The failure to update the registration, pursuant to article 42 of the Motor Vehicle Registry Regulation, shall be imputable to the legal sphere of the tax subject of the UCT and not to the Portuguese State, as the active subject of this tax.

4.6. The Respondent does not know what the Claimant intends to prove with the copies of the financial leasing contracts identified in documents 16 to 30 of Annex A attached to the initial petition, and therefore challenges this documentary evidence.

4.7. In the matter of financial leasing and for purposes of article 3, paragraph 2, of the Unique Circulation Tax Code (hereinafter "UCUT"), it is necessary that lessors comply with the accessory obligation provided for in article 19 of the UCUT, which has not occurred in the present case, with the consequent liability of the Claimant for arbitral costs, since such omission gave rise to the issuance of the assessments sub judice.

  1. The Respondent further raised the incident of forced intervention of third parties, arguing that the alleged lessees should be given the opportunity to respond to the arguments raised by the Claimant, as these may have effects on their legal spheres.

  2. The Claimant responded to the exception raised by the Respondent, as well as to the incident of forced intervention of third parties, arguing for the dismissal of the exception and for the rejection of the incident.

  3. By order of 07.09.2014, the hearing provided for in article 18 of the LRAT was dispensed with, and the presentation of arguments was also dispensed with, pursuant to article 18, paragraph 2 of the LRAT, as these appeared unnecessary.

By arbitral order of the same date, the incident of forced intervention of third parties was rejected.

  1. The tribunal is materially competent and is regularly constituted pursuant to the LRAT.

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

The process does not suffer from defects that invalidate it.

II – The relevant factual matter

  1. The tribunal considers the following facts proven:

9.1. The Claimant is a credit institution.

9.2. One of its areas of activity is financing of the automotive sector.

9.3. The Respondent made the additional UCT assessments, identified in Annex A and documents no. 1 to 15, attached to the initial petition, relating to the taxation periods of 2010, 2011 and 2012, which total the amount of 3.398,05 €, with the Claimant as tax subject, which made payment thereof after being notified for that purpose.

9.4. The vehicles to which the assessments listed in Annex A attached to the initial petition relate, on the dates of the occurrence of the facts giving rise to the tax obligations in question in this proceeding, were given under financial leasing contracts to customers of the Claimant, with the exception of the vehicles with registration … and … with respect to the following assessments:

9.4.1. Assessments no. 2010 …, in the amount of 48,00 €, 2011 … in the amount of 49,00 € and 2012 …, in the amount of 50,00 €, of the years 2010, 2011 and 2012, respectively, corresponding to vehicle …;

9.4.2. Assessment no. 2012 …, of the year 2012, in the amount of 31,00 €, corresponding to vehicle ….

9.5. On the dates of the occurrence of the facts giving rise to the tax obligations in question in this proceeding, all vehicles to which the assessments in question in this proceeding relate were registered with the Motor Vehicle Registry Office in favor of the Claimant.

  1. Facts not proven.

Nothing further of interest to the decision of the case has been proven.

  1. The Tribunal's conviction regarding the decision of factual matters was based on the documents in the file, namely the copies of the financial leasing contracts that were not challenged, as well as the statements of the parties in the pleadings presented.

Beyond not having challenged the accuracy of the photocopies of the said financial leasing contracts for purposes of article 368 of the Civil Code, we further understand that the authenticity of the handwriting or signatures was not effectively challenged for purposes of article 374, paragraph 2, of the Civil Code.

In fact, with respect to the mentioned documents, it can be read in the Response of the Respondent:

"It is that the Claimant attaches some financial leasing contracts but does not state, anywhere in the initial petition, what they are intended to prove, nor establishes any nexus between those documents and the argumentation put forward by it in the initial petition." (article 96 of the Response)

and,

"Thus, that documentary evidence is challenged here, not so much on the grounds of its falsity, but because we do not know what the Claimant intends to prove with it." (article 97 of the Response)

It emerges, therefore, from the position of the Respondent, that it does not question the authenticity of the document, but only sustains that the Claimant does not indicate in the initial petition the facts it intends to prove with them, which means that, in reality, it does not challenge the handwriting and signature of the said documents but, only, that it questions their probative relevance or, at least, that it understands that the probative pertinence of the documents will not have been made explicit by the Claimant.

With respect to the absence of proof of the effectiveness of the financial leasing contract with respect to the vehicle with registration …, regarding the taxation periods to which the respective assessments relate, the tribunal's decision results from the fact that in the financial leasing contract invoked (no. …) the period of effectiveness thereof is listed as 30.1.2003 to 30.1.2008, and no other contract has been invoked.

With respect to the absence of proof of the effectiveness of the financial leasing contract with respect to the vehicle with registration …, concerning assessment no. 2012 …, relating to the taxation period of the year 2012, the tribunal's decision results from the fact that in the financial leasing contract invoked (contract no. …) the period of effectiveness thereof is listed as 02.5.2006 to 02.5.2011., and no other contract has been invoked.

Thus, with respect to vehicles … and …, it was not proven that financial leasing contracts were effective during the taxation periods to which the aforementioned assessments relate.

-III- The applicable law

Exception

  1. The first issue to be resolved concerns the exception of illegal cumulation of claims raised by the Respondent.

Article 3, paragraph 1, of the Legal Regime for Tax Arbitration (hereinafter "LRAT") provides that "The cumulation of claims, even if relating to different acts, and the joinder of parties are admissible when the merits of the claims depend essentially on the appraisal of the same factual circumstances and on the interpretation and application of the same principles or rules of law".

Article 104 of the Code of Tax Procedure and Process regulates the same matter as follows:

"In judicial challenge, claims may be cumulated and parties joined, according to legal terms, in case of identity of the nature of the taxes, the factual and legal grounds invoked and the tribunal competent to decide."

Comparing the two rules, it is verified that the regime of the "LRAT" is more generous in the admissibility of joinder of claims, not requiring, on the one hand, the identity of the nature of the taxes and, on the other, the identity of the factual and legal grounds invoked, but only that the merits of the claims depend essentially on the same factual circumstances and on the interpretation and application of the same principles or rules of law.

The use of the adverb "essentially" cannot fail to mean that the total coincidence of factual circumstances and applicable rules is not required.

As Fernando Lança Martins writes on this subject [1]: "(…) To assess the identity of relevant facts it will therefore be necessary to consider the factuality from which, in the view of the taxpayer, the illegality of the acts subject to the proceeding results.

In this context, it will be necessary to consider the material elements of the tax facts underlying the tax acts at issue or the action of the Tax Administration in the tax procedure underlying the issuance of those acts.

To the extent that, to assess the legality of both tax acts, it is necessary to consider a single material reality transversal to the various tax facts in question, or a single procedural action of the Tax Administration from which the various tax acts in dispute result, the factual matter to be appreciated in order to assess the illegality of those acts may be essentially the same.

Thus, the evidentiary steps necessary to assess the legality of one of the acts may be used to assess the legality of another act subject to the proceeding, thereby enhancing the uniformity of decisions regarding the same question of fact in benefit of the legal certainty that should guide the resolution of disputes within the scope of the tax arbitration process".[2]

  1. In the case at hand, it is verified that the factual circumstances are essentially the same, since the facts invoked by the Claimant are, with respect to all tax acts, financial leasing contracts, moreover drawn up on the basis of an identical form.

The cumulation of claims relating to the tax acts of assessment subject to the present request for arbitral pronouncement appears, therefore, admissible in light of article 3, paragraph 1 of the "LRAT", since the merits of the claims depend essentially on the appraisal of the same factual circumstances and on the interpretation and application of the same rules of law, which will be analyzed below, and therefore the exception of illegal cumulation of claims, formulated by the Respondent, is rejected.

The merits of the case

  1. Pursuant to article 3, paragraph 1 of the UCT Code, "the tax subjects of the tax are the owners of the vehicles, considered as such the natural or legal persons, of public or private law, in whose name they are registered."

Paragraph 2 of the same provision provides that "Equivalent to owners are financial lessees, purchasers with reservation of ownership, as well as other holders of purchase option rights by force of the leasing contract."

In the concrete case, with respect to thirteen vehicles, it was proven that they were given in financial leasing at the time of the fact giving rise to the tax obligation.

From paragraph 2 of article 3 of the UCUT, it emerges with clarity that, in situations where there is an effective financial leasing contract, the tax subject will be the lessee and not the owner of the vehicle.

  1. This solution is in harmony with the principle of equivalence enshrined in article 1 of the "UCUT" by providing that "The unique circulation tax is subject to the principle of equivalence, seeking to burden taxpayers in the measure of the environmental and road cost that they cause, in implementation of a general rule of tax equality".

Other rules reinforce and give concrete effect to the weight of this principle in the internal system of this tax. First of all, article 3, paragraph 1, of the Law that approved the "UCUT" (Law no. 22-A/2007, of 29 June), embodying this idea of equivalence, determines that: "The revenue generated by the UCT incurred on vehicles of categories A, E, F and G, as well as 70% of the component relating to engine displacement incurred on vehicles of category B, shall be owned by the municipality of residence of the tax subject or equivalent, unless that revenue is incurred on vehicles subject to long-term leasing or operational leasing, in which case it must be allocated to the municipality of residence of the respective user."

And, for purposes of effective implementation of this legislative intention, article 19 of the "UCUT" provides that: "For purposes of the provision of article 3 of this code, as well as of paragraph 1 of article 3 of the law of its approval, entities that proceed to financial leasing, operational leasing or long-term leasing of vehicles are obligated to supply to the General Tax Directorate the data relating to the tax identification of the users of the leased vehicles."

Thus, the decisive importance conferred by the Law on the principle of equivalence is made quite clear, both on the side of the cause of environmental and road cost, and on the side of the Municipality which, typically, bears such costs and which, for that reason, is the beneficiary of the tax revenue. As Sérgio Vasques points out: "The structure of the new unique circulation tax is also clearly commutative, which since 2007 burdens automobiles according to CO2 emission levels, openly appealing to the principle of equivalence and a relationship of exchange with taxpayers"[3].

  1. The principle of equivalence thus points decidedly to the fact that the subjective scope should fall upon the actual user of the vehicles, which typically occurs with lessees in financial leasing contracts.

This means that, proven the effectiveness of a financial leasing contract, paragraph 2 of article 3 of the "UCUT" applies, which does not expressly require for its application motor vehicle registration of such contract. Even if it is understood that the presumption derived from the registration contained in paragraph 1 of the same article should apply to paragraph 2 of article 3 of the "UCUT", the fact is that, from proof of the financial leasing contract, the same is rebutted.

In fact, it has been understood uniformly by arbitral jurisprudence that article 3, paragraph 1, of the "UCUT", establishes a presumption necessarily rebuttable in light of article 73 of the General Tax Law and the principles of tax equality and equivalence. To this effect were the decisions rendered, among others, in arbitral proceedings numbers 26/2013-T, 27/2013-T, 14/2013-T, 170/2013-T, 256/2013-T, 286/2013-T, 289/2013-T, 294/2013-T, 168/2014-T, 127/2014-T and 244/2014-T.

Along this line was also arbitral decision no. 294/2013-T, of 6.06.2014, where it can be read[4]:

"In the case of financial leasing, the tax subject of the UCT will be the lessee as of the date of the fact giving rise to the tax, the ownership reflected by motor vehicle registration being merely a rebuttable presumption of the respective quality of the holder (owner or financial lessee)".

  1. However, in the case sub judice, it was not proven that assessments numbers 2010 …, in the amount of 48,00 €, 2011 … in the amount of 49,00 €, 2012 …, in the amount of 50,00 € and no. 2012 …, in the amount of 31,00 €, relate to vehicles subject to a financial leasing contract as of the date of the respective tax facts. With respect to these, therefore, the request for annulment does not succeed, since no other ground was invoked to exclude the presumption resulting from article 3, paragraph 1, of the UCUT.

All other assessments concern vehicles subject to financial leasing contracts as of the date of the tax facts, relating to the assessments subject to the present proceeding, and therefore, with respect to these, the request for arbitral pronouncement cannot fail to succeed.

  1. The Claimant further petitioned for the right to compensatory interest.

The Claimant's claim must still be assessed in light of article 43 of the General Tax Law.

Paragraph 1 of that article provides that "Compensatory interest is owed when it is determined, in gracious reclamation or judicial challenge, that there has been an error imputable to the services from which results payment of the tax debt in an amount greater than legally due".

In the case sub judice, it was not demonstrated that the Respondent had knowledge, at the date of the assessments, that the vehicles in question had been subject to a financial leasing contract dated prior to the tax fact.

In making the assessments, the Respondent complied with the provisions of article 3, paragraph 1, of the "UCUT", and the presumption established in this legal provision was applied.

Having limited itself to applying what follows from the said rule, in the absence of proof that would exclude such presumption, it cannot be concluded that there is the occurrence of "error imputable to the services".

Thus, the request for conviction of the Respondent to pay compensatory interest to the Claimant does not succeed.

  1. Subsidiarily, the Respondent further defended itself, based on the alleged non-compliance by the Claimant with the accessory obligation provided for in article 19 of the "UCUT", claiming liability of the Claimant for arbitral costs, since such omission, in its view, would have given rise to the issuance of the assessments sub judice.

From the evidence, the non-compliance by the Claimant with such accessory obligation is not proven, as no evidence was made by the parties on that matter.

However, even if the alleged non-compliance by the Claimant had been proven, article 535, paragraph 1, of the Code of Civil Procedure, (applicable to tax arbitration by force of article 29, paragraph 1, subparagraph e), of the "LRAT", provides that "When the defendant has given rise to the action and does not contest, the costs are paid by the plaintiff".

In the present case, the Respondent contested the action, and moreover could always have revoked the tax acts, pursuant to article 13, paragraph 1 of the "LRAT", which did not occur.

Thus, this claim of the Respondent cannot fail to be dismissed.

-IV- Decision

Thus, the arbitral tribunal decides:

a) To dismiss the request for arbitral pronouncement with respect to assessments numbers 2010 …, in the amount of 48,00 €, 2011 … in the amount of 49,00 €, 2012 …, in the amount of 50,00 € and no. 2012 …, in the amount of 31,00 €.

b) To grant the request for arbitral pronouncement, with respect to the other assessments, declaring the annulment of the challenged assessments.

c) To absolve the Respondent of the request for payment of compensatory interest.

Value of the action: 3.398,05€ (three thousand three hundred ninety-eight euros and five cents) pursuant to the provisions of article 306 of the CCP, 97-A, paragraph 1, subparagraph a), of the CTPP and 3, paragraph 2, of the Regulation of Costs in Arbitration Proceedings.

Costs in the amount of 612,00 € (six hundred twelve euros) to be paid by the Respondent in the proportion of ninety-four point seventy-six percent and by the Claimant in the proportion of five point twenty-four percent, pursuant to paragraph 4 of article 22 of the LRAT, article 122, paragraph 2 of the CTPP and article 527, paragraph 2 of the CCP.

Lisbon, CAAD, 9 October 2014

The Arbitrator

(Marcolino Pisão Pedreiro)

[1] The cumulation of claims in the tax arbitration process, in TAX ARBITRATION, no. 1, 2014, (Coordination Nuno Villa-Lobos – Tânia Carvalhais Pereira) p. 28.

[2] It should be noted that, even in light of article 104 of the CTPP, Jorge Lopes de Sousa considers that "It is not necessary for the cumulation and joinder to be viable that there be an absolute identity of factual situations, being sufficient that the tax-law issue to be assessed is identical". (Code of Tax Procedure and Process, Annotated and Commented, Áreas Publishers, 2006, Vol. I, p. 760).

Writing on the regime of the LRAT, the same author gives us the following example of factual identity supporting the cumulation of claims "Thus, for example, a case in which there is an IMI assessment relating to a year in which a person holding a right of use and habitation of a property is considered the tax subject of this tax will be identical, for purposes of a request for declaration of illegality, to another in which the same question is to be assessed with respect to another property of which he is the holder" (Jorge Lopes de Sousa, Commentary on the Legal Regime of Tax Arbitration, in GUIDE TO TAX ARBITRATION, Coord. Nuno Villa-Lobos and Mónica Brito Vieira, 2013, Almedina, pp. 147-148, emphasis ours).

[3] Manual of Tax Law, Almedina, 2011, p. 229.

[4] Arbitral decisions can be consulted at the website "www.caad.org.pt".

Frequently Asked Questions

Automatically Created

Who is liable for IUC tax on vehicles under a financial leasing contract in Portugal?
Under Portuguese tax law, when a vehicle is subject to a financial leasing contract (locação financeira), the lessee is generally considered the tax subject liable for IUC (Imposto Único de Circulação), not the lessor who holds legal title. Article 3, paragraph 2 of the UCUT (Unique Circulation Tax Code) establishes that in financial leasing arrangements, the lessee bears the tax obligation. However, this requires proper compliance with notification requirements under Article 19 of the UCUT, where lessors must fulfill accessory obligations to inform tax authorities about the leasing arrangement and identify the lessee.
Can the Tax Authority charge IUC to the registered owner when a financial lease agreement is in effect?
The Tax Authority's position in Process 225/2014-T was that it could assess IUC based on Motor Vehicle Registry records showing the registered owner, even when financial lease agreements exist. The Tax Authority argued that Article 3, paragraph 1 of the UCUT establishes a legislative policy that registered owners are tax subjects, and that failure to update registry information pursuant to Article 42 of the Motor Vehicle Registry Regulation is attributable to the taxpayer, not the State. However, this position conflicts with the principle that lessees in financial leasing contracts are the proper tax subjects under Article 3, paragraph 2 of the UCUT.
What is the subjective incidence rule for IUC on vehicles subject to locação financeira?
The subjective incidence rule for IUC on vehicles under locação financeira (financial leasing) is governed by Article 3, paragraph 2 of the Código do Imposto Único de Circulação (UCUT). This provision establishes that the lessee in a financial leasing contract is the tax subject responsible for IUC payment, rather than the lessor who appears as the registered owner. This reflects the economic reality that the lessee has possession and use of the vehicle. However, for this rule to apply effectively, lessors must comply with the accessory obligation in Article 19 of the UCUT to properly notify tax authorities of the leasing arrangement and identify the lessee to the Motor Vehicle Registry Office.
How did CAAD Process 225/2014-T rule on IUC liability between lessor banks and lessees?
In CAAD Process 225/2014-T, BANCO A (the lessor bank) challenged IUC assessments totaling €3,398.05 for vehicles under financial leasing contracts. The bank argued that lessees, not the registered owner/lessor, are the proper tax subjects under Article 3, paragraph 2 of the UCUT. The Tax Authority defended the assessments, arguing that registered owners are liable based on Motor Vehicle Registry records and that the bank failed to comply with Article 19 UCUT notification requirements. The case involved vehicles leased during 2010-2012, with the bank also claiming compensatory interest under Article 43 of the General Tax Law for unlawful tax collection.
Can a taxpayer claim compensatory interest after unlawful IUC tax assessments in Portugal?
Yes, under Portuguese tax law, taxpayers can claim compensatory interest (juros indemnizatórios) after unlawful tax assessments, as provided in Article 43 of the Lei Geral Tributária (General Tax Law). In Process 225/2014-T, BANCO A specifically requested compensatory interest for the deprivation of funds corresponding to the contested IUC assessments. Compensatory interest serves to compensate taxpayers for the financial loss caused by the State's unlawful retention of tax payments. The entitlement to such interest arises when tax assessments are subsequently annulled or declared unlawful, recognizing that the taxpayer was deprived of funds to which they were entitled.