CAAD 226/2018-T: Venture Capital Companies Exempt from Stamp Tax on Management Fees

ARBITRAL DECISION

I – REPORT

1. A..., S.A., with tax identification number..., with registered office at Rua ..., ..., ...-... Porto, filed, on 02-05-2018, a request for constitution of the arbitral tribunal, pursuant to articles 2º and 10º of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to only as RJAT), in conjunction with article 102º of the Code of Tax Procedure and Process (CPPT), in which the Tax and Customs Authority (hereinafter referred to only as Respondent, or ATA) is requested.

2. The Claimant seeks, with its request, the declaration of illegality of the decision rejecting the Administrative Appeal with File no. ...2017..., issued by the Finance Directorate of Porto, relating to self-assessments of stamp duty with reference to the years 2015 and 2016, with the consequent reimbursement of the tax paid, as well as recognition of the right to compensatory interest.

3. 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 03-05-2018.

3.1. The Claimant did not proceed to appoint an arbitrator, and therefore, under the provisions of subsection a) of article 6º, no. 2 and subsection b) of article 11º, no. 1 of the RJAT, the President of the Deontological Council appointed the undersigned as arbitrator of the singular arbitral tribunal, who communicated acceptance of the appointment within the deadline.

3.2. On 25-06-2018 the parties were notified of the arbitrator's appointment, with no objection being raised.

3.3. In accordance with the provisions of subsection c) of article 11º, no. 1 of the RJAT, the arbitral tribunal was constituted on 16-07-2018.

3.4. Accordingly, the Arbitral Tribunal is regularly constituted to consider and decide the object of the proceedings.

1. To support the request for arbitral pronouncement the Claimant alleges, in summary, the following:

The Claimant is a Venture Capital Company (SCR), regularly constituted under national legislation, in particular the current Legal Regime for Venture Capital, Social Entrepreneurship and Specialized Investment, which is established in Law no. 18/2015, of 4 March, with its main activity, at the date of the stamp duty self-assessments now contested, consisting of the management of the Venture Capital Fund B... (FCR).

Within the scope of that activity, the Claimant charged quarterly a management commission on that FCR, on which it assessed stamp duty at the rate of 4% provided for in item 17.3.4 of the General Table of Stamp Duty, which it did between March 2015 and December 2016.

However, SCRs have not been classified as "financial companies" under national legislation since 2002, which means that such commissions are excluded from the scope of stamp duty, in particular from item 17.3.4 of the GTSD. It is unequivocal that the subjection to stamp duty provided for in that item has as an essential condition that the entity charging the commission corresponds to one of the legal typologies foreseen therein (credit institutions, financial companies, other entities legally assimilated to financial companies and any other financial institutions).

The General Regime of Credit Institutions and Financial Companies (RGICSF) is the only diploma existing in the Portuguese legal order that enumerates, qualifies and explicitly specifies the entities that fall within the category of credit institutions, financial companies and financial institutions, as set out in subsection z) of article 2º-A and articles 3º and 6º of the said diploma.

The original version of article 6º of the RGICSF expressly provided in subsection h) of no. 1 that SCRs were qualified as financial companies, an express provision that lasted until the end of 2002. Having that subsection been repealed by Decree-Law no. 319/2002, of 28 December, SCRs unequivocally lost the legal qualification of financial company and, consequently, ceased to fall within the concept of financial institution.

It was the express intention of the legislator to terminate the qualification of that type of entity as a financial company, removing them from the spectrum of entities covered by the RGICSF.

An alleged lapse of the legislator cannot be invoked; not only due to the proximity of the changes introduced to that provision, but, mainly, given the general principles of interpretation of laws, pursuant to which the legislator must always be considered to have "enshrined the most appropriate solutions and known how to express their thinking in adequate terms" (cited), as expressed in no. 3 of article 9º of the Civil Code, it being therefore inadmissible to invoke mere forgetfulness for the non-inclusion of SCRs in those concepts. The very legal regime of the venture capital investment activity, published by the aforementioned Law no. 18/2015, of 4 March, corroborates this reality by providing, in its article 2º, that SCRs are not "financial intermediaries".

Being a provision of incidence at issue, it is subject to the Principle of Legality enshrined in article 103º of the Constitution of the Portuguese Republic (hereinafter 'Constitution'), as well as in article 8º of the LGT, a principle that requires provisions of incidence to be precise and with a high degree of determination, not conferring discretion in the assessment of the concepts involved. The interpretation of the provision contained in Item 17.3.4 of the GTSD, in the wording in force, as made by the ATA in the rejection in question, according to which SCRs qualify as other financial institutions, is unconstitutional by violation of the provisions of no. 2 of article 104º of the Constitution, unconstitutionality which is hereby invoked for all legal purposes.

Should it be understood that SCRs are subject to item 17.3.4 of the GTSD, which is raised only as a mere academic hypothesis, it will nonetheless be said that if subjection is concluded, the exemption contained in article 7º, no. 1, subsection e) of the Stamp Duty Code will apply.

The introduction of no. 7 to article 7º of the Stamp Duty Code was accompanied by a provision of the 2016 State Budget Law (specifically, article 154º of that diploma) which assigned it an interpretive character. The legislator may have sought to safeguard the principles of legal certainty and legal peace, preventing the interpretive character from being anything more than a disguise of the retroactivity of the new law, it being important in this context to bear in mind the constitutional principle of Prohibition of Retroactive Tax Rules enshrined in no. 3 of article 103º of the Constitution and reinforced in no. 1 of article 12º of the LGT.

The rule introduced in no. 7 of article 7º of the Stamp Duty Code, which was assigned an interpretive character, has an innovative nature, in that it resurrected a rule that had not been in force in the national legal order since 2003, and therefore cannot but be considered retroactive and, as such, contrary to the constitutional principle of prohibition of retroactive tax rules provided for in no. 3 of article 103º of the Constitution.

The logical corollary of all that has been said in this regard is reflected in the recent decisions of the Constitutional Court relating to cases no. 519/17, of 4 October 2017, and no. 449/17, of 20 February 2018, which were issued following an appeal filed by the ATA against the decisions of the Arbitral Tribunal relating to cases no. 633/2016-T, of 19 May 2017, and no. 348/2016-T, of 2 May 2017, respectively. The decisions appealed by the ATA are, in all respects, similar to the subject matter exposed here, and in both cases the Constitutional Court confirmed the unconstitutionality of the interpretive character assigned to the rule introduced in no. 7 of article 7º of the Stamp Duty Code.

The Claimant therefore concludes with the illegality of the decision rejecting the administrative appeal which is the object of the arbitral request.

1. The Tax and Customs Authority presented a response, invoking in summary, the following:

No. 2 of article 1º of the SIC establishes that "not subject to tax are operations subject to value added tax and not exempt from it".

The VAT exemption enshrined in item 27 of article 9º of the VATA provided for the operations of "administration or management of investment funds", in line with the wording of subsection g) of no. 1 of article 135º of Directive no. 2006/112/EC is applicable to any "investment fund", regardless of its nature and purpose.

VAT exemption is a sine qua non condition for the incidence of stamp duty.

The subjection to stamp duty of commissions charged by fund management entities, as consideration for the administration and management of the funds, depends on the cumulative verification of a subjective element and an objective element. The operations described in item 17.3.4 are only subject to stamp duty when carried out by or with the intermediation of credit institutions, financial companies or other entities legally assimilated to them and any other financial institutions, which fulfills the subjective element of incidence of the tax, with the objective element being verified when they constitute consideration for financial services provided.

SCRs are considered as financial institutions, as derived from subsection l), of no. 1 of article 6º of the RGICSF, combining that provision with the reading of other legal provisions, as expressly allowed by that subsection, although of special regime, given that the regulation is specified in Law 18/2015, of 4 March.

The relevant fiscal concept of "credit institutions, financial companies or other entities legally assimilated to them and any other financial institutions" for the purposes of the provision of incidence in question must be, in the first place, the one that prevails in financial law, in particular, in banking law, both national and community; and not, naturally, only on the basis of the legal diplomas relating to the Claimant's own constitution.

Now, precisely article 6º of the RGICSF considers that "are financial companies ... other companies which, corresponding to the definition of financial company, are so qualified by law". This is what happens with subsection f) of no. 1 of article 30º of the Securities Code (CVM) when it refers to "other financial institutions authorized or regulated, namely credit securitization funds, their management companies and other financial companies provided for in law, credit securitization companies, venture capital companies, capital funds and their management companies". And the same occurs with subsection h) of no. 1 of article 3º of Law 25/2008, of 5 June, in which, under the heading "financial entities", it provides that "venture capital companies and investors" are financial entities.

Thus, and contrary to what the Claimant alleges, it results expressly and manifestly from the Law that SCRs constitute financial institutions, for the purposes of item 17.3.4 of the GTSD.

The exemption granted by article 7º, no. 1, subsection e) of the SIC relates to interest, to commissions charged, to guarantees provided or to mere use, in all cases, by reference to the credit granted.

Moreover, no. 7 of article 7º of the SIC, introduced by Law 7-A/2016, of 30 March, is merely a clarification of a previous rule, the legislator having merely sought to clarify a pre-existing concept.

It is, therefore, incorrect the Claimant's reading that the legislator intended to say that only use would relate to the credit granted, when the legislator itself states that what they intended to say was that both interest and commissions, as well as guarantees provided, as well as use itself all related to the credit granted.

In any case, there is no retroactivity of that Law: only and exclusively an interpretive rule, clarifying the meaning intended by the legislator, given the doubts that arose in the interpretation of the legal provision. That is, there is an authentic interpretation that cannot be set aside merely for convenience.

This means that the exemption provided for in subsection e) of no. 1 of article 7º of the SIC does not benefit the Claimant.

The Respondent concludes with the legality of the decision rejecting the administrative appeal as well as of the acts of self-assessment of stamp duty contested which should, therefore, be maintained, arguing that, in any circumstances, compensatory interest cannot be required.

1. By order of 28-05-2018, the meeting required by article 18º of the RJAT was dispensed with, and the parties submitted arguments.

Where the Claimant, in summary, reinforcing what was already alleged in the initial request, came to state that:

• Regardless of whether the commissions are actually exempt under VAT, this does not determine that such exemption is a sine qua non condition for the incidence of stamp duty. In fact, we are dealing with a negative incidence rule, given that according to the provisions of no. 2 of article 1º of the Stamp Duty Code "not subject to tax are operations subject to value added tax and not exempt from it".

• The ATA wrongly seeks support in the Securities Code, in particular in subsection f) of no. 1 of article 30º, overlooking the fact that that rule is only relevant for the purposes of qualifying a particular entity as a qualified investor, for the purposes of applying the said Code.

• No. 1 of article 3º of Law no. 25/2008, of 5 June, establishes only the list of entities that are subject to the money laundering regime and does not define or determine what is meant by each of those entities.

• No. 7 in article 7º of the SIC was accompanied by a provision of the 2016 State Budget Law (see article 154º) which assigned it an interpretive character, but the provision in question has an innovative character and not merely interpretive, given the fact that it resurrected a rule that had not been in force in the legal order since 2003.

For its part, the Respondent refuted the contents of those arguments, reiterating what was alleged in the response presented.

II – PROCEDURAL MATTERS

7.1. The tribunal is competent and regularly constituted.

7.2. The parties have legal personality and capacity, show themselves to be legitimate and are regularly represented (articles 4º and 10º, no. 2, of the RJAT and article 1º of Ordinance no. 112-A/2011, of 22 March).

7.3. The proceedings do not suffer from any nullities.

7.4. The cumulation of claims is legal, in view of the provisions of article 3º, no. 1 of the RJAT.

7.5. No exceptions were raised that prevent the tribunal from considering the merits of the case.

III – FACTUAL AND LEGAL MATTERS

III.1. Factual Matters

Given the positions assumed by the parties and the documentary evidence attached to the proceedings, including the administrative file, the following facts are considered proven, with relevance for the consideration and decision of the issues raised:

• The Claimant is a Venture Capital Company (SCR), regularly constituted under national legislation, specifically the Legal Regime for Venture Capital, Social Entrepreneurship and Specialized Investment, currently established in Law no. 18/2015, of 4 March;

• At the date of the stamp duty self-assessments now contested, the Claimant's main activity consisted of the management of the Venture Capital Fund B...;

• Within the scope of that activity, the Claimant charged quarterly a management commission, on which it assessed stamp duty at the rate of 4%, provided for in item 17.3.4 of the GTSD, and as a result assessed, in the years 2015 and 2016, tax in the amount of €29,625.00;

• The Claimant proceeded to pay the stamp duty in the said amount of €29,625.00;

• An administrative appeal was filed by the Claimant against the stamp duty self-assessments in question;

• The administrative appeal was rejected by decision which was notified to the Claimant by availability in Via CTT on 30-01-2018.

Basis of the factual matters:

The factual matters given as proven are based on a critical examination of the documentary evidence presented and not contested, which is hereby incorporated, as well as the administrative file attached to the proceedings.

9.3. There are no other facts with relevance for the consideration of the merits of the case that have not been proven.

III.2. Legal Matters

As results from the arbitral request, the Claimant manifests its disagreement with the assessment of Stamp Duty which it undertook, by understanding, in summary, that the operations in question are not subject to that tax or, even if they were, they would always benefit from an exemption therefrom.

Let us examine this:

At issue, in the first instance, is the application of the provisions in item 17.3.4 of the GTSD which determines that the following are subject to stamp duty:

• "17.3. 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 – on the amount charged:

(…)

• 17.3.4. "Other commissions and consideration for financial services 4%".

In the version of the Claimant, SCRs, as is the case with it, are not covered by the provision of that item, since they do not form part of the concept of credit institutions, financial companies or other entities legally assimilated to them and any other financial institutions.

On the contrary, the Respondent argues that SCRs are considered as financial institutions, invoking as support for such conclusion the provisions of subsection l) of no. 1 of article 6º of the General Regime of Credit Institutions and Financial Companies (RGICSF), in the first place, but also the provisions of subsection f) of no. 1 of article 30º of the Securities Code (CVM) and also subsection h) of no. 1 of article 3º of Law 25/2008, of 5 June.

Let it be said at once that we fully agree with what the Respondent states regarding the path to be followed in order to qualify an entity as a financial institution, now transcribing what is said in the Response:

• "In accordance with no. 2 of article 11º of the LGT, in the field of legal-tax interpretation 'whenever terms proper to other branches of law are employed in tax provisions, they must be interpreted in the same sense as they have there, unless otherwise results directly from the law'."

• "It follows from the cited provision that the relevant fiscal concept 'of credit institutions, financial companies or other entities legally assimilated to them and any other financial institutions' for the purposes of the provision of incidence in question must be, in the first place, the one that prevails in financial law, in particular, in banking law, both national and community".

It is indeed within these parameters that we must find the answer to the question of whether an SCR should be qualified as a financial entity.

But before we enter this path, let it be said however, preliminarily, that we do not accept the Respondent's argument that "VAT exemption is a sine qua non condition for the incidence of stamp duty". On the contrary, we agree with the Claimant when it considers that we are instead dealing with a negative incidence rule.

Indeed, when no. 2 of article 1º of the SIC determines that "not subject to tax are operations subject to value added tax and not exempt from it", this means that there will be no subjection to Stamp Duty if the operation is already subject, and not exempt, to VAT. But this would not mean that the said exemption in VAT could give rise, by itself, to the application of Stamp Duty (which, be it acknowledged, the Respondent also assumes when it understands that the elements – objective and subjective – provided for in item 17.3.4 of the GTSD must occur for that purpose).

Returning, then, to the concept of financial institution it is relatively settled that, in the absence of an express legal definition in the national legal order, it is admitted that the RGICSF contemplates only a concept in the strict sense thereof, which coexists with a broader concept and where non-monetary financial institutions will be included.

Following what is stated by Carlos Costa Pina – Financial Institutions and Markets, Coimbra, 2005, page 249 – the limitation of the concept of financial companies is merely formal, solely for the purpose of applying the RGICSF. Which is not unrelated, as is said in Arbitral Decision no. 348/2016-T, "to the verified tendency of the progressive disappearance of barriers and distinctions between the three traditional financial sectors (banking, securities and insurance), with the consequent merger of interests and activities among the various types of institutions in the financial area, in particular, among monetary and non-monetary institutions, and the appearance of new concepts such as those of universal banking, bancassurance or assurfinance, etc., which tend to express formulas of collaboration among financial institutions with distinct but similar objects competing with each other".

We are not unaware of the existence of several arbitral decisions, including the one the undersigned subscribed to earlier this year, in decision 352/2017-T, when they consider that the scope of the concept of financial institution goes beyond what the RGICSF provides. We stated there that by enumerating article 6º of that diploma types of financial companies and specifically excluding others, this alone does not prevent other companies or entities from being considered "financial entities" for other purposes, other than those provided for by the RGICSF. For article 6º of the RGICSF does not have a doctrinal concern of exhaustive determination of the connotation and denotation of the concepts of financial company or financial institution, but rather of demarcating the scope of application of the general regime in question.

Indeed, as was noted there, much of the arbitral jurisprudence (by way of example, decisions no. 303/17, no. 9/17, no. 667/16, no. 633/16, no. 348/16 or no. 279/16) concludes that we can find financial institutions or financial companies beyond the scope of application of the RGICSF.

It happens that the generality of such decisions had in mind fund management companies, management companies of shareholdings in the insurance sector and the like.

Will the arguments invoked there also apply to venture capital companies?

For the Respondent there will be no doubt, as it assumes, without reservation, the "Claimant as a fund management company" (see, in particular, articles 21º and 25º of the response).

That such companies – SCRs – do not fall within the strict concept of financial institutions for the purposes of the RGICSF seems settled even for the Respondent when it concludes that those would be included in the residual rule constituted by subsection l) of no. 1 of article 6º of that regime, when it refers the definition of financial institution to other legal diplomas: "other companies which, corresponding to the definition of financial company, are so defined by law".

SCRs have their own legal regime, currently regulated by Law 18/2015 of 4 March which, in no. 1 of article 9º, provides that:

• "Venture capital companies and venture capital investors have as their main objective the undertaking of venture capital investments and, in the development of their activity, may carry out the following operations:

a) Invest in equity capital instruments, as well as securities or convertible rights, exchangeable rights or rights conferring the right to their acquisition;

b) Invest in debt instruments, including loans and credits, of companies in which they participate or in which they propose to participate;

c) Invest in hybrid instruments of companies in which they participate or in which they propose to participate;

d) Provide guarantees for the benefit of companies in which they participate or in which they propose to participate;

e) Apply their cash surpluses to financial instruments;

f) Undertake financial operations, namely risk hedging operations, necessary for the development of their activity".

On the other hand, no. 1 of article 2º of the same diploma provides that "notwithstanding the provisions of subsection b) of no. 1 of article 293º of the Securities Code, approved by Decree-Law no. 486/99, of 13 November, the companies referred to in the preceding article are not financial intermediaries", which includes SCRs. With that subsection b) of no. 1 of article 293º of the Securities Code determining that the following are considered financial intermediation activities "auxiliary services of investment services and activities".

It is noted in advance that we do not envisage that the qualification of an SCR as a financial institution could result from the corporate purpose legally fixed for them and just referred to.

It is true that articles 30º and 359º of the CVM expressly refer to SCRs, the first, in subsection f) of no. 1 of article 30º when considering as qualified investors "other financial institutions authorized or regulated, namely credit securitization funds, their management companies and other financial companies provided for in law, credit securitization companies, venture capital companies, venture capital funds and their management companies". And 359º to establish that SCRs are subject to the supervision of the Securities Market Commission.

It seems to us, however, that such provisions have no other scope than to determine that SCRs have the status of qualified investors while operators in the securities market. Moreover, article 110º-A of the CVM contemplates the possibility of other entities being able to have the qualification, optionally, of qualified investor, without thereby being considered as financial entities.

Note also, on the other hand, what is said in the preamble to the CVM regarding the figure of investors: "The Code devotes chapter V of title I to investors, which happens for the first time in a diploma of this kind. A distinction is established between institutional investors and non-institutional investors, equating to the former other entities that do not benefit from the protection conferred on the latter".

The only diploma in which, albeit indicatively, SCRs could be considered to be included within the scope of financial entities would be the Money Laundering Law – Law 25/2008 of 5 June – when, in listing the entities subject to it, under the heading "financial entities", it includes, in subsection h), SCRs.

We understand that such a fact, already because we are not dealing with a diploma that regulates financial activity, but which merely contains "measures of a preventive and repressive nature to combat money laundering and the financing of terrorism", is not capable of, by itself, attributing the qualification of financial entity to the entities provided for therein.

In addition to all that has been said, SCRs were expressly enshrined in subsection h) of the said article 6º of the RGICSF, which came to be repealed by DL 319/2022, of 28 December when it created the diploma disciplining the constitution and activity of SCRs (today regulated by the aforementioned Law 18/2015 of 4 March). That is to say, it is indisputable that the legislator intended expressly to remove venture capital companies from the scope of the RGICSF, with no arguments being envisaged that could justify a different interpretation of that legislative choice.

Given the foregoing, it must be borne in mind that what is at issue here is the application of a provision of incidence which, as it deals with an essential element of the tax, in its application special precautions are required of it, in view of the constitutional principle of legality, provided for in article 103º of the CRP. It being certain that, for the same reasons, recourse to analogy is prohibited (article 11º, no. 4 of the LGT).

In light of what has been said, we consider that it does not result from the letter, nor even from the spirit, of the law that SCRs may be included in the concept of financial institution in item 17.3 of the GTSD. Therefore, as the subjective element of incidence does not exist, the provisions of item 17.3.4 of that Table shall not apply to commissions charged by those entities.

It follows from the foregoing that the Claimant's claim succeeds, declaring the illegality of the decision rejecting the administrative appeal and of the stamp duty assessments, requiring their annulment.

The consideration of the other issues raised is thus moot.

COMPENSATORY INTEREST

In addition to the reimbursement of the tax, the Claimant requests that the right to payment of compensatory interest be declared.

Such right is enshrined in article 43º of the LGT, which has as a prerequisite that it be determined, in administrative appeal or judicial challenge – or in tax arbitration – that there was error imputable to the services resulting in payment of the debt in an amount higher than legally due.

The recognition of the right to compensatory interest in the arbitral proceeding results from the provisions of article 24º, no. 5 of the RJAT, when it provides that "the payment of interest is due, regardless of its nature, in accordance with the terms provided for in the general tax law and in the Code of Tax Procedure and Process".

In the case at hand, the assessments contested were carried out by the Claimant itself.

However, having appealed on administrative grounds from the illegality of the same, the ATA ignored all the elements it had at its disposal and which should have prevented the execution of the contested assessments, not granting its request, persisting in the error.

It is, therefore, manifest that the illegality of the acts of assessment in question is imputable to error on the part of the ATA.

Therefore, the Claimant has the right to the requested payment of compensatory interest.

IV. DECISION

Accordingly, this Arbitral Tribunal decides:

• To adjudge the arbitral claim filed as well-founded, declaring the illegality of the decision rejecting the administrative appeal with file no. ...2017..., issued by the Finance Directorate of Porto, relating to stamp duty self-assessments with reference to the years 2015 and 2016, which are therefore to be annulled.

• To condemn the Tax and Customs Administration to reimburse the amount of tax paid, increased by compensatory interest.

• To condemn the Respondent to pay the costs of the proceedings.

V. VALUE OF THE PROCEEDINGS

The value of the proceedings is set at €29,625.00, pursuant to article 97º-A, no. 1, a), of the Code of Tax Procedure and Process, applicable by virtue of subsections a) and b) of no. 1 of article 29º of the Legal Regime for Tax Arbitration and no. 2 of article 3º of the Regulation of Costs in Tax Arbitration Proceedings.

VI. COSTS

The arbitration fee is set at €1,530.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, in accordance with articles 12º, no. 2, and 22º, no. 4, both of the Legal Regime for Tax Arbitration, and article 4º, no. 4, of the said Regulation.

Lisbon, 13 December 2018

The Arbitrator

(António A. Franco)