Process: 25/2017-T

Date: September 5, 2017

Tax Type: IMT

Source: Original CAAD Decision

Summary

In CAAD Arbitration Process 25/2017-T, the tribunal addressed a unique procedural outcome involving Municipal Property Transfer Tax (IMT) on property acquired from insolvency proceedings. The taxpayer challenged an IMT assessment of €1,807.23 on property purchased during the insolvency of company B…, Lda. During the arbitration, the Tax Authority revoked the contested assessment based on Circular 4/2017, which replaced the previous Circular 10/2015 and established a new interpretation recognizing IMT exemptions for property transfers within insolvency proceedings. The tribunal declared supervening futility of the dispute (inutilidade superveniente da lide) under Article 277(e) of the Civil Procedure Code, as the taxpayer's claim had been satisfied outside the arbitration process. The decision provides important guidance on cost allocation in such circumstances. According to Article 536(3) CPC, when a claim is well-founded at filing but ceases due to supervening circumstances not attributable to the parties—such as changes in administrative guidance—costs should be divided equally. This case demonstrates how administrative circulars can fundamentally alter tax treatment, triggering revocation of assessments and rendering pending litigation futile. The ruling clarifies that IMT exemptions apply to acquisitions from insolvency estates, marking a significant shift from prior Tax Authority practice. Taxpayers in similar situations are entitled to reimbursement of improperly collected IMT plus compensatory interest, though the Tax Authority must execute consequential acts following revocation. This decision is particularly relevant for legal practitioners handling insolvency-related property transfers and demonstrates CAAD's approach to procedural economy when administrative action resolves disputes during arbitration.

Full Decision

ARBITRAL DECISION

I, Arbitrator Raquel Franco, appointed by the Ethics Council of the Administrative Arbitration Center (CAAD) to form the sole arbitral tribunal established on 21.03.2017, decide as follows:

I. REPORT

On 05-01-2017, the company "A…, S.A.", NIPC…, filed a petition for constitution of a sole arbitral tribunal, in accordance with the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to only as RJAT), with the Tax and Customs Authority as the Respondent.

The petition for constitution of the arbitral tribunal was accepted by the Esteemed President of CAAD and automatically notified to the Tax and Customs Authority on 20-01-2017.

Pursuant to the provisions of Article 6(2)(a) and Article 11(1)(b) of Decree-Law No. 10/2011, of 20 January, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the Ethics Council appointed the undersigned as arbitrator of the sole arbitral tribunal, who communicated acceptance of the appointment within the applicable deadline, and notified the parties of this appointment on 06-03-2017.

Thus, in accordance with the provisions of Article 11(1)(c) of Decree-Law No. 10/2011, of 20 January, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the sole arbitral tribunal was constituted on 21-03-2017, following the relevant legal procedures.

The Claimant requests that the Tribunal declare unlawful the tax assessment act for Municipal Immovable Property Transfer Tax (IMT) bearing number 2016…, in the amount of €1,807.23, relating to the acquisition of an autonomous unit designated by the letter "C" of the urban property registered in the property register under article …, of the union of parishes of …, … and …, in the context of the insolvency proceedings of company B…, Lda., which took place in the Judicial Court of Coimbra, … civil court, with number …/12… TJCBR, and consequently that it be annulled, with the consequent restitution of the tax paid, together with interest damages.

In the Response presented on 27.04.2017, the Tax Authority informed the Tribunal that the IMT assessment act which is the subject of this proceeding had been revoked by order dated 2017-03-02 from the Director of Finance of Coimbra, of which it sent a copy. In the information preceding the order revoking the act, it is stated that "in light of the new guidance conveyed by circular 4/2017, which replaces the understanding contained in circular No. 10/2015, which underlay the decision denying the administrative review, it appears to us that the same lead to the revocation of the order denying review, pursuant to and for the purposes of Article 112 of CPPT."

Thus, because the subject matter of the petition for arbitral pronouncement has been revoked, the Respondent requests that the subsequent futility of the dispute be declared, pursuant to the provisions of Article 277(e) of the Civil Procedure Code (CPC), applicable subsidiarily in accordance with Article 29(1) of the Tax Arbitration Regime.

Notified for this purpose, the Claimant, on 18.05.2017, presented arguments in which it reproduced all that had been alleged and petitioned in the petition for arbitral pronouncement, without adding anything further regarding the revocation of the challenged act.

II. PRELIMINARY PROCEEDINGS

The Tribunal is competent and is regularly constituted, pursuant to Articles 2(1)(a), 5 and 6 of the RJAT.

The parties have legal capacity and standing, are entitled to be heard, and are legally represented, pursuant to Articles 4 and 10 of the RJAT and Article 1 of Ordinance No. 112-A/2011, of 22 March.

The proceeding does not suffer from defects that would render it invalid.

III. ON THE SUBSEQUENT FUTILITY OF THE DISPUTE

Article 277(e) of the CPC, applicable by virtue of Article 29(1)(e) of the RJAT, provides that "Proceedings are terminated by the impossibility or subsequent futility of the dispute."

Impossibility of the dispute occurs in the event of death or extinction of one of the parties, by disappearance or loss of the subject matter of the proceeding or by extinction of one of the interests in conflict. Subsequent futility of the dispute occurs when, by virtue of new facts occurring during the pendency of the proceeding, the decision to be rendered would no longer have any useful effect, either because it is not possible to satisfy the claim that the claimant wishes to assert in the proceeding or because the purpose sought by the action has been achieved by other means. The impossibility or subsequent futility of the dispute thus translates into an impossibility or legal futility, whose determination is based on what is established by law. According to José Lebre de Freitas, Rui Pinto and João Redinha (Annotated Civil Procedure Code, Volume 1, 2nd edition, Coimbra Editora, Coimbra, 2008, p. 555), "the impossibility or subsequent futility of the dispute occurs when, by a fact occurring during the pendency of the instance, the claim of the plaintiff cannot be maintained by virtue of the disappearance of the subjects or the object of the proceeding, or finds satisfaction outside the scheme of the remedy sought. In both cases, the resolution of the dispute ceases to matter – in the former, by impossibility of achieving the intended result; in the latter, because it has already been achieved by other means."

In the present case, by revoking the IMT assessment act that was the subject of this proceeding, the Tax Authority satisfied the claim formulated by the Claimant in these proceedings. To that extent, the principal result that the Claimant sought to achieve through this arbitral proceeding has already been fully attained, and it is only necessary that the Tax Authority proceed (if it has not already done so) with the execution of the acts consequential to the revocation of the assessment act in question. Thus, the arbitral decision that would normally be rendered, ruling on the merits of the claims asserted, appears to be devoid of any useful effect, and therefore its pronouncement is not warranted.

It should be noted, finally, that the decision to revoke the assessment act in question by the Tax Authority arises as a result of the adoption of a new understanding regarding the relevant situation, that is, regarding the exemption from IMT requested by the Claimant, on the part of the Respondent. This new understanding emerges through circular 4/2017, from the Office of the Director General, dated 10.02.2017.

Without need for further consideration, the Tribunal thus finds that the subsequent futility of the dispute has been established.

IV. ON RESPONSIBILITY FOR COSTS

Article 536(3) of the CPC, applicable by virtue of Article 29(1)(e) of the RJAT, under the heading "allocation of costs," provides as follows:

Article 536 (art. 450 CPC 1961)
Allocation of Costs

1 - When the claim of the plaintiff or petitioner or the objection of the defendant or respondent was well-founded at the time it was brought or raised and ceased to be so due to supervening circumstances not attributable to them, the costs are divided equally between them.

2 - It is considered that an alteration of circumstances not attributable to the parties has occurred when:

a) The claim of the plaintiff or respondent or objection of the defendant or petitioner was based on a legal provision that was subsequently altered or revoked;

b) When there is a reversal of established case law upon which the claim of the plaintiff or petitioner or objection of the defendant or respondent was based;

c) When prescription or amnesty occurs during the course of the proceeding;

d) When, in execution proceedings, the assets that would serve as security to creditors have been dissipated by a fact not attributable to the judgment debtor;

e) When it is an action for the satisfaction of pecuniary obligations and the insolvency of the defendant or judgment debtor is declared, provided that, at the date of commencement of the action, such insolvency was not foreseeable to the plaintiff.

3 - In other cases of termination of proceedings by impossibility or subsequent futility of the dispute, responsibility for costs shall be borne by the plaintiff or petitioner, unless such impossibility or futility is attributable to the defendant or respondent, in which case the latter is responsible for all costs.

4 - It is considered, in particular, that the subsequent futility of the dispute is attributable to the defendant or respondent when it results from voluntary satisfaction by the latter of the claim of the plaintiff or petitioner, outside the cases provided for in paragraph 2 of the preceding article and unless, in case of settlement, the parties agree on the allocation of costs.

In the present case, we have that:

  1. The Claimant filed the petition for arbitral pronouncement on 05/01/2017;

  2. The new understanding of the Tax Authority from which the revocation of the assessment act resulted was sanctioned by order dated 10/02/2017;

  3. The Tax Authority proceeded with the revocation of the assessment act on 02/03/2017, notifying the Tribunal thereof on 27/04/2017.

In accordance with circular 4/2017 itself, it was issued as a result of Order No. 14/2017-XXI, of 26 January, from the State Secretary for Tax Affairs, which, based on recent case law of the Supreme Administrative Court (STA), as well as on the provisions of Article 68-A(4) of the General Tax Law (LGT), which provides that the tax administration must revise its positions in light of the case law of the superior courts, ordered the Tax Authority to revise its interpretation of Article 270(2) of the Insolvency and Business Recovery Code (CIRE), as expressed in section III of the annex to Circular No. 10/2015, regarding the exemption from IMT on the acquisition of immovable property.

Thus, it is possible to conclude that: (i) when the Claimant filed the petition for arbitral pronouncement, the assessment act had not yet been revoked; (ii) the revocation of the act took place as a result of a new understanding adopted by the Tax Authority regarding the IMT exemption in question; (iii) the new understanding of the Tax Authority arises as a result of case law of the STA on the matter sub judice.

However, although the Tax Authority's understanding of the matter has changed, it is not accurate to say that it arises as a result of a "reversal of established case law upon which the claim of the plaintiff or petitioner or objection of the defendant or respondent was based." In fact, this new understanding of the Tax Authority merely reflects what has been the understanding of the STA as reflected in well-established case law spanning several years (see, by way of example, the Judgments of 11 November 2015, rendered in case No. 968/13, of 18 November 2015, rendered in case No. 0575/15, of 25 September 2013, rendered in case No. 866/13, of 16 December 2015, rendered in case No. 1345/15 and, more recently, the Judgment of 20 January 2016, rendered in case No. 01350/15). Already on 18 November 2015, in the judgment rendered in case No. 0575/15, the STA stated that "an interpretation in accordance with the Portuguese Constitution requires that it be considered that the exemption in question also applies to sales and exchanges of elements of company assets falling within the scope of an insolvency plan or payment plan, or carried out in the context of the liquidation of the insolvent estate, since that is the solution to which the legislative authorization law points, which authorized the Government to legislate on this matter, and therefore any different interpretation would be unconstitutional, since in that case the Government would have legislated in disregard of the 'meaning and scope' of the legislative authorization."

Given the foregoing, the Tribunal considers that the provisions of Article 536(4) of the CPC, applicable by virtue of Article 29(1)(e) of the RJAT, are applicable in the present case: "It is considered, in particular, that the subsequent futility of the dispute is attributable to the defendant or respondent when it results from voluntary satisfaction by the latter of the claim of the plaintiff or petitioner, outside the cases provided for in paragraph 2 of the preceding article and unless, in case of settlement, the parties agree on the allocation of costs." As none of the circumstances provided for in paragraph 2 have occurred from which the absence of responsibility of the Respondent for the subsequent futility of the dispute could result, the Tribunal considers, pursuant to the said legal provision, that it is the Respondent's obligation to pay all costs.

V. DECISION

Based on the foregoing, this Arbitral Tribunal decides:

a) To declare the present arbitral proceeding terminated by subsequent futility of the dispute;

b) To condemn the Respondent to pay the costs of the proceeding.

VALUE OF THE PROCEEDING: in accordance with the provisions of Articles 306(2) of the CPC, 97-A(1)(a) of the Tax Procedure and Process Code and 3(2) of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceeding is set at €1,807.23 (one thousand eight hundred and seven euros and twenty-three cents).

COSTS: pursuant to the provisions of Articles 536 of the CPC, 12(2), 22(4) and 29(1)(e) of the RJAT, paragraph 4 of Article 4 of the Regulation of Costs in Tax Arbitration Proceedings and its respective Table I, the amount of costs is set at €306.00 (three hundred and six euros), in accordance with Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Respondent.

Let it be recorded and notified.

Lisbon, 05 September 2017

The Arbitrator

Frequently Asked Questions

Automatically Created

What happens when the Tax Authority revokes an IMT liquidation act during arbitration proceedings?
When the Tax Authority revokes an IMT assessment during arbitration, the tribunal declares supervening futility of the dispute (inutilidade superveniente da lide) under Article 277(e) of the Civil Procedure Code. The proceeding terminates without a decision on merits because the taxpayer's claim has been satisfied outside the arbitration process. The Tax Authority must execute consequential acts including reimbursement of tax paid and compensatory interest. The tribunal's role shifts to determining cost allocation rather than ruling on the substantive tax dispute.
How are arbitration costs allocated when supervening uselessness of the dispute is declared in Portuguese tax cases?
Under Article 536(3) of the Civil Procedure Code, applicable to tax arbitration via Article 29(1)(e) RJAT, costs are divided equally between parties when the claim was well-founded at filing but ceased due to supervening circumstances not attributable to them. Changes in Tax Authority guidance through administrative circulars—such as Circular 4/2017 in this case—constitute supervening circumstances that justify equal cost sharing rather than imposing full costs on the losing party.
Is IMT (Municipal Property Transfer Tax) due on property acquisitions made within insolvency proceedings in Portugal?
Following Circular 4/2017, IMT is not due on property acquisitions made within insolvency proceedings in Portugal. This circular replaced Circular 10/2015, which had denied the exemption. The new interpretation recognizes that property transfers from insolvency estates qualify for IMT exemption, leading the Tax Authority to revoke assessments previously issued under the old guidance. Process 25/2017-T confirms this exemption applies to autonomous property units acquired during court-supervised insolvency proceedings.
What impact did Circular 4/2017 have on IMT exemptions for property transfers in insolvency cases?
Circular 4/2017, issued by the Office of the Director General on February 10, 2017, fundamentally changed the Tax Authority's position on IMT exemptions for insolvency property transfers. It replaced Circular 10/2015 and established that such acquisitions qualify for IMT exemption. This new guidance led to systematic revocation of IMT assessments on insolvency property transfers, including the €1,807.23 assessment in Process 25/2017-T, and required the Tax Authority to reverse denials of administrative reviews under Article 112 CPPT.
Can a taxpayer claim reimbursement and compensatory interest after revocation of an unlawful IMT assessment?
Yes, taxpayers can claim both reimbursement and compensatory interest after revocation of an unlawful IMT assessment. In Process 25/2017-T, the claimant specifically requested 'restitution of the tax paid, together with interest damages.' Following revocation under Article 112 CPPT, the Tax Authority must execute all consequential acts, which include refunding the improperly collected tax (€1,807.23 in this case) plus legally mandated compensatory interest for the period the taxpayer was deprived of those funds.