Process: 292/2016-T

Date: November 3, 2016

Tax Type: Selo

Source: Original CAAD Decision

Summary

CAAD Arbitral Process 292/2016-T addressed whether Stamp Tax (Imposto do Selo) applies to late payment interest (juros de mora) charged by a financial institution on breached housing credit contracts. The claimant bank, A… S.A., challenged a Stamp Tax assessment of €332,613.21 plus €31,183.40 in compensatory interest for 2013, relating to interest on arrears from housing loans. The Tax Authority argued that while article 7, No. 1, subsection l) of the Stamp Tax Code exempts interest on loans for primary residence acquisition, this exemption does not extend to interest on arrears arising from contract breach. The bank contended that Stamp Tax fundamentally does not apply to default interest, or alternatively, that the primary residence exemption should cover all interest related to such loans, including late payment charges. The collective arbitral tribunal, constituted under Decree-Law 10/2011, prioritized examining whether Stamp Tax applies to interest on arrears under section 17.3.1 of the General Stamp Tax Table (TGIS), which imposes a 4% rate on interest from loans and credit accounts. The tribunal also analyzed whether the exemption for primary residence loan interest extends to compensatory interest charged upon borrower default. The claimant had paid the full assessed amount (€363,796.61) and requested reimbursement plus indemnificatory interest. This decision clarifies the scope of Stamp Tax on financial institutions' interest charges and interprets the boundaries of housing credit exemptions, impacting how banks assess tax obligations on default interest and whether such charges fall within the protective scope of primary residence tax benefits under Portuguese tax law.

Full Decision

ARBITRAL DECISION

The arbitrators Counsellor Jorge Manuel Lopes de Sousa (presiding arbitrator), (designated by the other Arbitrators), Prof. Doctor Luís Menezes Leitão and Dr. Maria Manuela do Nascimento Roseiro, designated, respectively, by the Claimant and by the Defendant, to form the Arbitral Tribunal, constituted on 08-08-2016, hereby agree as follows:

1. Report

A…, S.A., a company with its registered office at Avenue…, number…, in Lisbon (…-…), with unique registration number and collective entity number … (hereinafter referred to as the "Claimant" or "A…"), filed a request for constitution of a Collective Arbitral Tribunal, articles 2, No. 1, subsection a), 5, No. 3, subsection b), 6, No. 2, subsection b) and 10, No. 1, subsection a), of Decree-Law No. 10/2011, of 20 January (hereinafter "RJAT"), with a view to annulling the Stamp Tax assessment No. 2015…, in the amount of € 332,613.21, as well as the corresponding assessments of compensatory interest, in the amount of € 31,183.40, relating to the year 2013.

The Claimant further requests the reimbursement of sums unduly paid, plus indemnificatory interest.

The Defendant is the TAX AND CUSTOMS AUTHORITY.

The Claimant designated as Arbitrator Prof. Doctor Luís Menezes Leitão, pursuant to article 6, No. 2, subsection b), of the RJAT.

The request for constitution of the Arbitral Tribunal was accepted by the President of the CAAD and automatically notified to the Tax and Customs Authority on 06-06-2016.

Pursuant to subsection b) of No. 2 of article 6 and No. 3 of the RJAT, and within the period provided for in No. 1 of article 13 of the RJAT, the highest-ranking official of the Tax Administration service designated as Arbitrator Dr. Maria Manuela do Nascimento Roseiro.

The Arbitrators designated by the Parties agreed to designate Counsellor Jorge Lopes de Sousa as presiding arbitrator, who accepted the designation.

Pursuant to and for the purposes of No. 7 of article 11 of the RJAT, the President of the CAAD informed the Parties of this designation on 22-07-2016.

Thus, in compliance with the provisions of No. 7 of article 11 of the RJAT, with the period provided for in No. 1 of article 13 of the RJAT having elapsed without the Parties raising any objection, the Collective Arbitral Tribunal was constituted on 08-08-2016.

The Tax and Customs Authority filed a Reply, in which it argued that the request for arbitral pronouncement should be dismissed.

By order of 04-10-2016, the meeting provided for in article 18 of the RJAT was dispensed with and it was determined that the proceedings would continue with written pleadings.

The Parties filed pleadings.

The Arbitral Tribunal was regularly constituted and is competent.

The parties have legal personality and capacity, are legitimized (arts. 4 and 10, No. 2, of the same statute and art. 1 of Regulation No. 112-A/2011, of 22 March) and are duly represented.

The proceedings do not suffer from any nullities.

There are no obstacles to the examination of the merits of the case.

2. Facts

2.1 Established Facts

The following facts are considered established:

· The Department of Inspection of Banks and Other Financial Institutions of the Large Taxpayers Unit conducted an inspection of the Claimant relating to the year 2013, in which it made a correction to Stamp Tax, in the amount of € 332,613.21, by applying a rate of 4% to interest on arrears owed by reason of breach of housing credit contracts;

· In the year 2013, the Claimant did not assess Stamp Tax with respect to the aforesaid interest on arrears;

· In the Tax Inspection Report, which is attached as Appendix No. 1 to the request for arbitral pronouncement, the contents of which are reproduced herein, the Tax and Customs Authority expressed, among other things, the view that the exemption provided for in article 7, No. 1, subsection l), of the Stamp Tax Code does not cover interest on arrears owed by reason of breach of housing credit contracts;

· Following the inspection, Stamp Tax assessment No. 2015… was issued, in the amount of € 332,613.21, and assessments of compensatory interest were issued, in the amount of € 31,183.40, relating to the year 2013, with a payment deadline of 26-02-2016 (document No. 2 attached to the request for arbitral pronouncement, the contents of which are reproduced herein);

· On 26-02-2016, the Claimant paid the sum of € 363,796.61, relating to the aforementioned assessment (document No. 2 attached to the request for arbitral pronouncement, the contents of which are reproduced herein);

· On 27-05-2016, the Claimant filed the request for constitution of the arbitral tribunal that gave rise to the present proceedings.

2.2 Unproven Facts and Justification of the Factual Decision

There are no facts relevant to the decision of the case that have not been established.

The determination of the facts is based on the documents attached to the request for arbitral pronouncement, there being no dispute regarding the facts.

3. Law

The principal question that is the object of the present proceedings is whether the Claimant should have assessed Stamp Tax with respect to interest on arrears that it charged to its customers by reason of non-performance of obligations arising from housing credit contracts.

The Claimant argues, in summary, that Stamp Tax does not apply to interest on arrears at all and that, if it were to apply, in the case of interest owed on housing credits for primary residence, the exemption provided for in subsection l) of No. 1 of article 7 of the Stamp Tax Code applies equally to such interest, which provides that "are also exempt from tax" "interest charged on loans for the acquisition, construction, reconstruction or improvement of primary residence" and that, if tax were owed, it would be a case of substitution without withholding, to which the regime of No. 1 of article 28 of the LGT does not apply, which establishes the regime of liability in case of tax substitution, so that the debtor of the interest on arrears would be liable for payment of the tax.

By virtue of the provisions of article 124, Nos. 1 and 2, subsection b), of the CPPT, applicable to tax arbitration proceedings by virtue of the provisions of article 29, No. 1, subsection c), of the RJAT, priority must be given to the examination of defects giving rise to voidability imputed to the contested act, which result in more stable and effective protection of the rights infringed.

In the case at hand, the defects imputed to the contested assessment by violation of the objective scope of Stamp Tax on interest, in light of the provisions of section 17.3.1 of the TGIS, and of the exemption provided for in subsection l) of No. 1 of article 7 of the Stamp Tax Code are those which ensure more stable and effective protection of the rights infringed, because, if found to be well-founded, they definitively rule out the liability of the Claimant, which justifies the priority examination of these questions.

3.1 Questions of the Scope of Stamp Tax on Interest on Arrears and the Scope of the Exemption Provided for in Article 7, No. 1, Subsection l), of the Stamp Tax Code

It is appropriate to examine the two questions together, as they are interconnected.

Section 17.3.1 of the TGIS, as amended by Law No. 12-A/2010, of 30 June (former section 17.2.1.) provides for the application of a rate of 4% to "interest from, in particular, discounting of bills and treasury notes, from loans, from credit accounts and from credit without disbursement".

Subsection l) of No. 1 of article 7 of the Stamp Tax Code provides that "are also exempt from tax" "interest charged on loans for the acquisition, construction, reconstruction or improvement of primary residence".

"In determining the meaning of tax provisions and in qualifying the facts to which they apply, the general rules and principles of interpretation and application of laws are observed" (article 11, No. 1, of the LGT).

For this reason, "in determining the meaning and scope of the law, the interpreter shall presume that the legislature adopted the most appropriate solutions and knew how to express its intent in adequate terms" (article 9, No. 3, of the Civil Code).

In light of this latter presumption, the fact that in both aforementioned provisions of the CIS and the TGIS reference is made to "interest ... from loans", without any specification of any type of interest, leads to the conclusion that the exemption refers to the same types of interest that are covered by the scope provision, provided that the loans are "for the acquisition, construction, reconstruction or improvement of primary residence". In truth, in light of the presumption that the legislature knew how to express its intent in adequate terms, if in two related provisions the legislature uses the same expression, which is the one it considers most appropriate to express its intent, it must be concluded that it does so with the intention of expressing the same reality.

Thus, it must be concluded that, if interest on arrears from loans is covered within the objective scope defined by section 17.3.1 of the TGIS, it will be covered by the exemption when those loans are intended for the acquisition, construction, reconstruction or improvement of primary residence.

Furthermore, the position of the Tax and Customs Authority that provisions concerning tax benefits must be interpreted restrictively has no legal support.

Provisions that provide for tax benefits have the nature of exceptional provisions, as is clear from the express wording of article 2, No. 1, of the EBF, and therefore must be interpreted, in principle, in their precise terms, without enlargements or restrictions, so as to cover all cases literally provided for therein and only those, as is settled jurisprudence on the interpretation of this type of provisions, without prejudice to any possible enlargements or restrictions that permit the conclusion with certainty that the legislature did not adequately express the legislative intent, particularly through preparatory work or explanatory texts.

That is, provisions concerning tax benefits must be interpreted in strict terms and not restrictively.

In the case at hand, there being no textual support in article 7, No. 1, subsection l), of the TGIS for restricting its field of application solely to some types of interest covered by the scope provision and there being no manifestation of legislative intent by any other means (such as the preamble of a statute or statement of reasons or parliamentary discussion) that permits the conclusion that a solution different from that which results from the literal wording was intended, it must be concluded that the provision of subsection l) of No. 1 of article 7 must be applied according to the meaning that results from its terms.

Moreover, this is also a solution of evident reasonableness, in light of the discernible legislative purpose of facilitating access to primary residence, because the application of tax only to interest on arrears from loans for this purpose would impose an additional burden on taxpayers who presumably are experiencing greater difficulties in making the contractual payments, a fact that reveals lower contributive capacity.

On the other hand, the fact, cited by the Tax and Customs Authority, that interest on arrears is based on an unlawful act has no relevance for this purpose.

In truth, given that interest of various types, including that owed by reason of unlawful non-performance, is an omnipresent reality in tax legal relationships, it is indefensible that the tax legislature, in using the expression "interest from loans", which potentially covers all types, would have "forgotten" that this formula encompassed interest owed by reason of unlawful non-performance.

On the other hand, it is well known that tax law, in the matter of objective scope, pays greater attention to economic reality than to legal qualifications, a principle which has explicit expression in No. 3 of article 11 of the LGT, which is a corollary of the constitutional principles of equality and taxation based on contributive capacity. From this perspective, there is no reasonable justification for according more favorable tax treatment to remunerative interest than to interest on arrears, since, in either case, there are sums which the debtor must deliver to the creditor as consideration for the loan and the debtor of interest on arrears will be, presumptively and tendentially, in a specially less favorable situation in terms of contributive capacity than the debtor who only has to pay remunerative interest.

It is not, therefore, in this interpretation, a matter of legislatively benefiting a situation caused by the occurrence of an unlawful act, but rather of giving it the same treatment that is given to other situations of payment of interest on loans.

On the other hand, this equality of tax treatment is justified by the fact that it applies to any type of interest owed on loans for primary residence the principal reason that justifies the exemption, which is the fulfillment by the State of the obligation to encourage access to primary residence, which constitutes one of the tasks constitutionally imposed on the State in matters of housing [article 65, No. 2, subsection b), of the CRP].

For all the foregoing, it is to be concluded that there is no basis for taxation of Stamp Tax on interest on arrears from loans intended for the acquisition, construction, reconstruction or improvement of primary residence, whereby the contested assessment violates the provisions of article 7, No. 1, subsection l), of the Stamp Tax Code, in conjunction with section 17.3.1 of the TGIS.

3.2 Questions of Moot Consideration

Concluding that the assessment is illegal, for the reasons set forth, the examination of the remaining questions placed is rendered moot, as it would be unnecessary.

4. Reimbursement of Sums Paid and Indemnificatory Interest

The Claimant makes requests for reimbursement of the sum paid and for indemnificatory interest.

In accordance with the provisions of subsection b) of article 24 of the RJAT, the arbitral decision on the merits of the claim which admits no appeal or challenge binds the Tax Administration from the end of the period provided for appeal or challenge, and this latter must, in the exact terms of the well-foundedness of the arbitral decision in favor of the passive subject and until the end of the period provided for voluntary execution of decisions of tax court judgments, restore the situation that would have existed if the tax act that is the object of the arbitral decision had not been carried out, adopting the acts and operations necessary for that purpose", which is in harmony with the provisions of art. 100 of the LGT [applicable by virtue of the provisions of subsection a) of No. 1 of article 29 of the RJAT] which provides that "the tax administration is obliged, in case of full or partial well-foundedness of an administrative challenge, judicial challenge or appeal in favor of the passive subject, to the immediate and complete restoration of the legality of the act or situation that is the object of the dispute, including the payment of indemnificatory interest, if applicable, from the end of the period of execution of the decision".

Although article 2, No. 1, subsections a) and b), of the RJAT uses the expression "declaration of illegality" to define the jurisdiction of the arbitral tribunals that function in the CAAD, making no reference to condemnatory decisions, it should be understood that the jurisdiction of these tribunals includes the powers that in judicial challenge proceedings are attributed to the tax courts, and this is the interpretation that is in harmony with the sense of the legislative authorization on which the Government based itself to approve the RJAT, in which it proclaims, as the first directive, that "the tax arbitration proceeding must constitute a procedural means alternative to the judicial challenge proceeding and to the action for recognition of a right or legitimate interest in tax matters".

The judicial challenge proceeding, despite being essentially a proceeding for annulment of tax acts, admits condemnation of the Tax Administration to the payment of indemnificatory interest, as is clear from article 43, No. 1, of the LGT, which provides that "indemnificatory interest is owed when it is determined, in administrative challenge or judicial challenge, that there was error attributable to the services that resulted in payment of the tax debt in an amount greater than that legally due" and from article 61, No. 4 of the CPPT (as amended by Law No. 55-A/2010, of 31 December, which corresponds to No. 2 in the original wording), which provides that "if the decision recognizing the right to indemnificatory interest is judicial, the period for payment is counted from the beginning of the period of its voluntary execution".

Thus, No. 5 of art. 24 of the RJAT, when it states that "payment of interest, regardless of its nature, is owed, under the terms provided in the general tax law and in the Code of Tax Procedure and Process", must be understood as permitting the recognition of the right to indemnificatory interest in the arbitral proceeding.

On the other hand, given that the right to indemnificatory interest depends on the right to reimbursement of sums unduly paid, which are the basis for its calculation, implicit in the possibility of recognition of the right to indemnificatory interest is the possibility of examination of the right to reimbursement of such sums.

It is appropriate, therefore, to examine the request for reimbursement of the amounts unduly paid and for payment of indemnificatory interest.

In the case at hand, it is manifest that, as a consequence of the annulment of the assessment act, reimbursement of the tax paid is in order, by virtue of the aforementioned articles 24, No. 1, subsection b), of the RJAT and 100 of the LGT, as this is essential to "restore the situation that would have existed if the tax act that is the object of the arbitral decision had not been carried out".

As regards indemnificatory interest, article 43, Nos. 1 and 2, of the LGT provides that "indemnificatory interest is owed when it is determined, in administrative challenge or judicial challenge, that there was error attributable to the services that resulted in payment of the tax debt in an amount greater than that legally due".

In the case at hand, it was the Tax and Customs Authority that carried out the contested assessment, on its own initiative, whereby the defects affecting it are attributable to it.

Thus, the Claimant has the right to indemnificatory interest, at the statutory default rate, calculated from 26-02-2016, calculated on the sum of € 363,796.61, until full reimbursement, pursuant to articles 43, Nos. 1 and 4, and 35, No. 10, of the LGT, 61, Nos. 2, 3, 4 and 5, of the CPPT, and art. 559 of the Civil Code and Regulation No. 291/2003, of 8 April.

5. Decision

In accordance with the foregoing, this Arbitral Tribunal hereby agrees to:

a) Find the request for arbitral pronouncement well-founded;

b) Annul Stamp Tax assessment No. 2015…;

c) Find well-founded the requests for reimbursement of € 363,796.61 and for indemnificatory interest calculated from 26-02-2016.

6. Value of the Case

In accordance with the provisions of article 306, No. 2, of the CPC of 2013, article 97-A, No. 1, subsection a), of the CPPT and article 3, No. 2, of the Regulation, the case is assigned a value of € 363,796.61.

7. Costs

The amount of costs is fixed at € 24,000.00, to be borne by the Claimant, pursuant to article 5, No. 2, of the Regulation of Costs in Tax Arbitration Proceedings and Table II attached thereto.

Lisbon, 03-11-2016

The Arbitrators

(Jorge Lopes de Sousa)

(Luís Menezes Leitão)

(Maria Manuela do Nascimento Roseiro)

[1] In this sense, see the judgment of the Supreme Administrative Court of 15-11-2000, case No. 025446, published in the Bulletin of the Ministry of Justice No. 501, pages 150-153, in which abundant jurisprudence of the Supreme Administrative Court and the Supreme Court of Justice is cited.

This Bulletin of the Ministry of Justice is available at http://www.gddc.pt/actividade-editorial/pdfs-publicacoes/BMJ501/501_Dir_Fiscal_a.pdf

Frequently Asked Questions

Automatically Created

Is stamp tax (Imposto do Selo) applicable to late interest (juros de mora) on housing credit loans in Portugal?
The central issue in Process 292/2016-T was whether Stamp Tax applies to late payment interest (juros de mora) on housing credit contracts. The Tax Authority assessed €332,613.21 in Stamp Tax at a 4% rate on interest on arrears charged by the bank during 2013. The bank argued that either Stamp Tax does not apply to default interest at all, or that the exemption for primary residence loans under article 7, No. 1, subsection l) of the Stamp Tax Code should extend to all interest related to such loans, including late payment charges arising from contract breach.
What exemption applies to stamp tax on mortgage-related interest charges under Portuguese tax law?
Article 7, No. 1, subsection l) of the Stamp Tax Code exempts 'interest charged on loans for the acquisition, construction, reconstruction or improvement of primary residence' from Stamp Tax. The dispute centered on whether this exemption extends to interest on arrears (juros de mora) charged when borrowers default on housing credit obligations. The Tax Authority maintained that the exemption covers only contractual interest on performing loans, not compensatory interest arising from breach, while the claimant argued for a broader interpretation encompassing all interest related to primary residence financing.
How did CAAD Arbitration Process 292/2016-T rule on the stamp tax liquidation of €332,613.21?
The arbitral tribunal in Process 292/2016-T was constituted on 08-08-2016 as a collective tribunal under the CAAD (Centro de Arbitragem Administrativa) framework established by Decree-Law 10/2011. The bank challenged Stamp Tax assessment No. 2015… totaling €332,613.21 plus €31,183.40 in compensatory interest. The tribunal prioritized examining substantive issues: whether section 17.3.1 of the General Stamp Tax Table applies to interest on arrears, and whether the primary residence exemption covers such charges. The proceedings involved written pleadings, and the tribunal applied articles 11 and 124 of relevant tax procedural codes to determine the most effective protection of taxpayer rights.
Can taxpayers claim reimbursement and indemnity interest after an unlawful stamp tax assessment in Portugal?
Yes, Portuguese tax law allows taxpayers to claim reimbursement of unduly paid taxes plus indemnificatory interest (juros indemnizatórios). In Process 292/2016-T, the claimant bank paid €363,796.61 under protest and requested full reimbursement plus indemnificatory interest if the tribunal annulled the assessment. Article 43 of the Tax Benefits Statute and general principles of tax liability govern such reimbursements. When an administrative or arbitral decision determines that a tax assessment was unlawful, the taxpayer is entitled to recover the principal amount plus compensatory interest for the period the State held funds without legal basis, ensuring full restitution for improper tax collection.
What is the procedure for challenging a stamp tax liquidation through CAAD collective arbitral tribunal?
Under Decree-Law 10/2011 (RJAT), taxpayers can challenge tax assessments through CAAD by filing a request for constitution of an arbitral tribunal. In collective arbitrations, each party designates one arbitrator, who jointly select the presiding arbitrator. The process involves: (1) filing the arbitration request within the legal deadline; (2) automatic notification to the Tax Authority; (3) designation of arbitrators; (4) tribunal constitution; (5) submission of reply and pleadings; (6) optional hearing or written proceedings; and (7) issuance of the arbitral decision. Process 292/2016-T followed this procedure, with the tribunal constituted within the statutory timeframe and parties submitting comprehensive written arguments on the Stamp Tax liability for housing credit default interest.