Process: 326/2017-T

Date: November 27, 2017

Tax Type: IMT

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 326/2017-T) addresses the IMT exemption for properties acquired for resale under Article 7 of the IMT Code (CIMT). The applicant company, engaged in real estate trading (CAE 68100), acquired land for construction in December 2016 with an IMT exemption certificate. The Tax Authority subsequently revoked the exemption and assessed IMT of €7,951.45, arguing the company had ceased activity for VAT purposes at the acquisition date. The applicant contested on two grounds: (1) violation of the right to prior hearing under Article 60 of the General Tax Law (LGT), as the Tax Authority issued the assessment without allowing contradictory input; and (2) improper revocation, claiming VAT cessation does not imply cessation for Corporate Income Tax (IRC) purposes, which governs the resale exemption. The Tax Authority countered that prior hearing would have been futile since the assessment was based solely on the taxpayer's own declaration of activity cessation, and that exemption prerequisites must exist at the transmission date. The case raises critical questions about the temporal requirements for tax exemptions, the relationship between different tax regimes (VAT vs IRC), and procedural guarantees in tax assessments. The outcome impacts real estate companies' understanding of when exemptions can be revoked and the procedural protections available in IMT disputes through CAAD arbitration.

Full Decision

ARBITRAL DECISION

The request for constitution of the arbitral tribunal was accepted by the Honorable President of CAAD, being, in legal terms, notified to the Tax and Customs Authority. The Deontological Council appointed the undersigned as arbitrator of the single Arbitral Tribunal, notifying the parties of this appointment. In compliance with the provision in paragraph c) of article 11 of Decree-Law No. 10/2011, of 20 January, with the wording introduced by article 228 of Law No. 66-B/2012, of 31 December, the Arbitral Tribunal was constituted on 16 August 2017.

I – REPORT

1- On 15.05.2017, "A... – LTD", taxpayer no...., with registered office at... no...., ...–... Lisbon, filed a request for constitution of a single Arbitral Tribunal, in accordance with the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter referred to only as LRAT), with the Tax and Customs Authority being the Respondent.

2- It contests the IMT assessment act no.... in the amount of € 7,951.45, with a payment deadline of 2017.03.02 and paid within that period, the assessment of which was communicated to it through official letter no...., dated 10.01.2017, issued by the Lisbon Tax Office....

The assessment relates to the acquisition of a property consisting of land for construction, registered in the property register under article no...., of the parish of..., municipality of Setúbal.

3- It requests the annulment of the assessment, the reimbursement of the amount "paid" and compensatory interest, given the illegality of the aforementioned tax assessment acts.

4- It invokes, succinctly, in its favor:

Omission of the right to prior hearing provided for in article 60 of the LGT, on the understanding that it should have been heard prior to notification of the tax assessment, which renders the act illegal, as none of the grounds set out in that provision that would have allowed it to be dispensed with were present, it being certain that this was an unfavorable act in tax matters.

It further submits that the IMT assessment act is illegal because, at the time of acquisition, it was entitled to an exemption, since all the requirements of article 7 of the CIMT that would have allowed it to benefit from the exemption granted to it were met, including the declaration of commencement of activity for the purchase and resale of real estate initiated in 2014.

It further alleges that the TA could not conclude that the exemption was wrongly granted solely on the basis of cessation of activity for VAT purposes:

(...) The cessation of activity for VAT purposes does not imply... the respective cessation also for IRC purposes." And "it follows from the reference provided in article 7 of the CIMT to paragraph 1 of article 109 of the IRC Code, which is a tax on income, in this case the IRC, with respect to which taxpayers must maintain open activity."

If there were doubts, they would have to be valued procedurally in favor of the Applicant in accordance with article 100, paragraph 1 of the CPPT.

5- For its part, the TA... argues that the disputed assessments embody a correct interpretation and application of the law to the facts and do not suffer from any defect of violation of law or otherwise, and that, consequently, the request should be declared entirely unfounded, with the act remaining in the exact terms in which it was made.

INDEED, the TA... understands that

Prior hearing cannot be seen as mere formality to be complied with; it must be seen as having a purpose, which will always be to allow for the contradictory principle, in the expectation that other facts or legal arguments may reverse the proposed decision embodied in the draft rejection.

In this case, the IMT assessment with revocation of the exemption, being indeed an act prejudicial to the taxpayer, was based solely on a fact/act performed by the taxpayer - the cessation of activity.

The intervention of the taxpayer, in the context of prior hearing, could never have changed the direction of the decision, which would only have been, hypothetically, possible with the presentation of the declaration of resumption of activity, which is what it ultimately did.

The assessment was made, therefore, because the taxpayer declared that it had ceased its activity, and therefore had no right to the exemption, which is inherent to the activity itself of purchase for resale, and having the elements to assess the tax, these having also been provided by the taxpayer through the deed of purchase and sale, nothing was added by the TA, all the information was brought by the taxpayer.

The resumption of activity effective as of 1 November 2016, presented on 10 January 2017, does not have the capacity to "repair" the situation for purposes of the exemption, thus creating a sort of "successive dealing" in the company's activity.

The right to tax benefits must refer to the date of verification of the respective prerequisites, even though it may be dependent on declaratory recognition by the tax administration.

At the date of execution of the public deed of purchase and sale, the taxpayer had ceased its activity, therefore the property was not intended for its purchase for resale activity, and the prerequisites for the exemption under article 7 of the CIMT were not met.

And if the exemption is not verified, the standard taxation rule is restored, which, in accordance with article 18 of the CIMT: "1 - The tax shall be assessed at the rates in force at the time the taxable event occurs. 2 - If the exemption lapses, the rate and value to be considered in the assessment shall be those in force at the date of assessment. 3 - When, in the case referred to in the preceding paragraph and after the acquisition of the goods, events have occurred that alter their nature, the tax shall be assessed on the basis of the rates and values in force at the date of transmission."

The fact that the taxpayer came "subsequently" to declare that the activity had actually always been maintained does not exclude the rules for the constitution of the right to tax benefits, nor the rules for tax assessment. We must even conclude that at the date of the taxable event which occurred with the execution of the purchase and sale contract, the exemption under article 7 of the CIMT did not apply, since the beneficiary had already ceased its activity, this being the prerequisite of the exemption: acquisition for resale.

Since the exemption was not verified, we must necessarily conclude that the tax act in question did not violate any legal provision and should therefore be maintained.

II - The proceedings are not subject to nullities.

III - There is no obstacle to the consideration of the merits of the case.

IV - STATEMENT OF FACTS

1- The Applicant commenced activity for IRC and VAT purposes on 16 June 2014, indicating as its main activity "purchase and sale of real estate" which corresponds to CAE 68100;

2- The Applicant acquired by public deed dated 29 December 2016, the urban property located in the parish of..., in Setúbal, registered in the respective property register under article... (land for construction);

3- The aforementioned property transmission, by order of 23.11.2016, benefited from an exemption from payment of IMT, under the provisions of article 7, paragraph 1, of the CIMT, by reason of being declared as intended for resale;

4- At the date of transmission, the Applicant had a certificate issued by the Tax Office concerning IMT exemption on acquisitions for resale made up to 31 December 2016;

5- The aforementioned certificate was requested and obtained on 23 November 2016, stating that the Applicant was at the date registered for the exercise of the activity of purchase for resale of real estate and that it had exercised that activity in the previous year;

6- The Applicant submitted Form 1 provided for in Article 19 of the IMT Code, regarding the acquisition to be made, and the Lisbon Tax Office... issued an IMT assessment with no tax payable.

7- The Lisbon Tax Office... notified the Applicant to pay IMT, considering that the benefit had been wrongly granted. By official letter dated 10 January 2017, from that office, the Applicant was notified of the respective tax act, with tax payable in the amount of € 7,951.45.

8- According to the reasoning presented by the tax administration services, "The aforementioned property was acquired for resale on 29.12.2016 (...) with the benefit of the exemption provided for in article 7 of the CIMT. Having been subsequently verified by the services that the benefit appears to have been wrongly granted. Since the purchaser, at the date of assessment, did not meet the prerequisites provided for in the combination of article 7 of the CIMT, with paragraph a) no. 1 of article 117 of the CIMT, "... that the IMT exemption for resale depends on the verification of the presentation, prior to acquisition, of the declaration of registration, amendment, in accordance with articles 118 and 119 of the CIRC, relating to the exercise of the activity of purchaser of real estate for resale". In summary, it had activity 68100 purchase and sale of real estate, ceased on 31-10-2016. (...)."

9- On 31 October 2016, the Applicant ceased activity for VAT purposes, as evidenced by a copy of the respective declaration, having declared its resumption, effective as of 1 November 2016, in a declaration presented on 10 January 2017.

V - Facts Established as Proven

All of the foregoing.

Reasoning for facts established as proven and not proven:

With regard to the facts, the Tribunal does not have to pronounce on everything alleged by the parties, but rather has the duty to select the facts that are relevant to the decision and to distinguish between the facts established and those not established (see article 123, paragraph 2 of the CPPT and article 607, paragraph 3 of the CPC, applicable under article 29, paragraph 1, paragraphs a) and e), of the LRAT).

Thus, the facts relevant to the judgment of the case are selected and delimited based on their legal relevance, which is established in light of the various plausible solutions to the legal question(s) (see former article 511, paragraph 1 of the CPC, corresponding to the current article 596, applicable under article 29, paragraph 1, paragraph e), of the LRAT).

Thus, taking into account the positions taken by the parties, in light of article 110/7 of the CPPT, and the documentary evidence attached to the proceedings, the facts listed above are considered proven and relevant to the decision.

VI - ON THE LAW

The central disputed issues in this proceeding that require consideration for decision are as follows:

a - The alleged defect of omission of the exercise of the right to prior hearing and as to the consequences of its verification, considering the principle of preservation of the act and its applicability to the present case.

b - The question of whether companies with ceased activity in terms of VAT can still benefit from the exemption provided for in article 7 of the CIMT: purchase for resale of real estate.

Let us consider,

The spirit underlying the provision of article 124 of the CPPT, applied to the present case, requires that the merits question be considered first and only thereafter the formal question (of lack of prior hearing), since the establishment of defects therein would result in less stable and effective protection of the interests prejudiced, considering the possibility of renewal of the act and no award of compensatory interest.

Thus

It should be said that companies can, at any time, declare the cessation of activity for VAT purposes, without this requiring their dissolution and winding-up, and the taxpayer must deliver the respective declaration of cessation to the competent tax office within 30 days from the date of cessation, in accordance with article 33 of the CIVA.

This cessation of activity in terms of VAT does not result in the extinction of the company, which only occurs at the time of completion of the winding-up of the company, which precedes its dissolution.

In accordance with paragraph 2 of article 146 of the Commercial Societies Code "a company in liquidation maintains its legal personality and, unless otherwise provided in the subsequent provisions or the mode of liquidation, the provisions governing non-dissolved companies continue to be applicable to it, with the necessary adaptations."

In the specific tax field, article 15 of the General Tax Law refers to "the susceptibility of being a subject of tax legal relations", with the maintenance of legal and tax personality by the company in liquidation, persisting, above all in terms of IRC, in accordance with the provisions of paragraph 5 of article 8 of the CIRC, regarding entities with registered office or effective management in Portuguese territory.

Cessation occurs at the date of completion of liquidation, or at the date of merger or split, as regards companies dissolved as a result thereof.

The cessation of activity, in terms of VAT and in terms of IRC, can thus occur at different times and arise from different facts, a company ceased for VAT purposes may continue with activity in terms of IRC, whose cessation will only occur at the moment when the company is closed in legal terms, that is, when the completion of liquidation occurs.

That is, in these situations, we are faced with companies that have not been liquidated and dissolved, continuing to have legal existence and tax personality with certain tax obligations (namely those provided for in articles 112 and 113 of the CIRC).

Nevertheless, and without prejudice to the foregoing, it should be noted that companies that cease activity in terms of VAT become, so to speak, inactive - in the expressive sense of having no economic activity - which, by definition, does not exist in inactivity.

Now, with all respect for contrary opinion, it is understood that, in no case, can it be conceived that there could be an exemption whose basic prerequisite is, precisely, the exercise of a specific activity, (in this case the exercise of an activity of purchase for resale of real estate) when that activity is found not to exist (or subsist), even if there is a declaration that formally "attests" otherwise.

If the company ceased for VAT purposes continues with legal personality, it may at any time opt for resumption of activity by delivering the respective declaration within the periods provided for in article 31 of the CIVA.

In this case, the taxpayer declared the resumption of activity, effective as of 1 November 2016, in a declaration presented on 10 January 2017.

However, such act cannot be attributed the value that the Applicant desires.

Indeed, as is well noted in Court of Appeal decision (AC.STJ) 01654/15 of 26-10-2016, the intervention of the TA, at the moment of the declaration of commencement of activity by taxpayers, is based on the reality presented to it by the interested parties, and it is always incumbent upon it to make the necessary corrections at a later moment whenever it verifies that a discrepancy has occurred that implies non-payment or payment of less tax than what would be due.

Thus, on this point, the TA is correct, since the Applicant, as purchaser, at the date of assessment, did not meet the prerequisites provided for in article 7 of the CIMT, relating to the exercise of the activity of purchaser of real estate for resale, as it had ceased its activity since 31-10-2016.

The Respondent's argument does not succeed on this point.

Defect of Lack of Prior Hearing

Having regard to the provisions of article 60 of the LGT, it is manifest that the hearing of the taxpayer by the Administration prior to assessment was not waived (see paragraph 2 and 3 of article 60 of the General Tax Law), but rather was imposed on it by paragraph a) of paragraph 1 of the same legal provision.

The fact that it was the Claimant that presented the declaration of cessation of activity in terms of VAT obviously has no relevance in this respect, as it does not constitute a direct basis or prerequisite (not even a quantitative one) for taxation, resulting at most in an indication or qualifying circumstance of a tax situation that has nothing to do with the provision of article 60 of the LGT.

As is frequently stated, "The purpose pursued by the figure in question is still and fundamentally the discovery of material truth and the anticipated defense of the taxpayer's interests. If the legality of the assessment depends on the correct determination of the taxpayer's contributory capacity, it is understood that there is an objective interest in the taxpayer collaborating with the tax administration in order to prevent future disputes. On the other hand, from the taxpayer's perspective, it has an interest in clarifying any uncertainties regarding evidence of the tax administration before they are resolved in a manner contrary to its interests, thus avoiding the need to contest or appeal the assessment.", here attesting to the pursuit of that referred to dual function - defensive and preventive.

It was, indeed, from this perspective, necessary and mandatory to hear the taxpayer prior to assessment.

However,

The hearing of interested parties is designed to permit their participation in decisions that concern them (see article 267, paragraph 5 of the CRP), contributing to a thorough clarification of the facts and a more appropriate and just decision, the omission of this hearing constitutes an omission of a legal formality leading to the voidability of the decision (see article 163, paragraph 1 of the CPA), unless it is manifest that the decision could only have had in the abstract the content it had in concrete form and that, therefore, its preservation was required by the application of the general principle of preservation of the administrative act.

[Part of the summary of the recent decision of the Supreme Administrative Court Process: 095/16 of 18-10-2017 has been transcribed, which, with all due respect, we will continue to follow closely]

... The possibility of applying the principle of preservation of the act requires a case-by-case examination, analyzing the particular and concrete circumstances of each case, in order to determine, in a judgment of subsequent prognosis, whether or not there is a situation of absolute impossibility of the procedure's decision being influenced by the participation of the applicant.

That is, continuing in the sense of the decision we have cited... the omission of the right to hearing, through the application of the principle of preservation of the administrative act, is only admissible when the intervention of the interested party in the tax procedure is unequivocally incapable of influencing the final decision.

Now, in this case, the final direction of the discussion is not completely unequivocal for it is, at least in the abstract, arguable whether the activity of purchase for resale of real estate was maintained for purposes of the exemption given that, among other things, despite cessation for VAT purposes, it was maintained in terms of IRC and there was a declaration that, as has been said, "attested" the exercise of that activity until 31 December 2016.

The analysis must consider the particular and concrete circumstances of each case, in order to determine, in a judgment of subsequent prognosis, irrespective of the subsequent fact of the result of that discussion, that is, irrespective of whether the alleged defects in the challenge/contestation are upheld or not.

The touchstone for the application of the aforementioned principle is, therefore, the incapacity of the interested party's participation to influence the final decision, whether in its direction or in its grounds.

It being certain that, as noted, "the application of the principle of preservation of the act necessarily implies a posteriori judgment, "this must be a judgment of subsequent prognosis, therefore it cannot and should not be influenced by the dismissal of the other defects (in addition to the omission of the right to hearing) invoked in the proceeding in which the act was challenged, under penalty of emptying the right of participation and practical impossibility of this institute."

(See in the same sense the decision of the Full Court of the Tax Contentious Section of the Supreme Administrative Court of 15 October 2014, delivered in process No. 1374/13.)

It is thus understood that it is not possible to assert that the participation of the Applicant could not have influenced, in terms of fact and law, the decision of the procedure, nor can it be asserted that the fact that the discussion of the legality of the assessments (whatever the result of that discussion, that is, irrespective of the merit of the alleged defects in the judicial challenge), has been carried out in the context of the arbitral action, reduces the formality (notification for the exercise of the right to prior hearing) to non-essential, thereby remedying the resulting defect.

WHEREFORE the request for arbitral decision is upheld, since the disputed assessment is subject to the formal defect of lack of prior hearing provided for in article 60 of the LGT, requiring the annulment of the respective tax act.

As to the request for compensatory interest

It is established case law, particularly in the STA, that when an assessment act subject to challenge is annulled solely for a formal defect, there is no basis, under the provisions of article 43 of the LGT, for awarding compensatory interest.

That provision requires that there be an error attributable to the services from which (in light of a causal nexus) the payment of undue tax resulted.

And the existence of that error is not considered verified in the case under consideration.

It is concluded, effectively, that, in cases, such as the present, in which the annulment of the assessment is based on the omission of formality due to violation of the right of participation or omission of the duty of prior hearing, there is a lack of legal basis for condemning the TA to payment of compensatory interest under article 43 of the LGT.

DECISION

Therefore, it is decided in this Arbitral Tribunal to uphold in part the arbitral request filed and, accordingly:

a - To declare the annulment of the IMT assessment act contested on the grounds of formal defect;

b - To order the reimbursement of the amount improperly paid;

c - Not to order the TA to pay compensatory interest;

d - To order the Applicant and Respondent to bear the costs of the proceedings, set forth below.

Value of the Case

The value of the case is set at € 7,951.45, in accordance with article 97-A, paragraph 1, a), of the Code of Procedure and Tax Procedure, applicable under the force of paragraphs a) and b) of paragraph 1 of article 29 of the LRAT and paragraph 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

Costs

The arbitration fee is set at € 612.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent and Applicant respectively, in the proportion of 90/10, in view of the fact that the request was considered partially upheld, in accordance with articles 12, paragraph 2, and 22, paragraph 4, both of the LRAT, and article 4, paragraph 4, of the cited Regulation.

Lisbon, 27 November 2017

The Arbitrator,

(Fernando Miranda Ferreira)

Frequently Asked Questions

Automatically Created

What is the IMT exemption for properties acquired for resale under Article 7 of the IMT Code?
The IMT exemption for properties acquired for resale under Article 7 of the IMT Code applies to real estate acquisitions by companies whose primary activity is buying and selling properties (CAE 68100). To qualify, the acquirer must: (1) be registered for real estate trading activity; (2) have exercised that activity in the previous year; and (3) acquire the property specifically for resale purposes, not for own use or rental. The exemption requires obtaining a certificate from the Tax Office confirming these conditions are met. Critically, Article 7 references Article 109(1) of the IRC Code, linking the exemption to corporate income tax activity status rather than VAT registration alone. If the property is not resold within the legal timeframe or if the prerequisites cease to exist, the Tax Authority can revoke the exemption and assess IMT retroactively, applying rates and values in force at the assessment date under Article 18 CIMT.
Can the Tax Authority revoke an IMT exemption based solely on VAT activity cessation?
According to the Tax Authority's position in this case, cessation of VAT activity alone can justify revoking an IMT exemption if it demonstrates the company is no longer engaged in real estate resale activity. However, the taxpayer argues this interpretation is incorrect because Article 7 CIMT references Article 109(1) of the IRC Code, which governs corporate income tax, not VAT. The taxpayer contends that cessation for VAT purposes does not automatically mean cessation for IRC purposes, and that activity must be maintained open for the income tax under which the exemption is granted. This legal dispute highlights uncertainty about whether VAT and IRC activity statuses are independent or interconnected for IMT exemption purposes. The Tax Authority's approach suggests a practical interpretation where cessation declarations indicate the company is no longer pursuing its resale activity, regardless of formal IRC registration. The resolution of this issue determines whether companies can maintain IMT exemptions while being inactive for VAT but theoretically active for IRC.
Is the right to a prior hearing required before IMT liquidation under Article 60 of the LGT?
Yes, Article 60 of the General Tax Law (LGT) generally requires prior hearing before unfavorable tax acts, including IMT assessments. However, the Tax Authority argued that prior hearing was not required in this case because the assessment was based exclusively on facts declared by the taxpayer itself (activity cessation), with no additional facts contributed by the administration. The Tax Authority contended that hearing the taxpayer could not have changed the decision unless the company presented a declaration of activity resumption, which it eventually did. The taxpayer disagreed, arguing that the IMT assessment with exemption revocation was clearly an unfavorable act requiring prior hearing under Article 60 LGT, with no applicable exception. Article 60 allows omission of prior hearing only in specific circumstances, none of which the taxpayer believed were present. This procedural dispute raises important questions about when prior hearing can be dispensed with in tax matters and whether the futility of the hearing justifies its omission, a position that conflicts with the principle that prior hearing serves the contradictory principle and is not mere formality.
How does CAAD arbitration work for challenging IMT tax assessments in Portugal?
CAAD (Centro de Arbitragem Administrativa) arbitration provides an alternative to judicial courts for challenging IMT tax assessments in Portugal. Under the Legal Regime of Arbitration in Tax Matters (RJAT/Decree-Law 10/2011), taxpayers can request constitution of a single arbitral tribunal to contest tax acts. The process begins with filing a request identifying the contested act and legal grounds. The CAAD President accepts the request and notifies the Tax Authority, then the Deontological Council appoints an arbitrator. The tribunal is constituted once the arbitrator accepts and parties are notified, typically within 3-4 months. In this case, the request was filed May 15, 2017, and the tribunal constituted August 16, 2017. Arbitration offers advantages over traditional litigation: faster resolution (typically 6-12 months total), specialized tax arbitrators, and lower costs. The taxpayer can request reimbursement of amounts paid and compensatory interest if successful. The Tax Authority must respond defending the legality of the contested act. The final arbitral decision is binding and equivalent to a court judgment, subject only to limited appeal grounds.
What are the legal consequences of failing to meet resale deadlines for IMT-exempt properties?
When properties acquired with IMT exemption under Article 7 CIMT are not resold within required timeframes or exemption prerequisites cease to exist, the Tax Authority can revoke the exemption and assess IMT retroactively. Article 18(2) CIMT specifies that when exemption lapses, the tax is assessed using rates and values in force at the assessment date, not the original acquisition date, potentially increasing the tax burden if property values or rates have risen. If events after acquisition alter the property's nature, Article 18(3) applies rates and values from the transmission date. Taxpayers must pay the assessed IMT plus interest for late payment from the original deadline. Beyond financial consequences, failure to meet resale requirements can trigger closer scrutiny of future exemption requests and potentially indicate fraud if acquisitions were never genuinely intended for resale. Companies must maintain proper documentation proving resale intent and activity continuity. The case illustrates that even obtaining an exemption certificate doesn't guarantee permanent exemption—ongoing compliance with prerequisites is essential. Companies should avoid activity cessation declarations during periods when they hold IMT-exempt properties, as such declarations can trigger exemption revocation regardless of whether activity actually ceased substantively.