Summary
Full Decision
ARBITRAL DECISION
REPORT
SPECIAL CLOSED REAL ESTATE INVESTMENT FUND A… (hereinafter referred to as "Fund A…" or Applicant), with tax identification number…, here represented by its managing company B… – REAL ESTATE INVESTMENT FUND MANAGEMENT COMPANY, S.A., with tax identification number… and with registered office at…, …, …, …, in Lisbon, came, on 17-05-2017, pursuant to Article 2º No. 1, subparagraph a) and Articles 10º et seq. of the Legal Framework of Tax Arbitration, provided for in Decree-Law No. 10/2011, of 20 January, as amended by Article 228º of Law No. 66-B/2012, of 31 December (hereinafter abbreviatedly referred to as "LFTA") and Articles 1º and 2º of Order No. 112-A/2011, of 22 March, to submit a request for arbitral pronouncement on the legality of the acts of assessment of Municipal Tax on Onerous Property Transfers (IMT) Nos.…, …, …, … and….
The Tax and Customs Authority (hereinafter, TCA) is the Respondent.
The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the TCA on 22-05-2017.
The Applicant did not proceed to appoint an arbitrator, wherefore, pursuant to the provisions of subparagraph a) of No. 2 of Article 6º and subparagraph b) of No. 1 of Article 11º of the LFTA, the President of the Ethics Council of CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable timeframe.
On 11-07-2017 the parties were duly notified of such appointment, and neither manifested the intention to refuse it, pursuant to the joint provisions of Articles 11º, No. 1, subparagraphs a) and b) of the LFTA and 6º and 7º of the Ethics Code.
Thus, in accordance with the provision in subparagraph c) of No. 1 of Article 11º of the LFTA, the arbitral tribunal was constituted on 26-07-2017.
Duly notified, the TCA submitted, within the legal timeframe, a reply in which it defended the lack of merit of the request, defending itself solely through challenge and attaching a copy of the administrative file.
Dispensed with was the meeting referred to in Article 18º of the LFTA, as it was deemed unnecessary in this case, the tribunal invited the parties to produce written submissions, which they did, reiterating and developing their respective legal positions.
The date of 10-11-2017 was fixed for the rendering of the final decision.
The Applicant seeks that the illegality of the IMT assessments Nos.…, …, …, … and… and corresponding compensatory interest in the amount of €4,073,530.40 be declared, with their consequent annulment and restitution of the amount already paid by the Applicant, plus compensation for unwarranted guarantee provision, alleging, in summary:
- The Applicant was cited in the capacity of subsidiary liable party for the reversal of the tax enforcement proceedings Nos. …2015…, …2015…, …2015…, …2015…, …2016…, with reference to the alleged debt of IMT and compensatory interest.
- The acts of IMT tax assessment are unlawful, as are the ancillary acts for assessment of compensatory interest, as they are based on mistaken factual and legal grounds.
- The acts of assessment in question should, therefore, be declared unlawful and annulled.
For its part, the Respondent came forward in response alleging, in summary:
- The assessments in question are a consequence of the lapse of the IMT exemption that benefited the transfers of the properties identified below to the sphere of C…, Lda (C…), the original debtor in the tax enforcement proceedings whose reversal operated against the Applicant.
- Lapse due to the fact that the referred transfers did not meet the requirements of Article 874º of the Civil Code (CC), not constituting purchase and sale contracts, not meeting the resale prerequisites for purposes of IMT exemption and thus not gathering the requirements of the benefit provided for in Article 7º and in No. 5 of Article 11º of the Code of Municipal Tax on Onerous Property Transfers (CIMT).
- The arbitral request should, therefore, not proceed, due to lack of legal basis.
The arbitral tribunal is materially competent and was regularly constituted.
The parties enjoy legal personality and capacity, are legitimate and are legally represented (Articles 4º and 10º, No. 2, of the same instrument and 1º of Order No. 112-A/2011, of 22 March).
The proceedings do not suffer from any nullities nor are there exceptions or preliminary questions to be decided.
Thus, there is no obstacle to the examination of the merits of the case.
II. DECISION
1. FACTUAL MATTERS
1.1. Facts Established as Proven
The following facts are considered proven:
a) The Applicant acquired from company C…, by deed of "purchase and sale and assumption of debt" executed on 31.03.2010 and for the overall value of €5,322,112.00, the autonomous fractions designated by the letters A to J, and for the overall value of €3,152,888.00, the autonomous fractions designated by the letters L to S, all of the urban property registered in the urban property matrix under Article …º, of the Union of Parishes of… and…, municipality of Vila Nova de Gaia (doc. 5 attached with the arbitral request).
The price was paid as follows:
- €1,000,000.00 in cash, received by the seller and for which a receipt was given;
- €7,475,000.00 through the assumption by the Applicant of the debts of C… arising from a Credit Line Agreement celebrated with D…, SA, on 19.12.2007, which on 31.03.2010 amounted to €7,475,000.00, effected by contract of transfer of contractual position contained in the purchase and sale deed, with C… being released therefrom.
b) The properties identified in a) had been acquired by C… from E…, Lda, by means of purchase and sale deeds executed on 19.12.2007 (docs. 6 and 7 attached with the arbitral request).
c) The Applicant acquired from company C…, by deed of "purchase and sale and assumption of debt" executed on 31.03.2010, the autonomous fractions designated by letters A to T of the urban property registered in the urban property matrix under Article …º, of the parish of…, municipality of Viseu, for the overall value of €13,000,000.00 (doc. 8 attached with the arbitral request).
The price was paid through the assumption by the Applicant of the debts of C… arising from a Credit Line Agreement celebrated with D…, SA, on 01.08.2007, which on 31.03.2010 amounted to €13,000,000.00, effected by contract of transfer of contractual position contained in the purchase and sale deed, with C… being released therefrom.
d) The properties identified in c) had been acquired by C… from F…, SA, by means of purchase and sale deed executed on 01.08.2007 (doc. 9 attached with the arbitral request).
e) The Applicant acquired from company C…, for the amount of €60,000.00, which it declared to have received and for which it gave a receipt, by deed of purchase and sale executed on 31.03.2010, the rural property registered in the rural property matrix under Article… of the Union of Parishes of… and…, municipality of Tondela (doc. 10 attached with the arbitral request).
f) The property identified in e) had been acquired by C… from G…, Lda, by means of purchase and sale deed executed on 10.10.2007 (doc. 12 attached with the arbitral request).
g) The Applicant acquired from company C…, by deed of "purchase and sale and assumption of debt" executed on 31.03.2010, for the value of €2,990,000.00, the urban property registered in the urban property matrix under Article º… of the Union of Parishes of… and…, municipality of Tondela (doc. 11 attached with the arbitral request).
The price was paid through the assumption by the Applicant of the debts of C… arising from a Credit Line Agreement celebrated with D…, SA, on 10.10.2007, which on 31.03.2010 amounted to €2,990,000.00, effected by contract of transfer of contractual position contained in the purchase and sale deed, with C… being released therefrom.
h) The property identified in g) had been acquired by C… from H…, SA, by means of purchase and sale deed executed on 10.10.2007 (doc. 13 attached with the arbitral request).
i) The Applicant acquired from company C…, by deed of "purchase and sale and assumption of debt" executed on 31.03.2010, the autonomous fractions designated by letters A to T of the urban property registered in the urban property matrix under Article …º, of the parish and municipality of…, for the overall price of €9,555,000.00 (doc. 14 attached with the arbitral request).
The price was paid through the assumption by the Applicant of the debts of C… arising from a Credit Line Agreement celebrated with D…, SA, on 15.07.2008, which on 31.03.2010 amounted to €9,555,000.00, effected by contract of transfer of contractual position contained in the purchase and sale deed, with C… being released therefrom.
j) The properties identified in i) had been acquired by C… from H…, SA, by means of purchase and sale deed executed on 15.07.2008 (doc. 15 attached with the arbitral request).
k) The transfers of the properties identified above to the legal sphere of C… had all benefited from the IMT exemption provided for in Article 7º of the CIMT, by virtue of its having declared, in the respective notarial acts of acquisition, that the referred properties were intended for resale.
l) The "purchase and sale and assumption of debt" contracts referred to in a), c), g) and i) contain, in the first place, the sale by C… and the purchase by the Applicant of the properties and for the values there referred; in a second moment, the agreement of the parties regarding the mode of payment – assumption of debt (docs. 5, 8, 11 and 14 attached with the arbitral request).
m) In compliance with Service Order OI2014… a tax inspection procedure was instituted and carried out against C…, with respect to the 2010 tax year.
n) In the Tax Inspection Report the TCA considered that "the IMT exemption [from which C… had benefited] lapsed, at the moment of celebration of the referred contracts [between C… and the Applicant], because the alienated properties were given a different destination from that of resale" since the referred "transactions were executed by public deeds, in which purchase and sale and assumption of debt transactions are celebrated (see Administrative File - PA2, p. 45 et seq).
o) Consequently, it proceeded to issue the IMT assessment acts Nos.… (on 29.05.2015), … (on 29.05.2015), … (on 20.08.2015), … (on 19.08.2015) and … (on 19.02.2016) and demanded payment of the respective tax from C… (Administrative File – PA 4 and doc. 1 attached with arbitral proceedings).
p) By virtue of the non-existence or insufficiency of attachable assets of C…, the TCA operated the reversal, against the Applicant, of the tax enforcement proceedings Nos. …2015…, …2015…, …2015…, …2015… and …2016…, of 24.02.2017, which were based on the referred assessment acts (Administrative File – PA 5 and doc. 2 attached with arbitral request).
1.2. Facts Established as Not Proven
Among those alleged, relevant to the decision, it remained unproven that the Applicant provided a guarantee.
1.3. Justification Regarding the Factual Matters
Regarding the factual matters the tribunal need not rule on everything that was alleged by the parties; rather, it is its duty to select the facts that matter for the decision and distinguish the proven from the unproven matter (cf. Article 123º, No. 2 of the Tax Procedure Code and Article 607º, No. 3 of the Civil Procedure Code, applicable ex vi Article 29º, No. 1, subparagraphs a) and e), of the LFTA).
Thus, the facts pertinent to the judgment of the case are chosen and delimited according to their legal relevance, which is established in light of the various plausible solutions of the question(s) of law (cf. former Article 511º, No. 1 of the Civil Procedure Code, corresponding to current Article 596º, applicable ex vi Article 29º, No. 1, subparagraph e), of the LFTA).
Thus, taking into account the positions assumed by the parties, in light of Article 110º/7 of the Tax Procedure Code, the documentary evidence and the administrative file attached to the records, the facts listed above were considered proven, with relevance to the decision, taking into account that, as was written in the Judgment of the Southern Tax Court of 26-06-2014, rendered in proceeding 07148/131, "the evidentiary value of the tax inspection report (...) may have probative force if the assertions contained therein are not challenged."
ON THE LAW
The essential question to be decided and raised by the Applicant, SPECIAL CLOSED REAL ESTATE INVESTMENT FUND A…, in its request for arbitral pronouncement is the illegality of the IMT assessment acts identified in item s) of the factual matters.
The Applicant invokes that the issuance of the assessments in question is based on erroneous factual and legal grounds.
In fact, the issuance of the said assessments follows from the understanding of the TCA, after having carried out an inspection procedure with respect to the 2010 fiscal year of C…, regarding the lapse of the IMT exemption from which C… had benefited at the time of acquisition of the properties which it subsequently came to sell to the now Applicant.
C…, an real estate company, had acquired the referred properties by deeds in which it declared the intention to destine them for future resale, having subsequently celebrated the contracts which came to be designated as "purchase and sale and assumption of debt" with the Applicant.
It is sought, then, to know whether these contracts celebrated between C… and the Applicant constitute a resale for the purpose of preventing the lapse of the IMT exemption provided for in Article 7º, No. 1 of the CIMT.
It is convenient, first of all, to define the legal framework of the question.
Article 7º of the CIMT provides:
Exemption for acquisition of properties for resale
1 - Acquisitions of properties for resale are exempt from IMT, under the terms of the following number, provided that it is verified that a declaration of intent provided for in Article 112º of the Personal Income Tax Code (IRS) or in subparagraph a) of No. 1 of Article 109º of the Corporate Income Tax Code (IRC), as the case may be, relating to the exercise of the activity of buyer of properties for resale, has been filed before the acquisition.
2 - The exemption provided for in the preceding number does not prejudice the assessment and payment of the tax, under general terms, except if it is recognized that the purchaser normally and habitually exercises the activity of buyer of properties for resale.
3 - For purposes of the provision in the latter part of the preceding number, it is considered that the taxpayer normally and habitually exercises the activity when he proves its exercise in the preceding year by means of a certificate issued by the competent tax office, and it must always appear in such certificate whether, in the preceding year, a property was acquired for resale or resold if previously acquired for that purpose.
[…]
As regards the lapse of the exemption, Article 11º of the CIMT states:
Lapse of exemptions
[…]
5 - The acquisition referred to in Article 7º shall cease to benefit from exemption as soon as it is verified that the properties acquired for resale were given a different destination or that the same were not resold within a period of three years or were resold again for resale.
[…]
The exemption for acquisition of properties for resale is founded on the understanding that such properties constitute "goods" in the real estate activity of the beneficiary. The exemption thus aims to eliminate financial charges which, although constituting deductible costs, would tend to be passed on to the final selling price of the properties.[1]
The law establishes a set of prerequisites of the IMT exemption regime for properties acquired for resale which constitute preventive mechanisms against its abusive use and the practice of tax fraud operations, as was stated in a Supreme Administrative Court judgment of 22.02.2017, rendered in proceeding No. 01245/16. In line with what was written there, "only companies that are registered for IRS or IRC purposes in the activity of purchase of properties for resale can benefit from this exemption, [under the terms of Article 7º, No. 1 of the CIMT]."
The exemption regime applies exclusively to properties acquired for resale by companies, not applying to properties acquired for other purposes (…). In order for the exemption to apply it must appear from the very contract that the acquired property is intended for resale. The resale must be effected within a maximum period of three years (Article 11º, No. 5), and the concept of resale presupposes the transfer of ownership of the property through a purchase and sale contract.[2] Finally, the resale effected within that timeframe cannot have as its purpose further resale (Article 11º, No. 5). Thus, in a strict interpretation of the provision (Article 11º, No. 5 of the CIMT), it must be understood that, in the case of exemption of properties acquired for resale, the Law requires the effecting of the resale as an essential prerequisite of the exemption, without equating it with any other type of contract. This has also been the traditional understanding of our jurisprudence within the framework of the Code of Municipal Transfer Tax and Tax on Inheritances and Donations, whose regime is, in this aspect, very similar to the regime of the CIMT."[3]
Now, the term resale is a term non-existent in civil law and in tax legislation, being only referred to in this situation.
As was stated in a Supreme Administrative Court judgment rendered on 07.03.2012, in proceeding 1141/11, "to resell is to sell again, or to sell what one had bought, even without that purpose, and it becomes all too evident that only through the sale does resale operate…"
The concept of resale thus presupposes the transfer of ownership of the property through a purchase and sale contract.
For its part, purchase and sale is, under the terms of Article 874º of the CC, the contract by which the ownership of a thing, or another right, is transferred, by means of a price.
Its effects are those provided for in Article 879º of the CC: transfer of the thing or the ownership of the right, obligation to deliver the thing and the obligation to pay the price.
In view of this, we must then determine whether the contracts designated by the Applicant and by C… as "purchase and sale and assumption of debt" configure a resale for the purpose of preventing the lapse of the IMT exemption.
Analyzing the evidence, it is unquestionable that the contracts sub judice meet the requirements of Article 874º and produce the effects of Article 879º: we are dealing with contracts through which the right of ownership of the properties mentioned in them was transferred by means of public deed; they are onerous contracts and unequivocally celebrated by means of a price perfectly established for each of the properties. The mode of payment was equally agreed upon by the parties following the purchase and sale through assumption of debt by the Applicant with C… being released therefrom. It is certain that Article 885º of the CC does not impose the moment of payment.
On this point, Raul Ventura[4] recognizes that the obligation assumed by the purchaser to pay a price to the seller is an essential element of the purchase and sale contract.[5]
However, he clarifies that it must be distinguished between the price and the obligation of which it is the object.
Continuing in the line of his teachings, "manifestly, the qualification of the contract is not altered by there being, during the execution phase thereof, a performance in satisfaction (…)" or an assumption of debt, we add.
In truth, "the agreement between purchaser and seller that the obligation assumed by the former to pay a sum of money be extinguished by the delivery of a different thing concerns performance and there is no initial phase of constitution of the obligation." Also citing Sebastião de Sousa,[6] who "states that the adjustment of the price element must be in money, but the payment, which is already execution of a perfect and finished contract, may be arranged in another way." Exemplifying, he adds "I can sell the edition of this work for 20 thousand cruzeiros, the publisher paying me the price in books from his bookstore; acquiring by purchase a house of residence, for 100 thousand cruzeiros, I can arrange with the seller to make the payment in coffee or sugar; the contract does not lose, by this, its nature of purchase and sale."
To understand it otherwise would correspond to violating important principles of civil law, such as private autonomy and freedom of contract.
We are thus obliged to conclude, contrary to what the Respondent advocates, that the dealings referred to here constitute resales, in the technical-legal sense of the term, since in them are found all the elements that define the purchase and sale contract and which are provided for in Article 874º of the CC.
In summary, in view of the factuality presented and established as proven - C… transferred the ownership of the above-referred properties by means of public purchase and sale deeds; the three-year period for resale was respected in all cases; there was no declaration by the purchaser, here the Applicant, of intention to resell the properties – it is concluded that the assessments sub judice are illegal, by violation of Articles 7º and 11º, No. 5 of the CIMT, by error regarding the factual and legal grounds.
The assessments of compensatory interest are based on the assessments impugned, and thus also suffer from the same vice of violation of law.
The arbitral request does not proceed in the part in which it requests the condemnation of the Respondent to pay compensation for unwarranted guarantee provision, since the Applicant failed to prove having provided the said guarantee.
The arbitral pronouncement request partially proceeding for the reasons pointed out, the examination of other questions raised by the parties is rendered unnecessary.
3. DECISION
In harmony with the foregoing, this Arbitral Tribunal decides:
a) To judge the arbitral pronouncement request partially upheld and, in consequence, to declare unlawful the IMT assessment acts Nos.…, …, …, … and …, annulling them, with all the legal tax consequences legally applicable.
b) To judge the arbitral pronouncement request without merit insofar as it refers to the condemnation of the TCA to payment of compensation for unwarranted guarantee provision.
c) To condemn the Applicant and Respondent to payment of the costs of the proceedings in the proportion of 5% and 95%, respectively.
4. VALUE OF THE CASE
The value of the case is fixed at €4,073,530.40, under the terms of Article 305º, No. 2 of the Code of Civil Procedure and Article 97º-A, No. 1, a) of the Code of Tax Procedure and Process, applicable by virtue of subparagraphs a) and b) of No. 1 of Article 29º of the LFTA and No. 2 of Article 3º of the Regulation of Costs in Tax Arbitration Proceedings.
5. COSTS
The value of the arbitration fee is fixed at €51,408.00, under the terms of Articles 12º, No. 2, and 22º, No. 4, both of the LFTA, and Article 4º, No. 4, of the Regulation of Costs in Tax Arbitration Proceedings and Table I annexed thereto.
Notify accordingly.
Lisbon, 30 October 2017
The Arbitrators
(José Baeta de Queiroz)
(Nuno Oliveira Garcia)
(Cristina Aragão Seia)
[1] In this sense, the Supreme Administrative Court judgment of 22.02.2017, rendered in proceeding No. 01245/16, which cites, for this purpose, J. Silvério Mateus and L. Corvelo de Freitas, Taxes on Patrimony. The Stamp Tax: Annotated and Commented, Lisbon, Engifisco, 2005, p. 385.
[2] In this sense, José Maria Fernandes Pires, Lessons on Taxes on Patrimony and Stamp Tax, pp. 422 to 424; Pinto Fernandes and Cardoso dos Santos, Code of Transfer Tax and Tax on Inheritances and Donations, National Press, Vol. I, p. 371.
[3] See Supreme Administrative Court Judgments of 19.06.1985 rendered in Proceeding 002841, of 13.10.1993, rendered in Proceeding 15334, of 28.01.2008, rendered in Proceeding 642/08, and of 07.03.2012, rendered in Proceeding 01141/11.
[4] The purchase and sale contract in the Civil Code, ROA, Year 40-II, Lisbon, 1980, pp. 305-348.
[5] "By means of a price," in accordance with Article 874º CC.
[6] On purchase and sale, p. 102.
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