Process: 35/2017-T

Date: September 15, 2017

Tax Type: IMT

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 35/2017-T) addresses the IMT exemption for property transfers in insolvency liquidation under Article 270(2) of the Portuguese Insolvency Code (CIRE) and the procedural implications of tax revocation during arbitration. Two companies challenged IMT assessments totaling €41,015.04 for property acquired during insolvency liquidation, claiming exemption under Article 270(2) CIRE, which exempts sales, exchanges or transfers of businesses or establishments carried out within insolvency proceedings or liquidation of insolvent estates. After the arbitration commenced, the Tax Authority revoked the contested assessments on 6 March 2017. Under Article 13 RJAT, the taxpayers were notified and asked whether to continue proceedings. The applicants chose to proceed, as they sought compensatory interest on the tax paid, which had not been reimbursed despite the principal tax refund. The Tax Authority argued for termination due to supervening futility of the dispute, contending that once the principal claim disappeared, accessory claims could not be considered, and that CAAD lacked material competence under Article 2(1) RJAT to rule autonomously on compensatory interest. The case raises important procedural questions about the scope of CAAD jurisdiction when the underlying tax assessment is revoked but ancillary claims remain, the conditions for supervening uselessness under Article 277(e) CPC, and taxpayers' rights to compensation for unduly paid taxes. The tribunal's analysis would clarify whether compensatory interest claims survive tax revocation and whether CAAD can adjudicate such claims independently.

Full Decision

ARBITRAL DECISION

I - REPORT

1. On 8 January 2017, the companies A..., Lda., tax identification number..., with registered office at Av..., civil parish and municipality... and B..., Lda., tax identification number..., with registered office at Rua... no...., ..., civil parish and municipality... (hereinafter referred to as "Applicants") requested the constitution of an arbitral tribunal, under the terms of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter designated only as "RJAT").

2. The request for constitution of the arbitral tribunal was accepted by the Honourable President of CAAD and notified, on 20 January 2017, to the Tax and Customs Authority (hereinafter designated as "TCA" or the "Respondent").

3. The Applicants seek a pronouncement from the Arbitral Tribunal to declare the illegality of the Municipal Property Transfer Tax (hereinafter "MPTT") assessment acts in the total amount of €41,015.04 (forty-one thousand and fifteen euros and four cents).

4. In the request for arbitral pronouncement, the Applicants chose not to appoint an arbitrator. In accordance with paragraph a) of article 6(2) and paragraph b) of article 11(1) of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council of CAAD appointed as arbitrator of the single arbitral tribunal the Honourable Dr. Olívio Mota Amador, who, within the applicable deadline, communicated acceptance of the appointment.

5. The parties were notified, on 6 March 2017, of the arbitrator's appointment and did not express any intention to challenge the appointment, in accordance with articles 11(1), paragraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

6. The Director-General of the TCA, on 6 March 2017, sent to the President of CAAD, in accordance with and for the purposes of article 13(1) of the RJAT, the order revoking the tax acts that are the subject of the present arbitral proceedings.

7. The President of CAAD, on 6 March 2017, notified the Applicants of the communication from the TCA, referred to in the preceding paragraph, and requested that the Applicants, given the circumstances provided for in article 13(2) of the RJAT, inform CAAD, if they so wished, about the continuation of the proceedings.

8. The Applicants, on 13 March 2017, requested from the President of CAAD the continuation of the proceedings.

9. In accordance with paragraph c) of article 11(1) of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Arbitral Tribunal was constituted on 22 March 2017.

10. On 19 April 2017, the Respondent requests the attachment to the file of a new order designating legal experts and of the order revoking the MPTT assessment act in question in the present proceedings.

11. The Arbitral Tribunal, by order of 5 May 2017, granted the Respondent's request, referred to in the preceding paragraph.

12. On 5 May 2017, the Respondent, duly notified for this purpose, submitted its Reply.

13. The Arbitral Tribunal, by order of 14 June 2017, granted the Applicants a period of 10 days to comment on the termination of the proceedings due to supervening futility of the dispute alleged by the Respondent in the Reply. The Applicants submitted their comments on 26 June 2017.

14. On 17 August 2017, the Arbitral Tribunal dispensed with the holding of the meeting provided for in article 18 of the RJAT, as there was no need for the production of evidence, which it did in exercise of the principles of tribunal autonomy in the conduct of the proceedings and in order to promote celerity, simplification and informality thereof (see articles 19(2) and 29(2) of the RJAT). The Tribunal furthermore set 11 September 2017 as the deadline for delivery of the arbitral decision. The aforementioned deadline was extended, by order of 11 September, to 15 September 2017.

15. The position of the Applicants, in accordance with the provisions of the petition for constitution of the Arbitral Tribunal, is, in summary, as follows:

15.1. In accordance with the provisions of article 270(2) of the Insolvency and Business Recovery Code (IBRC) "Likewise exempt from municipal property transfer tax are acts of sale, exchange or transfer of the business or of its establishments within insolvency, payment or recovery plans or carried out in the context of liquidation of the insolvent estate."

15.2. The transfer in question in the present proceedings is a transfer effected by sale, within the liquidation of the insolvent estate, and therefore the exemption provided for in article 270(2) of the IBRC should apply.

15.3. To this effect, the Supreme Administrative Court has already decided, through decisions no. 765/13, 1085/14, 1067/15, 968/13, 575/15, 788/14, 95/2015, 99/2015, 200/2015, 664/2015, 6693/2015, 74/2016, 81/2016, 131/2016 and 132/2016.

15.4. The same understanding has also been adopted by the Arbitral Tribunal, as evidenced by the decisions issued in the context of proceedings no. 259/2016-T, 321/2016-T and 371/2016-T.

15.5. Accordingly, it should be recognized that the Applicants benefit, under the provisions of article 270(2) of the IBRC, from MPPT exemption in the acquisition of the real property, identified in the present proceedings, within the insolvency process, with the consequent annulment of the contested assessments and the reimbursement of the amounts paid with corresponding compensatory interest.

16. The position of the Respondent, expressed in the Reply, can be summarized as follows:

16.1. Due to the fact that the Head of Finance of ..., by order of 2 March 2017, granted the requested MPTT exemption, there is no need for an arbitral pronouncement on the pretension of the Applicants, and therefore the termination of the proceedings is requested, without any costs to be paid by the Respondent, since this impossibility is prior to the constitution of this Tribunal, in accordance with paragraph e) of article 277 of the CPC pursuant to article 29 of the RJAT.

16.2. Even if the Applicants affirm that they maintain interest regarding the compensatory interest claimed, since there is total impossibility of considering the principal claim, any accessory claim cannot be considered here.

16.3. Furthermore, as clearly appears from article 2(1) of the RJAT, there is an exception of material incompetence of the Arbitral Tribunal to consider the accessory claim for compensatory interest autonomously.

16.4. Therefore, it is concluded that there is material incompetence of the Arbitral Tribunal, which constitutes a dilatory exception that prevents examination of the merits and requires the absolution of the Respondent from the instance, as provided in the joint provisions of articles 576, 577 and 578 of the Civil Procedure Code (CPC), applicable pursuant to article 29 of the RJAT.

16.5. With regard to liability for costs, the Respondent revoked the contested acts in time, and therefore it is not responsible for the constitution of the Arbitral Tribunal. For which reason, it cannot be held liable for the costs of the proceedings, nor would it be by virtue of the provision of article 527(1) of the CPC.

17. The Applicants, on 25 June 2017, in compliance with the order of the Arbitral Tribunal of 14 June 2017, informed that they had already been reimbursed of the tax that had been demanded of them, but that this reimbursement was not accompanied by the compensatory interest claimed. Thus, the Applicants consider that the Respondent was obliged to reimburse the assessed tax together with the compensatory interest claimed and not reimbursed, and that, therefore, there is no such alleged supervening futility of the dispute.

II - PRELIMINARY MATTERS

18. The arbitral tribunal is materially competent and is regularly constituted, in accordance with articles 2(1)(a), 5(2) and 6(1) of the RJAT.

19. The parties have legal standing and capacity, are legitimate and are duly represented, in accordance with articles 4 and 10 of the RJAT and article 1 of Order no. 112-A/2011 of 22 March.

20. The Respondent raised the supervening futility of the dispute and the material incompetence of the Arbitral Tribunal to consider the accessory claim for compensatory interest autonomously, preliminary questions whose analysis should precede examination of the merits of the claim.

21. No other exceptions requiring examination have been raised.

22. The proceedings are not affected by any defects that would invalidate them.

III - FACTUAL MATTERS

23. Proven Facts

Based on documentary evidence attached to the proceedings, the following facts are considered proven:

A) The Applicants acquired in co-ownership, in equal shares, on 20 October 2016, by deed of sale executed by the Notary C... at Rua... no..., in..., the urban property located at..., civil parish of..., municipality of..., registered in the urban property register under no... and described in the Property Registry of... under no.../....

B) The property identified in the preceding paragraph formed part of the assets of the company "D... S.A.", Tax ID no..., with registered office at... ..., ..., and the acquisition took place within an insolvency process of the said legal person, which was conducted before the Judicial Court of the District of Guimarães, Central Instance - ... Commercial Section ... under no.../14... TBFAF.

C) The Applicants filed, on 18 October 2016, a request (with entry number E...) requesting exemption from MPTT and Stamp Tax on the acquisition referred to in paragraph A).

D) The Head of Finance of..., by order of 10 November 2016, denied the request for MPTT exemption, based on Instruction MPPT 2014/01 and Circular no. 10/2015, since the real property acquired, in co-ownership, did not form part of the universality of the insolvent business.

E) The Head of Finance of..., by order of 2 March 2017, revoked his order of 10 November 2016, in the part relating to the denial of MPPT, granting the exemption as requested and ordered the initiation of an administrative restitution procedure for the amounts paid, namely €20,507.52 in favour of B... and €20,507.52 in favour of A....

24. Unproven Facts

There are no facts relevant to the decision that have not been proven.

IV - LEGAL MATTERS

IV.1 The Question of Supervening Futility of the Dispute

25. Supervening futility of the dispute is a cause of termination of the proceedings, in accordance with article 277(e) of the CPC. Since the CPC applies subsidiarily to tax arbitral proceedings, in accordance with article 29(1)(e) of the RJAT.

26. The Head of Finance of..., by order of 2 March 2017, revoked his order of 10 November 2016, in the part relating to the denial of MPPT. Thus, an arbitral decision that would examine the merits of the claims formulated by the Applicants would be deprived of any useful effect, should the result that the Applicants sought to obtain through the present arbitral proceedings be totally achieved.

27. Considering the facts of the present arbitral proceedings (see nos. 8, 13 and 17), it appears that the Applicants requested the continuation of the proceedings because the question of compensatory interest remained, since the Finance Service of... considered that no interest was owed.

28. In this regard it is important to cite Professor Clotilde Palma who in the CAAD decision issued in proceedings no. 360/2014-T stated: "(...) although revocation has disintegrative or destructive effects, in whole or in part, on the prior act, even in case of total revocation the claimant may have an interest in the declaration of illegality of the revoked act as a basis for a possible claim for damages caused to him until the effects of the revoking act were produced."

29. Accordingly, it is necessary to continue the present proceedings for the examination of the possible right to compensatory interest.

IV.2 The Right to Compensatory Interest

30. Article 43(1) of the General Tax Law establishes that "compensatory interest is owed when it is determined, in gracious reclamation or judicial challenge, that there was error attributable to the services which resulted in payment of the tax debt in an amount greater than that legally owed."

31. Likewise, article 100 of the General Tax Law, applicable pursuant to article 29(1)(a) of the RJAT, provides that the "... tax administration is obliged, in case of total or partial success of reclamations or administrative appeals, or of judicial proceedings in favour of the tax subject, to immediately and fully restore the situation that would have existed if the illegality had not been committed, including the payment of compensatory interest, in accordance with the terms and conditions provided for in the law."

32. According to article 24(1)(b) of the RJAT, as no appeal or challenge of the arbitral decision is available, the same binds the TCA, which must "restore the situation that would have existed if the tax act subject of the arbitral decision had not been carried out, adopting the necessary acts and operations for this purpose."

33. Furthermore, in accordance with article 24(5) of the RJAT, in arbitral proceedings "The payment of interest, regardless of its nature, is due, in accordance with the terms provided for in the general tax law and in the Tax Procedure Code."

34. Having regard to the legal framework in force and set out above, this tribunal considers that it is permissible to recognize the right to compensatory interest in tax arbitral proceedings.

35. Arbitral jurisprudence, particularly through Arbitral Decisions issued in proceedings no. 360/2014-T, 392/2014-T and 152/2016-T, has pronounced that arbitral tribunals are competent to determine the payment of compensatory interest.

36. The MPPT assessment act in question in the present proceedings is attributable to the TCA, which carried it out illegally and subsequently revoked it, changing the understanding that gave rise to the tax act that is the subject of the present arbitral proceedings. There was a defect of violation of substantive law, which is embodied in error in the legal assumptions, attributable to the TCA.

37. In this context, the Applicants are entitled, in addition to the reimbursement of the amount of tax improperly paid (which has already occurred), to the payment of compensatory interest, in accordance with the provisions of articles 43(1) of the General Tax Law and 61 of the Tax Procedure Code, calculated from the payment of the tax until full reimbursement of the said amount.

V - COSTS

38. In accordance with article 22(4) of the RJAT, "the arbitral decision issued by the arbitral tribunal includes the determination of the amount and apportionment among the parties of the costs directly resulting from the arbitral proceedings."

39. From the present arbitral proceedings it appears that the MPPT assessment that is the subject of the present request for arbitral pronouncement was revoked by the Respondent only through the order of 2 March 2017, that is, after the entry into CAAD of the request for constitution of the arbitral tribunal, which occurred on 8 January 2017. Furthermore, the arbitral proceedings had to continue for the examination of the right to compensatory interest, which the TCA did not recognize.

40. In the current Portuguese legal order, the principle applies that the party that caused the proceedings bears the costs thereof (article 527(1) of the Civil Procedure Code applicable by virtue of article 29(1)(e) of the RJAT).

41. As a consequence of the foregoing, the responsibility for the costs, in their entirety, must be assigned to the Respondent, for the purposes of article 12(2) of the RJAT and article 4(4) of the Regulation of Costs in Tax Arbitration Proceedings.

VI - DECISION

In accordance with the foregoing, this Arbitral Tribunal decides:

a) To condemn the Respondent, in accordance with articles 43(1) of the General Tax Law and 61 of the Tax Procedure Code, to the payment of compensatory interest;

b) To condemn the Respondent to the costs of the present proceedings.

The value of the proceedings is set at €41,015.04 (forty-one thousand and fifteen euros and four cents), in accordance with article 97-A(1)(a) of the Tax Procedure Code, applicable by virtue of articles 29(1)(a) and (b) of the RJAT and article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings.

The arbitration fee is set at €2,142.00 (two thousand one hundred and forty-two euros), in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT), to be paid in full by the Respondent, in accordance with article 22(4) of the RJAT.

Let notification be made.

Lisbon, Centre for Administrative Arbitration, 15 September 2017

The Arbitrator

Olívio Mota Amador

Frequently Asked Questions

Automatically Created

What is the IMT tax exemption under Article 270(2) of the Portuguese Insolvency Code (CIRE)?
Article 270(2) of the Portuguese Insolvency Code (CIRE) provides an IMT exemption for acts of sale, exchange or transfer of businesses or their establishments carried out within insolvency proceedings, payment or recovery plans, or in the context of liquidation of insolvent estates. This exemption applies to property transfers effected through sale during insolvency liquidation, as confirmed by multiple Supreme Administrative Court decisions and CAAD arbitral precedents including processes 259/2016-T, 321/2016-T and 371/2016-T.
When does supervening uselessness of proceedings (inutilidade superveniente da lide) apply in Portuguese tax arbitration?
Supervening uselessness of proceedings (inutilidade superveniente da lide) in Portuguese tax arbitration applies under Article 13 RJAT when the Tax Authority revokes the contested tax assessment during pending proceedings, potentially rendering the dispute moot. However, under Article 13(2) RJAT, taxpayers must be notified and given the opportunity to indicate whether they wish to continue proceedings. If taxpayers maintain a legitimate interest—such as claiming compensatory interest on taxes paid—the proceedings may continue despite revocation of the principal assessment. The impossibility must be absolute for termination under Article 277(e) CPC.
Can taxpayers claim compensatory interest (juros indemnizatórios) after revocation of an IMT tax assessment?
The right to claim compensatory interest (juros indemnizatórios) after revocation of an IMT assessment is contested. Taxpayers argue they are entitled to compensatory interest on unduly paid taxes even after revocation and reimbursement of the principal. However, the Tax Authority contends that CAAD lacks material competence under Article 2(1) RJAT to adjudicate compensatory interest claims autonomously once the principal tax assessment has been revoked, arguing this constitutes a dilatory exception requiring absolution from the instance under Articles 576-578 CPC. The tribunal must determine whether compensatory interest claims can be severed from the principal claim and whether CAAD jurisdiction extends to such ancillary claims post-revocation.
What happens when the Tax Authority revokes a tax assessment during CAAD arbitration proceedings under Article 13 RJAT?
Under Article 13 RJAT, when the Tax Authority revokes a tax assessment during CAAD arbitration proceedings, the Director-General must communicate the revocation order to the CAAD President, who then notifies the taxpayers under Article 13(2). Taxpayers must inform CAAD whether they wish to continue proceedings despite revocation. If they choose to proceed—typically because ancillary claims like compensatory interest remain—the tribunal continues. Otherwise, proceedings terminate for supervening futility. The timing of revocation also affects cost allocation: if revocation occurs before tribunal constitution, the Tax Authority may not bear costs under Article 527(1) CPC, though this depends on when the revocation became effective relative to procedural milestones.
How does the CAAD arbitral tribunal process IMT exemption disputes involving insolvency-related property transfers?
CAAD arbitral tribunals process IMT exemption disputes involving insolvency-related property transfers by examining whether the transaction qualifies under Article 270(2) CIRE, which requires the transfer to be: (1) a sale, exchange or transfer of a business or establishment; (2) carried out within insolvency proceedings, payment/recovery plans, or liquidation of the insolvent estate. The tribunal reviews the factual circumstances of the acquisition and applies settled case law from the Supreme Administrative Court confirming that sales during insolvency liquidation qualify for exemption. CAAD decisions 259/2016-T, 321/2016-T and 371/2016-T have consistently recognized this exemption. The tribunal assesses whether the Tax Authority correctly applied the statutory exemption to the specific transfer at issue.