IMT Tax Exemption on Property Acquisition in Insolvency Proceedings Under Article 270(2) CIRE – CAAD Arbitration

ARBITRATION AWARD

I – REPORT

1. A..., S.A., (hereinafter designated as "Claimant"), registered number ..., with registered office at ..., nº..., ... -..., Lisbon, came to request, pursuant to articles 2.º, n.º 1, subparagraph a), and 10.º of the Legal Regime for Tax Arbitration (RJAT), which forms part of Decree-Law nº 10/2011, of 20 January, the declaration of illegality of the assessment of Municipal Tax on Onerous Property Transfers (IMT), in the total amount of € 18,876.00, plus € 2,668.50 referring to compensatory interest, all in a total of € 21,544.50 (twenty-one thousand five hundred and forty-four euros and fifty cents), concerning the acquisition in the insolvency proceedings nº .../10.0TBMLGL, instituted in the 2.º Court of the Judicial Court of the municipality of ..., from the insolvent estate B..., Ld.ª, equally based in the municipality of ..., Registered number nº. ..., of a set of urban properties with the characteristics of land for construction, better identified below, and the consequent annulment of the dismissal of the gracious complaints against such assessments.

2. The Respondent is the Tax and Customs Authority (hereinafter designated simply as "Respondent").

3. The petition for constitution of the arbitration court was accepted by the Illustrious President of CAAD and automatically notified to the Respondent on 02-08-2016.

4. Given that the Claimant did not proceed with the appointment of an arbitrator, pursuant to article 6.º, n.º 2, subparagraph a), of the RJAT, the undersigned was designated as arbitrator by the President of the Deontological Council of CAAD, with the appointment being accepted within the timeframe and terms legally provided for.

5. On 20-09-2016, the Parties were duly notified of this appointment, and did not manifest intention to challenge the designation of the arbitrator, pursuant to article 11.º, nº 1, subparagraphs a) and b) of the RJAT, read in conjunction with articles 6.º and 7.º of the Deontological Code.

6. In accordance with the provision of subparagraph c), of n.º 1, of article 11.º of the RJAT, the Arbitration Tribunal was constituted on 06-10-2016.

7. The Claimant alleges, in summary, that:

a) The "ratio" of the exemption in article 270.º, n.º 2, of the Code on Insolvency and Business Recovery (CIRE) is to foster and support the rapid sale of assets that form part of the insolvent estate for obvious reasons of creditor interest, but also of public interest in the normal functioning of the business world, in which each insolvency proceeding presents itself as a disruptive element of the market;

b) Only a restrictive interpretation of this legal provision could justify limiting its application to the transfer of the totality of the establishment or business and not to any assets that form part of such totality;

c) Such limitation would, however, arbitrarily restrict the scope of the legislative authorization in article 9.º, n.º 2, of Law nº 39/2003, and cannot be considered in accordance with the Constitution;

d) To that extent, the disputed assessments, being illegal, must be annulled, with the consequent recognition of the right to compensatory interest, calculated from 5 November 2015, the date of payment of the debt.

1. The Respondent presented a Reply, in which it defends itself by contesting, alleging, for the purposes of rejecting the request for arbitration award, in summary, the following:

a) The exemption provided in n.º 2 of article 270.º of the CIRE covers all acts integrated within the scope of insolvency, payment, or liquidation of the insolvent estate plans, with the reservation, however, that if the object of the exempt transfer is the business or the establishment and not one or two assets of its portfolio;

b) Despite the legislative authorization being more permissive, the legislator, as regards the situation in question, only intended to maintain the exemption in the case of transfer of the totality of assets associated with the exercise of the economic activity of the business;

c) If the legislator had intended to alter the meaning of the law, it could have expressly done so in article 234.º of Law nº 66-B/2012, of 31/12, which amended the aforementioned provision;

d) If it did not do so, it is because it did not intend to grant more exemptions than those included in the current wording;

e) In authorizing the Government only to approve a set of tax benefits within the scope of insolvency and business recovery proceedings, Parliament granted it the possibility of approving all such tax benefits as a package, approving only a part, or purely and simply not utilizing the legislative authorization;

f) The use of the legislative authorization may be integral or partial, provided that the partial authorization does not conflict with the meaning of the authorizing law;

g) In the situation in question, Parliament would limit itself to enumerating the tax benefits that the Government may grant within the scope of insolvency or payment plans or the liquidation of the insolvent business, without imposing on the Government the obligation to approve all such benefits, as an alternative to purely and simply not utilizing the legislative authorization;

h) In the present case, however, the Court decisions cited by the Claimant went far beyond the literal wording of article 270º, nº 2, of the C.I.R.E., encroaching on the area of exercise of the legislative function;

i) The acquisitions were not intended to pursue the same activity, nor did the acquisition involve the purchase of the totality of all assets related to the activity of the insolvent business;

j) That is to say, the sale of real estate of the business, in isolation, is not, therefore, covered by the exemption provided in n.º 2 of art.º 270.º of the CIRE, being consequently subject to IMT under the general rules;

k) In short, the acts in dispute do not suffer from any illegality, therefore the entire allegation in the Request for Arbitration Award that contradicts the above is contested as being unfounded, and the Claimant's claim should be considered as without merit, and the Respondent absolved from all requests;

l) Since there is no illegality in the acts of assessment nor legal grounds to sustain the Claimant's claim, the request for reimbursement of the amounts paid by the Claimant is consequently without merit, as is the request for compensatory interest;

1. By order of 14/11/2016, the Tribunal decided to dispense with the holding of the meeting provided for in article 18.º of the RJAT, determining that proceedings continue with optional written submissions, to be presented by the Parties within a simultaneous period of 20 days, as provided for in article 91.º, n.º 5, of the CPTA, applicable by virtue of article 29.º, n.º 1, subparagraph c), of the RJAT;

2. The Claimant and the Respondent presented written submissions, both maintaining the content of the request for arbitration award and the reply, respectively.

II – PRELIMINARY RULING

1. No exceptions were raised.

2. The Parties enjoy legal standing and capacity, have legitimate interest in the request for arbitration award, and are duly represented, pursuant to articles 4.º and 10.º of the RJAT and article 1.º of Regulation nº 112-A/2011, of 22 March.

3. No nullities are present, therefore it is necessary to examine the merits.

III. MERITS

III.1. FACTS

§1. Established Facts

1. The Tribunal considers the following facts established:

a) The Claimant acquired, within the scope of insolvency proceedings nº .../10.0TBMLGL, instituted in the 2.º Court of the Judicial Court of the municipality of ..., from the insolvent estate of "B..., Ld.ª", based in the Municipality of..., Registered number nº..., a set of urban properties with the characteristics of land for construction, forming part of the respective insolvent estate, located in the parish of ..., municipality of ... and district of Viseu, better described in the following table:

[Table content preserved as in original]

b) The acquisition was made for the total amount of €290,400;

c) Following an action of internal control and supervision promoted by the Finance Department of the District of..., aimed at confirming the prerequisites of the exemptions provided in articles 269.º, subparagraph e), and 270.º, nº 2, of the Code on Insolvency and Business Recovery (CIRE), the Respondent proceeded with the additional assessment of Municipal Tax on Onerous Property Transfers (IMT), in the total amount of € 18,876.00, plus € 2,668.50 referring to compensatory interest, all in a total of € 21,544.50 (twenty-one thousand five hundred and forty-four euros and fifty cents), which was levied on the aforementioned acquisition – Assessment nº ... of 2015 (Tax and Customs Authority);

d) The Claimant presented a Gracious Complaint against this assessment (Gracious Complaint nº …2016…), which was dismissed by order, by delegation, of the Chief of the Division of Tax Management and Assistance of the Unit of Major Taxpayers (UGC), dated 28 April 2016;

e) The Claimant proceeded to pay the amount of € 21,544.50, referring to the assessed tax, on 05/11/2015.

§2. Unestablished Facts

1. With relevance for the decision, there are no essential unestablished facts.

§3. Reasoning Regarding the Facts

1. As regards the established facts, the Tribunal's conviction was based on the free evaluation of the positions taken by the Parties regarding facts and on the content of the documents attached to the case file, not contested by the Parties.

III.2. LAW

§1. Issue to be Decided

1. In the present proceeding, the interpretation and application of the provision contained in article 270.º, n.º 2, of the CIRE (Code on Insolvency and Business Recovery, approved by Decree-Law nº 53/2004 and subsequent amendments) is at issue, it being important to determine whether the exemption therein provided only benefits the transfer of the totality of assets associated with the exercise of the economic activity of the business, as the Respondent contends, or whether it is also applicable to the transfer, in isolation, of real estate of the business or of its establishments, as the Claimant contends.

§2. Application of the Law to the Case Sub Judice

1. Article 270.º, n.º 2, of the CIRE provides as follows:

"Equally exempt from municipal tax on onerous property transfers are acts of sale, exchange, or transfer of a business or of establishments thereof integrated within the scope of an insolvency or payment plan or carried out within the scope of the liquidation of the insolvent estate."

1. The literal element of article 270.º, n.º 2 of the CIRE determines that the IMT exemption is applicable both to the sale and to the exchange, and only as regards the latter is the requirement of transfer of a business or totality imposed.

2. According to the preamble of Decree-Law nº 53/04, of 18 March, which approved the CIRE, "are essentially maintained, the existing regimes in the CPEREF as regards the exemption from fees and tax benefits, as well as the indication of criminal violations" (§49).

3. Pursuant to the diploma that approved the CPEREF (Decree-Law nº 123/93, of 23 April), "in addition to quite favorable treatment of the two proceedings covered by the diploma in the field of court costs, a set of incentives of a fiscal nature are also adopted in this decree-law, through which it is sought especially to avoid undue penalties or serious drawbacks for the legal, economic or financial operations in which the recovery process may develop".

4. Still according to this diploma, "[w]ith that intention some fiscal or parafiscal charges related to legal dealings that might constitute the means of recovery approved by creditors were removed, particularly having in mind the stamp tax, the municipal contribution, the municipal sisa tax and the fees themselves due for the acts."

5. Thus, it is contrary to the purpose intended by the legislator – maintenance in essence of the existing regimes in the CPEREF as regards exemption from fees and tax benefits – the understanding that sales of elements of the assets of the business, even if integrated within the scope of the insolvency plan or payment plan or carried out within the scope of the liquidation of the insolvent estate, would be excluded from IMT exemption.

6. In the words of the Supreme Administrative Court, in a judgment issued on 30 May 2012 (Case nº 0949/11):

"This interpretation [followed by the Tax Authority in this case] clashes, however - as well observed in the appealed sentence - with what the legislator set down in nº 49 of the preamble of the CIRE as regards tax benefits, where it is stated that: 'are essentially maintained, the existing regimes in the CPEREF as regards the exemption from fees and tax benefits' and it is certain that subparagraph c) of n.º 2 of article 121.º of the CPEREF exempted from municipal sisa tax the transfers of immovable property."

1. The understanding expressed by the Supreme Administrative Court is also subscribed to, in the judgment of 17 December 2014 (Case nº 01085/14), according to which:

"Taking into account the purpose that the legislator intends to achieve with the granting of such exemption, - to foster and support the rapid sale of assets that form part of the insolvent estate for obvious reasons of creditor interest, but also of public interest in the resumption of normal functioning of the business world in which each insolvency proceeding presents itself as a disruptive element, giving "a bonus" to whoever acquires the real estate assets that form part of the insolvent estate – buy these assets cheaper because they do not have to pay the IMT that would be due on the acquisition of a similar real estate outside the insolvency proceedings – and which will be sold in the liquidation phase, the ambiguous text of n.º 2 of art.º 270º can be subject to a clearer and unambiguous reading without resort to any extensive interpretation. It suffices that we ask ourselves whether to achieve the purpose previously defined it makes any difference whether one is selling globally the business with all its assets and liabilities, whether one is selling one or more of the commercial establishments that made it up, whether one is selling assets that formed part of its patrimony but were not used in its commercial operations – for example a real estate received in payment of a debt that the insolvent business was creditor of – in order to be faced with a sale that is carried out within the scope of the liquidation of the insolvent estate? And, if in the same situations it is not sales but exchanges or transfers – it being that this word must have been used in an improper sense in so far as associated with the business world it is usually reported as the transfer of operation, transfer of the commercial establishment, similar to lease and not to alienation, and in the Code of Insolvency and Business Recovery it is also shown to be used as regards the acquisition of assets by creditors? We believe that the answer cannot fail to be negative."

1. An interpretation of article 270.º, n.º 2 of the CIRE in accordance with the Constitution of the Portuguese Republic points in the same direction.

2. Indeed, as stated in the judgment of the Supreme Administrative Court, of 30 May 2012 (Case nº 0949/11):

"N.º 2 of article 270.º of the CIRE, whose wording is not clear as regards the scope of the IMT exemption therein provided, must be interpreted in accordance with subparagraph c) of n.º 3 of article 9.º of Law nº 39/2003, of 22 August, for as between two meanings of the law, both with support - at least minimal - in the respective letter, the interpreter must opt for that which makes it compatible with the constitutional text (interpretation in accordance with the constitution) [thus] should be understood as being exempt from IMT not only the sales of the business or establishments thereof, as totalities of assets, but also the sales of elements of its assets, provided that they are integrated within the scope of the insolvency plan or payment plan carried out within the scope of the liquidation of the insolvent estate."

1. In the same sense, the Supreme Administrative Court pronounced itself in the judgment of 3 July 2013 (Case nº 0765/13) in which it was decided that:

"N.º 2 of article 270.º of the CIRE, whose wording is not clear as regards the scope of the IMT exemption therein provided, could, at most, be interpreted as covering not only the sales of the business or establishments thereof, as a totality of assets, but also the sales of elements of its assets, provided that they are integrated within the scope of an insolvency or payment plan or carried out within the scope of the liquidation of the insolvent estate."

1. Meanwhile, through Circular nº 4/2017 of the Services Directorate for IMT, IS, IUC and Special Contributions (DSIMT), which came to amend point III of the annex to Circular nº 10/2015, the Tax and Customs Authority came to adjust its interpretation of article 270.º, n.º 2, of the CIRE, to the jurisprudence constant in this matter, now providing that "[t]he application of the tax benefits provided for in n.º 2 of article 270.º of the CIRE does not depend on the thing sold, exchanged or transferred covering the totality of the insolvent business or one of its establishments," concluding that "[t]hus, acts of sale, exchange or transfer, in isolation, of real estate of the business or of establishments thereof are exempt from IMT, provided that they are integrated within the scope of insolvency, payment or recovery plans or carried out within the scope of the liquidation of the insolvent estate."

2. It is concluded, thus, that the claim for annulment of the IMT assessment act contested is well-founded and, consequently, that the claim for annulment of the act dismissing the Gracious Complaint in question is well-founded.

3. From the illegality of the assessment act in dispute, and from the consequent annulment thereof, results the right of the Claimant to be reimbursed of the amount of tax improperly paid.

4. The Claimant further requests the payment of compensatory interest. As regards this, n.º 1 of art. 43.º of the General Tax Law provides as follows: "[c]ompensatory interest is due when it is determined, in a gracious complaint or judicial challenge, that there was error imputable to the services from which resulted payment of the tax debt in an amount higher than legally due."

5. It is considered that "[t]he error imputable to the services that carried out the assessment is demonstrated when they proceed with a gracious complaint or challenge of the same assessment and the error is not imputable to the taxpayer" (DIOGO LEITE DE CAMPOS, BENJAMIM SILVA RODRIGUES, JORGE LOPES DE SOUSA, General Tax Law. Annotated and Commented, 4.ª ed., Lisbon, 2012, p. 342).

6. The law further determines, in article 100.º of the General Tax Law, that: "[t]he tax administration is obliged, in case of full or partial success of complaints or administrative remedies, or of judicial proceedings in favor of the taxpayer, to the immediate and full restoration of the situation that would have existed if the illegality had not been committed, including the payment of compensatory interest, in the terms and conditions provided for in the law."

7. As stated in the judgment of the Supreme Administrative Court of 11/02/2009, appeal nº 1003/08, "[h]aving the legislator adopted compensation in the form of compensatory interest, following a decision annulling an assessment act, presuming the patrimonial damage resulting from the deprivation of the amount paid following an act of illegal assessment, the interpretation of art. 100.º of the General Tax Law in accordance with the Constitution is that it recognizes the right to compensatory interest from the date on which the deprivation of the amount illegally assessed occurred and not only from the end of the execution period of the annulment decision."

8. In the present proceeding we are faced with an additional IMT assessment based on error imputable to the services, from which resulted the improper payment of the tax obligation by the Claimant, therefore this is recognized as having the right to compensatory interest on the amount of tax improperly paid.

9. In accordance with n.º 1 of article 61.º of the Code of Tax Procedure and Process (CPPT), "[i]nterest is calculated from the date of improper payment of the tax until the date of processing of the respective credit note, in which it is included."

V – DECISION

Accordingly, and with the grounds hereby stated, this Arbitration Tribunal decides:

a) To judge the request for arbitration award as well-founded;

b) To annul, with all legal effects, the act of IMT assessment in dispute in the present proceeding;

c) To annul, with all legal effects, the act dismissing the Gracious Complaint nº …2016…;

d) To judge the request for payment of compensatory interest as well-founded, which accrues to the reimbursement of the tax improperly paid, applying the legal rate and calculating such interest from the date of payment of the tax until the issuance of the credit note, all in the terms that shall be determined in execution of the judgment.

VI – VALUE OF THE CASE

In accordance with article 306.º, n.º 2, of the CPC and 97.º-A, n.º 1, subparagraph a), of the CPPT and 3.º, n.º 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at € 21,544.50.

VII – COSTS

Pursuant to article 22.º, n.º 4, of the RJAT, the amount of costs is fixed at € 1,224.00, in accordance with Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Respondent.

Lisbon, 01/03/2017

The Arbitrator

(Paulo Nogueira da Costa)