CAAD Arbitration on IMT Exemption for Payment in Kind and Resale of Property – Process 400/2014-T

ARBITRAL DECISION

I – Report

1. The taxpayer "A, Lda.", tax identification number … (hereinafter "Claimant"), submitted, on 27 May 2014, a request for the constitution of a Collective Arbitral Tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Framework for Tax Arbitration, hereinafter "LFTA"), in which the Tax and Customs Authority (hereinafter "TCA") is the Respondent.

2. The Claimant seeks an arbitral pronouncement on the illegality of the assessments of Municipal Tax on Onerous Transfers of Real Property (IMT) and compensatory interest, relating to the year 2008, in the total amount of €77,696.88, contained in office no. … (2014-01-27) of the Tax Office of Cascais; and the decree of their respective annulment.

3. The request for the constitution of the arbitral tribunal was accepted by the Hon. President of CAAD and automatically notified to the Tax and Customs Authority on 28 May 2014.

4. In accordance with the provisions of article 6, paragraph 2, subparagraph a) and article 11, paragraph 1, subparagraph b) of Decree-Law no. 10/2011, of 20 January, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council appointed the arbitrators of the Collective Arbitral Tribunal, who communicated their acceptance of the role within the applicable period, and notified the parties of this appointment on 15 July 2014.

5. The Collective Arbitral Tribunal was constituted on 30 July 2014; it was regularly constituted and is materially competent, in accordance with articles 2, paragraph 1, subparagraph a), 5, 6, paragraph 1, and 11, paragraph 1, of the LFTA (as amended by article 228 of Law no. 66-B/2012, of 31 December).

6. In accordance with paragraphs 1 and 2 of article 17 of the LFTA, the TCA was notified on 30 July 2014 to submit its response.

7. The TCA submitted its response on 30 September 2014, accompanied by a copy of the administrative file, as had been requested.

8. In that response, the TCA alleges, in summary, the total lack of merit of the Claimant's request, asking for the dismissal of all claims.

9. The Arbitral Order of 1 December 2014 determines the waiver of both the meeting referred to in article 18 of the LFTA and the submission of written arguments by the parties; and sets the date of 13 January 2015 for the rendering of the final decision.

10. The Parties have legal personality and capacity and have standing, in accordance with articles 4 and 10, paragraph 2, of the LFTA and article 1 of Ordinance no. 112-A/2011, of 22 March.

11. The Parties are duly represented.

12. The case is not affected by any defects and no preliminary or subsequent questions, prejudicial or of exception, were raised that would prevent the examination of the merits of the case, with the conditions being met for a final decision to be rendered.

II – Legal Reasoning: Factual Matters

II.A. Facts Considered Proven

a) The Claimant received office no. … (2014-01-27) of the Tax Office of Cascais, which contains assessments of IMT for acquisition for residential purposes on 30 December 2008, of fractions "UG" and "UH" of urban property registered in the matrix of the parish of …, under Article …, in the amount of €72,000.00, plus €5,696.88 as compensatory interest, totalling €77,696.88 in debt.

b) The reasoning presented in the office states that the exemption obtained from the acquisitions of the properties on 30 December 2008, pursuant to Article 7 of the IMT Code (hereinafter "IMTC"), lapsed because a deed of dation in payment was executed, on 17 December 2010, in favour of a creditor who is a banking entity, regarding those two fractions.

c) The Claimant is a limited liability company engaged in the business of buying and selling real property.

d) On 30 December 2008, the Claimant acquired fractions "UG" and "UH" of the urban property registered in the matrix of the parish of …, under Article …, at the price of €600,000.00 for each of the fractions.

e) The Claimant benefited from IMT exemption, pursuant to article 7 of the IMTC, by allocating the properties for resale and meeting the other requirements.

f) These properties were the subject of a deed of dation in payment in favour of Bank B, SA, executed on 17 December 2010.

g) As the conclusion of a partial inspection action relating to 2010 and carried out in 2012 and 2013 by the Tax Inspection Services of the TCA, the Inspection Report concludes that the IMT exemption lapsed, pursuant to article 7 of the IMTC, based on the fact that a different purpose than resale was given to the properties, thus ceasing to verify a subsequent requirement of the exemption, namely resale (and resale within a time period).

h) The assessment of the IMT shortfall, having found this lapse, was based on the combination of articles 18, paragraph 2, 19, paragraph 2, and 21, paragraph 2, subparagraph b) of the IMTC.

i) The Claimant was heard on the Draft Inspection Report, thereupon manifesting its total disagreement.

II.B. Facts Considered Not Proven

a) The evidence presented is of a documentary basis and was incorporated into the case file.

b) No proven matter in the record had its authenticity or correspondence with the facts called into question.

c) There are no unproven facts that have interest for the decision of the case.

III – Legal Reasoning: Matters of Law

III.A. Position of the Claimant

a) The Claimant understands that the exemption provided for in article 7 of the IMTC is based on the purpose of subjecting the commercial activity of buying properties for resale to Corporate Income Tax (IRC), and not to IMT.

b) Given this ratio legis, the Claimant argues that dation in payment has the same scope as a sale and purchase, since it transmits ownership in exchange for a price, with the sole particularity that the price is calculated by reference to a credit that is extinguished with that transmission.

c) The effects, particularly for meeting the requirements of the mentioned IMT exemption, would be exactly the same – since the underlying materiality is the same as in a resale.

d) In support of this understanding, it emphasizes that the acquirer, in the dation in payment, paid the IMT due, in the amount of €59,521.32 – when the acquirer itself, as a banking entity, would be partially exempt from the tax by application of article 8 of the IMTC, if it were a pure dation in payment due to the alienator's debts resulting from a loan granted by the acquirer, or from rent due under a financial leasing contract.

e) The fact that the acquirer, in that dation in payment, paid the IMT demonstrates, in the Claimant's understanding, that the substance of the transmission was that of a true sale and purchase – regardless of the name attributed to the transmission.

f) In support of this equivalence and of non-discriminatory fiscal treatment of equivalent situations of onerous transmission of ownership, constitutional principles of equality and taxpaying capacity, and of prevalence of substance over form, are invoked.

g) On the other hand, the Claimant invokes the lack of reasoning of the tax act as regards compensatory interest – because the notification of the tax debt provides no clarification as to the fulfilment of the requirements on which, pursuant to article 35 of the General Tax Law (GTL), the existence of compensatory interest depends.

h) Finally, understanding that the assessed liability is based on an error attributable to the TCA's services, the Claimant argues that there would be grounds for indemnificatory interest in its favour, to be officially calculated by the arbitral decision, and calculated until the actual reimbursement of the tax paid by it in the meantime.

III.B. Position of the Respondent

a) In response, the TCA argues the idea that dation in payment has a different nature from resale, since "resale", in the strict and proper sense, is the act that fulfils the purpose that presided over the initial acquisition of the property, because it is this that constitutes the proper object of the activity of the entity benefiting from the exemption.

b) That is, the Respondent argues that the reason for the exemption regime is the benefit of companies that resell the properties they acquired with that objective of resale, sparing them the burden of IMT on the initial purchase insofar as this is intended for that commercial intermediation between purchase and resale, which in turn transforms the properties into mere commodities, within the scope of their business activities.

c) Added to this is the observation that dation in payment does not fall within the business activity of the Claimant; in dation in payment a debtor seeks to exempt itself from a specific debt, and therefore cannot be considered that this cause of extinction of obligations could constitute the object of that activity, in the sense of being targeted by that activity or being characteristic of it.

d) On the contrary, in dation in payment the properties cease to be the object that is transacted for a price, to become themselves the means of payment: the object is the debt, the properties become instruments of extinction in kind of that debt.

e) The Respondent further counter-argues that the Claimant goes so far as to foster an equivocation, insofar as it begins by arguing an equivalence of figures only to end with the defence of the idea, which is distinct, that there would have been a slip in the definition of the "nomen iuris" by the parties, based on the circumstance that the acquirer, in the dation in payment, paid IMT.

f) But, the TCA observes, the payment of IMT does not have the power to transform a dation in payment into a sale and purchase; furthermore, in a dation in payment the object transacted does not have to be isolated, as would have to occur in a sale; as in a dation in payment a good is delivered as a means of payment, several goods, of various natures, movable and immovable, can be mixed without restrictions, provided the creditor accepts them in payment.

g) In dation in payment, concludes the Respondent, the acquirer did not act as buyer but only as creditor; consequently, no resale occurred or anything equivalent to it – and certainly no slip or error occurred in the legal qualification, in the choice, by the parties, of the "nomen iuris".

h) Not existing such equivalence for the intended effects of the rule granting IMT exemption, the TCA refuses that there has been any violation of constitutional or legal principles imposing equality and consideration of taxpaying capacity, or determining the prevalence of substance over form.

i) On the other hand, the TCA disputes that there has been a lack of reasoning for the provision of compensatory interest, since, as compensatory interest forms an integral part of the tax debt, the Claimant cannot be unaware of the grounds of that debt – since it was notified of the Inspection Report in which all the bases of the decision reasoning are set out, and it reacted to them in accordance with its right to be heard.

j) Finally, the Respondent argues that, as there has been no error on the part of the services, as no illegality has occurred, there is no basis for the indemnificatory interest claimed by the Claimant.

III.C. Questions to Be Decided

The following questions are the subject of these proceedings:

A) Whether, in view of the legal nature of the deed of dation in payment in favour of Bank B, SA, executed on 17 December 2010, the same constitutes a true sale and purchase – resale – for the purposes of the exemption provided for in article 7, paragraph 1, of the IMTC;

B) Whether the act of assessment of IMT as a consequence of the deed of dation in payment mentioned is legal or not;

C) Whether the act of assessment of compensatory interest is defective due to lack of reasoning;

D) Whether the assessment acts violate the constitutional principles of equality, taxpaying capacity and prevalence of substance over form.

III.C.1 – Legal Framework Applicable to IMT Exemption for Purchases for Resale

1. Let us, therefore, first examine the applicable legal framework.

2. Article 7, paragraph 1 of the IMTC provides: "acquisitions of properties for resale are exempt from IMT, in accordance with the following number, provided that it is verified that a statement was submitted prior to the acquisition as provided for in article 112 of the Personal Income Tax Code (IRS) or in subparagraph a) of paragraph 1 of article 109 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".

3. For its part, paragraph 2 of the said rule establishes that "[the] exemption provided for in the preceding number does not prejudice the assessment and payment of the tax, in accordance with the general rules, unless it is recognized that the acquirer exercises normal and habitual activity as a buyer of properties for resale".

4. And its paragraph 3 provides that "for the purposes of the provisions at the end of the preceding number, a taxpayer is deemed to exercise the activity normal and habitually when it proves its exercise in the previous year by means of a certificate issued by the competent tax office, which must always indicate whether, in the previous year, a property was acquired for resale or resold which had previously been acquired for that purpose".

5. As regards the lapse of the exemption, article 11, paragraph 5 of the IMTC provides that "the acquisition referred to in article 7 shall cease to benefit from exemption as soon as it is verified that the properties acquired for resale were given a different purpose or that they were not resold within the period of three years or were resold again for resale".

6. Pursuant to paragraph 1 of article 7, acquisitions of properties for resale are exempt from IMT when the taxpayer (legal or natural person) exercises normal and habitual activity as a buyer of properties for resale.

7. From the combination of paragraph 1 of article 7 and paragraph 5 of article 11 of the IMTC, the IMT exemption for the acquisition of properties for resale lapses, for a taxpayer (legal or natural person) previously qualified for such, when it is sold again for resale or when it is given a different purpose from that which presided over the acquisition.

III.C.2 – Legal Nature of the Deed of Dation in Payment

1. Dation in payment is a form of extinction of obligations which consists in the performance of a different obligation from the one owed, with the purpose of, by means of agreement of the creditor, immediately extinguishing the obligation (article 837 of the Civil Code).

2. Vaz Serra (in R.L.J., 99th, p. 100), regards it as a sale and purchase or an exchange, depending on whether the debtor delivers a thing in substitution for money – which functions as its price – or a thing in substitution for another;

3. Antunes Varela (in Obligations in General, VOL. 2, 7th edition, p. 174), argues that it is an act performative of the obligation, based on a conventional exchange or permutation of performances, appealing to the notions of purpose of the dation, which is the extinction of the obligation, and means of this extinction, which presupposes a concerted exchange between the parties), it seems clear to us that we are dealing with a synallagmatic (or bilateral) contract.

4. For Antunes Varela, the exact and complete conception of dation is the one that depicts, in the single moment in which the act is exhausted, the dual aspect it involves. Only by including the purpose and means of the act can a full picture of dation in payment be obtained.

5. The purpose of the dation consists in the extinction of the obligation (of the sole obligation that persists in the relations between the parties); the means of this extinction, being different from the obligated performance (aliud pro alio), presupposes a concerted exchange between the parties – an exchange that is effected at the very moment of the datio.

6. There is a notable analogy between the most common modalities of dation (such as the delivery of a thing or the assignment of a right) and the contract of sale and purchase. Therefore, article 838 grants the creditor the same protection that articles 905 et seq. of the same statute grant to the buyer when the thing or right transmitted presents defects.

7. The application to dation in payment of the rules of sale and purchase results not only from the cited article 838, but from the general reference in article 939, which provides for the application of the rules of sale and purchase to other onerous contracts by which goods are alienated or encumbrances are established on them, insofar as they are consistent with its nature and are not in contradiction with the respective legal provisions.

8. By virtue of the provisions of those rules, the provisions relating to the sale of another's property (articles 892 et seq.) are applicable to dation in payment, if a thing not belonging to the debtor was given in payment for valuable consideration.

9. However, if there is analogy or similarity as to the means – transmission of ownership in exchange for a consideration – there is not as to the purpose – extinction of an obligation or debt in the case of dation, onerous transmission with commercial or business intentions, in the case of sale and purchase – and it cannot be concluded, from the respective conceptual framework, on a full identification between the two contracts.

10. In conclusion, the contract of dation in payment configures a contract through which an onerous transmission of ownership of a given good is effected, with the purpose of performing an obligation, by effecting a performance different from the one originally owed.

11. Notwithstanding the reference made by the Civil Code, within the dation in payment, to the rules of the contract of sale and purchase, by analogy of institutes and legislative economy, this does not in itself make the "dation in payment" a "sale and purchase".

12. Other contracts are equally covered by this reference made by article 939 of the Civil Code, such as the contract of exchange, among others. The contract of exchange is not disciplined in the Civil Code, but given its nature as an onerous contract, it is regulated in accordance with the provisions relating to the contract of sale and purchase, by force of article 939 of the Civil Code, not being by this effect a "sale and purchase" contract.

III.C.3 – Object of the Exemption Provided for in Article 7 of the IMTC: the Ratio Legis

1. Tax exemptions are contemplated in Chapter II of the IMTC in articles 6, 7, 8 and 9.

2. Maintaining the same spirit as the law of the Sisa Code, the IMT preserved the exemption from tax for the acquisition of real property for resale, now provided for in article 7 of the respective Code.

3. As an exemption, it is immediately framed, from a systematic and formal perspective, as a tax benefit.

4. It is highly important for the question to be decided to ascertain the ratio of this tax benefit, in order to conclude whether the IMT exemption may be maintained in the face of the operation of transmission of properties through a deed of dation in payment.

5. The exemption for the acquisition of properties for resale is based on the circumstance that such properties, intended to integrate the tradable assets of the acquiring company, constitute "commodities" of the respective activity, which in principle should be exclusively taxed on the basis of its income. Thus the exemption aims ultimately at avoiding high financial charges which, although being costs deductible for the purpose of determining taxable income, would tend to be passed on to the final sale price of the real property (Cf. J. Silvério Mateus /L. Corvelo de Freitas, Taxes on Property. The Stamp Duty Tax: Annotated and Commented, Lisbon, Engifisco, 2005, p. 385)".

6. As Nuno Sá Gomes states, (in CTF 380, pp. 488 et seq.), the basis of the exemption in question is the circumstance that the acquired properties remain, as commodities, in the tradable assets of the enterprise taxed on the exercise of the activity of acquiring properties for resale.

7. The taxation of entities that buy properties for resale must be done according to the rules of the tax applicable to income – IRS or IRC – so that the subjection to IMT of transactions carried out by these entities, sufficiently proven as such – would burden and artificially increase the sale price of the property to its final acquirer, which also cannot be an entity exercising the commercial activity of buying for resale, now already to avoid "cascading" exemptions or even tax fraud.

8. In conceptual terms, what the legislation comes to indicate is that the purchase of a good with the intention of reselling it afterwards should not be regarded as a true acquisition, insofar as the current purchaser will not be the future owner (nor usufructuary) of the good in question.

9. We are not in the present case facing a subjective exemption but rather an objective exemption, subject to a set of conditions that may be suspensive and resolutive.

10. And, if the property is transacted by the owner, who acquired it for resale, in another form than the same "resale" operation, IMT shall then be assessed for having ceased to comply with one of the conditions provided for in the exemption of article 7 of the IMTC, with the automatic application of the lapse of the exemption provided for in paragraph 5 of the IMTC.

11. In a certain sense one could even consider that this exemption does not deal with a true tax benefit, since, as an exemption, in the strict sense of the term, it may not remove taxation from those who have an obligation to bear it and, as a tax benefit, it does not have the character of interest of extrafiscal public policy.

12. In conceptual terms, what the legislation comes to indicate is that the purchase of a good with the intention of reselling it afterwards should not be regarded as a true acquisition, insofar as the current purchaser will not be the future owner (nor usufructuary) of the good in question, nor did it acquire it with any other purpose than to resell it subsequently, under market conditions, within the scope of its commercial or business activity of buying properties for resale.

13. Consequently, the law establishes a set of prerequisites of the regime of exemption in IMT of properties acquired for resale that constitute preventive mechanisms against its abusive use and the practice of tax fraud operations.

14. Thus only companies that are taxed for the purposes of IRS or IRC in the activity of buying properties for resale may benefit from this exemption (article 7, paragraph 1).

15. The exemption regime applies exclusively to properties acquired for resale by companies, not applying to properties acquired for other purposes and subsequently allocated to tradable assets.

16. For the exemption to be applied, it must appear from the contract itself that the acquired property is intended for resale.

17. The resale must be carried out within a maximum period of three years (article 11, paragraph 5).

III.C.4 – The Integration of the Concept of "Resale" Object of the Exemption Provided for in Article 7 and Paragraph 5 of Article 11 of the IMTC

1. In order to integrate the concept of "resale" required for the application of the exemption in question, and to determine whether the deed of dation in payment falls within its scope of application, we must proceed to the interpretation of the said rule, having identified the ratio of this same exemption.

2. As tax exemptions constitute, as a rule, tax benefits,

3. Therefore, a correct approach to the question to be decided requires making a brief reference to the interpretation of the rules of benefits and exemption from taxation.

4. Tax benefits, among which exemption from taxation, are, by nature, rules of an exceptional character, since they contain a derogation from the general principles governing taxation, as they somewhat derogate from the principles of taxpaying capacity, generality and equality of taxation, and only find justification in the protection of interests of constitutional relevance, superior to those of taxation itself, whether of a political, economic, social or cultural character (Manual of Tax Law, 11th edition, with addendum, 2000, pages 323/326, Nuno de Sá Gomes, cited in the opinion of the Hon. Deputy Attorney General).

5. The rules of tax benefits thus merit autonomous treatment because they are anti-systemic rules by definition, being in permanent tension with the principle of taxpaying capacity, which they derogate as a standard in the distribution of tax (See Sérgio Vasques, Manual of Tax Law, p. 312).

6. And it is this circumstance that legitimates the support of a principle of strict or declarative interpretation (strict interpretation) regarding them, founded precisely on their exceptional or anti-systemic nature, which is not to be confused with literal interpretation.

7. Indeed, it is now surpassed the idea that all tax law is exceptional law, which would have the effect of excluding analogical integration in relation to all tax rules. And, likewise, it is no longer dominant in the doctrine, as it was in the past, the thesis that tax rules should always be the subject of literal interpretation, particularly for reasons of legal certainty and protection of the taxpayer, which likewise proscribed extensive interpretation.

8. Rather, the understanding prevails that tax rules should be interpreted in accordance with the common general theory of interpretation of laws, without any specialties, based on a view of tax law as an autonomous branch of law, and not special or exceptional.

9. However, the observation is imposed on this thesis that the particular configuration of the principle of tax legality, as it results in a true rule of typicity of taxes, postulates the eradication of recourse to analogy in relation to the rules covered by the reserve of law (i.e., incidence, rate, tax benefits and guarantees of taxpayers).

10. Hence it is understood that tax exemption, insofar as it runs counter to the principles of generality and equality of taxation, is incapable of application to cases that have not been expressly contemplated in the benefit granted.

11. Thus, in a strict interpretation of the rule (article 11, paragraph 5 of the IMTC) it must be understood that, in the case of exemption of properties acquired for resale, the law requires, without more, the carrying out of resale as an essential prerequisite of the exemption, without equating it with any other type of act or contract.

12. The interpretation and integration of this concept of "resale" has been pronounced upon on several occasions by the Portuguese courts.

13. See the Hon. Supreme Administrative Court decision in case 592/2012, of 28/11/2012, in which the SAC concludes that, for the purposes of the exemption provided for in article 7, paragraph 1 of the IMTC, the exchange or permutation of goods assumes no relevance, only resale being relevant in its technical-legal sense.

14. Indeed, the rules that enshrine tax benefits are not susceptible to analogical integration, although they do admit extensive interpretation (cfr. article 9, of the E.B.F.).

15. And therefore, in light of these principles, the SAC understands, in the cited decision, that, "in a strict interpretation of the rule (article 11, paragraph 5 of the IMTC) it must be understood that, in the case of exemption of properties acquired for resale, the Law requires, without more, the carrying out of resale as an essential prerequisite of the exemption, without equating it with any other type of act or contract".

16. This has also been the traditional understanding of our case law within the scope of the Code of Municipal Tax on Transfers and the Tax on Inheritances and Gifts, whose regime is, in this respect, very similar to the regime of the IMTC – cf. Decisions of 6/3/1985, case no. 2732, of 19.06.1985, case no. 002841, of 13.10.1993, case no. 15334, of 28.01.2008, case no. 642/08 and of 07.03.2012, case 01141/11.

17. As was set out in the Decision of 13.10.1993, cited above (published in the Appendix to the Official Gazette, of 20/5/1996, pp. 3279 to 3282) "in view of the text of the applicable law and the legal intent of, with the granting of this exemption, avoiding successive taxation, in transfer tax, of the same goods, in a short period of time, it is not to be concluded that the legislator said less than he intended, but rather it is to be recognized that the terms used reflect the will therein unequivocally expressed, to the effect that only the act of 'resale' of the property in question is relevant for the purpose indicated there".

18. And also on the subject of the concept of resale it was also said in the aforesaid Decision 1141/11 that "to resell is to sell again, or to sell what had been bought, even if not with that purpose, and it becomes all too evident that only through sale does resale take place, and not… by means of mere exchange or permutation of the originally acquired goods (…) Being so, only resale assumes relevance for the purposes of exemption from transfer tax, not so the exchange or permutation" (Doctrinal Decisions, no. 257, p. 644)."

19. The Supreme Administrative Court decision of 04.10.2000, in Case 24.923, expressly refuses that dation in payment can integrate the concept of resale of the articles of the former Code of Municipal Tax on Transfers and Tax on Inheritances and Gifts – CIMSISD.

20. Also the majority of the doctrine has argued that the concept of "resale" should be understood in its technical-legal sense, concretized in the conclusion of a contract of sale and purchase.

21. On this subject and within the scope of the Code of Municipal Tax on Transfers and Tax on Inheritances and Gifts, it enacts a concept of transmission proper to transfer tax, broader than that of civil law (See, on the concept of transmission for the purposes of transfer tax, Francisco Pinto Fernandes and José Cardoso dos Santos, Code of Transfer Tax and Tax on Inheritances and Gifts, edition of the National Press, volume I, p. 23, annotation 2.2 to article 1), but does not do so in relation to the concept of resale.

22. On this matter José Maria Fernandes Pires clarifies, in his Lessons on Taxes on Property and Stamp Duty, pp. 422-423, in an analysis of the prerequisites of IMT exemption, whose regime is, in this respect, similar to that of the Code of Municipal Tax on Transfers and Tax on Inheritances and Gifts, that "the use by the legislator of the concept of resale and not of transmission has the effect of making it essential that the sale of the property occurs, that is, the transmission of the title of ownership. Only in this way is the prerequisite of resale consummated and this is so because the IMTC, having a concept of transmission proper to it, does not have a concept of resale proper to it, so, with respect to this we must use that of civil law. In this way, it is not enough for these companies to carry out other transactions on these properties, namely that they conclude contracts of promise of alienation, for the resale to be considered consummated. Even in cases where the conclusion of a contract-promise for alienation of these properties is followed by material delivery of the possession of the property, the resale cannot be considered verified. Although the conclusion of this type of contracts with delivery of possession is considered by the IMTC as a fact subject to tax, the fact is that in the case of exemption of properties acquired for resale, the Law requires, without more, the carrying out of resale as an essential prerequisite of the exemption, without equating it with any other type of act or contract".

23. Also J. Silvério Mateus /L. Corvelo de Freitas (Taxes on Property. The Stamp Duty Tax: Annotated and Commented, Lisbon, Engifisco, 2005, p. 404) argue that the concept of resale presupposes the transmission of ownership of the property through the contract of sale and purchase.

III.C.5 Subsumption

1. The case sub judice is entirely subsumed in the aforementioned considerations in that it concerns a situation of assessment of IMT for acquisition for residential purposes, on 30-12-2008, of two fractions of urban property (fractions "UG" and "UH" of property registered in the urban matrix of the parish of …, under article …).

2. The aforesaid acquisition had initially benefited from exemption in accordance with article 7 of the IMTC, because it was an acquirer whose commercial purpose was the acquisition of properties for resale and those were intended for that purpose.

3. Since the mentioned fractions were the subject, on 17-12-2010, of dation in payment in favour of Bank B, this different purpose from resale entailed the lapse of the aforementioned exemption with the consequent assessment of IMT in the light of the provisions of articles 18, paragraph 2, 19, paragraph 2, and 21, paragraph 2, subparagraph b) of the IMTC.

4. From the foregoing the obvious conclusion follows of lack of merit of the request for annulment of the assessment.

III.C.6 - Compensatory Interest and Duty of Reasoning

1. In light of the general duty of reasoning, express and accessible, of harmful acts (article 268, paragraph 3, of the Constitution and article 77 of the GTL), in the assessment of compensatory interest together with the tax debt, the discrimination of the amounts of tax and compensatory interest is required, explaining and making clear the respective calculation.

2. As has been understood by the SAC, the legal and constitutional requirement of reasoning aims, primarily, to allow interested parties knowledge of the reasons that led the administrative authority to act, so as to enable them to make a conscious choice between acceptance of the legality of the act and its challenge (Cfr Jorge Lopes de Sousa, General Tax Law Annotated and Commented, Ed. "Writing Meeting" – 4th Ed – 2012, pg 675).

3. To ascertain whether or not a tax administrative act is reasoned, it is necessary, first and foremost, to make the distinction between formal reasoning and substantive reasoning: one thing is to know whether the TCA made known the reasons that determined it to act as it did, the reasons on which it based its action; another, different, is to know whether those reasons correspond to reality and whether, corresponding, they are sufficient to legitimize the specific action.

4. Thus, if formal reasoning does not clearly explain the reasoning of the act, due to obscurity, contradiction or insufficiency, the act is considered not reasoned (Cfr article 125, paragraph 2, of the Administrative Procedure Code).

5. That is: to fulfill the duty of reasoning of the tax assessment act the decision has to respond to the taxpayer on the cognitive and evaluative itinerary traveled by the author of the act, so that the reasons for that decision and no other are known.

6. The regime of compensatory interest has the nature of an aggravation of the tax debt, a kind of surtax aimed at indemnifying the State for the loss of the availability of the amount that was not assessed at the moment when it should have been (Cfr on this matter and in this sense, the Decisions of the SAC of 8-7-92 – case no. 12147; of 29-1-92 – case no. 13671 and of 27-11-96, case no. 20775).

7. Such a regime is provided for in article 35 of the GTL, from which the numbers of interest for the case sub judice are transcribed: "1 - Compensatory interest is due when, due to a fact attributable to the taxpayer, the assessment of part or all of the tax due or the delivery of tax to be paid in advance, or withheld or to be withheld within the scope of tax substitution, is delayed. (…) 3 - Compensatory interest accrues day by day from the end of the period for submission of the declaration, the end of the period for delivery of tax to be paid in advance or withheld or to be withheld, until the supply, correction or detection of the defect that caused the delay in assessment. 4 - For the purposes of the preceding number, in case of inspection, the defect is considered supplied or corrected from the inspection report. (…) 6 – For the purposes of this article, it is always considered that there is a delay in assessment when tax declarations are submitted outside the legal periods. 7 - Compensatory interest is only due for a maximum period of 180 days in case of error of the taxpayer evidenced in the declaration or, in case of a defect found in an inspection action, up to 90 days after its conclusion. 8 – compensatory interest is integrated into the tax debt itself, with which it is jointly assessed. 9 – The assessment must always clearly show the principal amount of the obligation and of the compensatory interest, clearly explaining its calculation and distinguishing it from other obligations due. 10 – The rate of compensatory interest is equivalent to the rate of legal interest fixed in accordance with paragraph 1 of article 559 of the Civil Code.

8. First and foremost the legislator required that the delay be attributable to the taxpayer.

9. "The reason for compensatory interest is connected, among other things, with a judgment of censure, as a matter of fault, that is, in conduct dolus or negligent attributable to the taxpayer, determinant of the non-timely receipt, by the State, of the total tax due and, to that extent, constitutive of an obligation to indemnify of a civil nature." (cfr. decision of the 2nd Panel of the Administrative Court of the South, rendered on 12/01/2010, in case no. 3177/09).

10. "I - The assessment of compensatory interest by the Tax Administration is umbilically linked to the existence of a concrete assessment of tax due by the taxpayer. II - The delay in the assessment of tax only gives rise to compensatory interest if the taxpayer's fault in such delay is demonstrated. III - Fault consists in the reprehensible omission of a duty of diligence, which is to be gauged in the abstract, by the standard of care of the bonus pater familiae, hypothetically placed in the specific situation. IV - The understandable doubt, difficulty, or reasonable divergence of judgment as to the qualification and framing of a given tax situation does not contribute to the integration of the said concept of fault – so that, by such means, there is no room for the imposition of compensatory interest. (cfr. decision of the 2nd Section of the SAC, rendered on 11/03/2009, in case no. 0961/08).

11. In this essential matter also the provisions of article 33 of the IMTC are relevant: "1 - Whenever, due to a fact attributable to the taxpayer, the assessment of tax due is delayed, compensatory interest shall accrue to it in accordance with article 35 of the General Tax Law. 2 - Interest shall be accrued day by day, from the end of the period for requesting assessment until the date the defect is supplied, within the period fixed in article 35 of this Code".

Subsuming:

1. The claimant alleges lack of reasoning of the tax act as regards compensatory interest – because the notification of the tax debt provides no clarification as to the fulfilment of the requirements on which, pursuant to article 35 of the GTL, the existence of compensatory interest depends.

Let us see:

1. The TCA notified the claimant, "(...) in accordance with paragraph 5 of article 11, paragraph 1 of article 35 and paragraph 5 of article 36 of the Municipal Tax Code on Onerous Transfers of Real Property (...)" of the assessment of IMT in the amount of €77,696.88 "(...) corresponding to €72,000.00 IMT and €5,696.88 compensatory interest (...)" tax acts resulting from the acquisition on 30-12-2008 of the identified fractions "UG" and "UH" to which it gave "(...) a different purpose by executing a deed of dation in payment on 17-12-2010 (...)" [Cfr administrative file and Doc no. 6, attached with the defense].

2. Attached to this notification the respondent TCA presented a note called "demonstration of the assessment" in which, regarding the assessment of compensatory interest, it states: "COMPENSATORY INTEREST AT 4% PER ANNUM Interest from 17-01-2011 to 08-01-2013 in the amount of €5,696.88".

3. Would it then be reasonable to conclude that the claimant – a commercial company engaged in the buying and selling of properties for resale – remained without understanding the grounds for the assessment of compensatory interest assessed?

4. Now, it is manifest in this case that the TCA, as notified to the claimant, based the assessment act on the understanding that it considered fulfilled the prerequisites for requiring compensatory interest arising from fault or negligence (of the claimant) in non-performance of its duty of timely communication to the Tax Administration of the cessation of the prerequisite of IMT exemption of which it had benefited, thus causing an official assessment.

5. By citing, in the assessment and notification act, the provisions of article 36, paragraph 5 of the IMTC, the TCA left justified or reasoned the date of commencement of the counting of compensatory interest: the 30th day following the date of execution of the deed of dation in payment (17-12-2010), that is, 17-1-2011.

6. The reasons or grounds of the TCA justifying the assessment of compensatory interest and its calculation in terms of period and applicable rate are thus minimally but sufficiently explicit.

7. Therefore the act does not suffer from the defect of violation of law due to lack of reasoning.

III.C.7 On the Violation of the Principle of Equality Provided for in Article 13 of the Constitution

1. The principle of equality is a constitutional legal principle, transversal to the entire legal system, which at the level of Tax Law is expressed in the universal obligation of all citizens to be bound by the payment of taxes.

2. However, one of the dimensions of the principle of equality is the prohibition of arbitrariness, that is, equal situations should be treated equally, and unequal situations should be treated unequally: equal tax for those with equal taxpaying capacity (horizontal equality) and different tax for those with different taxpaying capacity, in proportion to this difference (vertical equality).

3. But the principle of equality is also expressed in the obligation of imposing differentiating measures so as to obtain an equality of opportunity necessary for real equality between taxpayers. It is in this context that positive discrimination in favor of the family, for example, or deductions from the collection in the context of IRS as a function of the number of children, is justified.

4. In the case of the IMT exemption for entities whose commercial purpose is the buying and selling of properties for resale, as has been left said or implicit previously, what are the reasons or grounds for exempting, acts of purchase of properties, from taxation in the context of IMT on the condition that resale occurs within 3 years and what are the grounds for not considering an act equivalent to resale the act of dation in payment.

5. It is added that it is understandable that the economic agent in the resale of the property considers that good as a commodity and transacts it as if it were a commercial article.

6. This notion implies that the taxpayer does not make any modification or alteration to the state of the property, the only value added created being the value of the margin of profit of the economic agent.

7. The same does not happen, as was seen, in dation in payment in which the economic agent carries out, like any debtor, the performance (with the agreement of the creditor) of a pecuniary obligation through dation.

8. The reasoning of unconstitutionality invoked by the claimant is therefore without merit.

III.C.8 - Indemnificatory Interest

This is a question whose examination is obviously precluded by the total lack of merit of the claim as per the decision below.

IV. Decision

In view of all the foregoing, this Arbitral Tribunal decides to find the claim submitted by A, Lda. totally without merit, and accordingly absolves the Tax and Customs Authority.

V. Value of the Proceedings

The value of the proceedings is set at €77,696.88, in accordance with the provisions of article 97-A of the Tax Procedure Code, applicable by virtue of article 29, paragraph 1, subparagraph a), of the LFTA and article 3, paragraph 2, of the Costs Regulation in Tax Arbitration Proceedings (CRTAL).

VI. Costs

Costs to be borne by the claimant, given that the present claim was found totally without merit, in the amount of €2,448.00, in accordance with Table I of the CRTAL, and in compliance with the provisions of articles 12, paragraph 2, and 22, paragraph 4, both of the LFTA.

Lisbon, 2 February 2015

The Arbitrators

José Poças Falcão
(President)

Ana Teixeira de Sousa

Fernando Borges Araújo