IMT Exemption for Resale Under Article 7 CIMT: Legal Requirements and Arbitral Decision 401/2014-T

ARBITRAL DECISION

The arbitrator Paulo Lourenço, designated by the Deontological Council of the Administrative Arbitration Center (CAAD) to form the Arbitral Tribunal, constituted on 30 July 2014, decides as follows:

I - Report

1. On 27 May 2014, the company A..., Ltd., legal entity no. ..., requested, in accordance with and for the purposes of the provisions of subsection a) of Article 2, no. 1 and Article 10, both of Decree-Law no. 10/2011, of 20 January, the constitution of an Arbitral Tribunal.

2. The request for constitution of the Arbitral Tribunal was accepted by the Honourable President of CAAD on 28 May 2014.

3. Pursuant to the provisions of subsection a) of Article 6, no. 2 and subsection b) of Article 11, no. 1 of Decree-Law no. 10/2011, of 20 January, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council designated as arbitrator of the arbitral tribunal the undersigned hereto, who communicated his acceptance within the applicable period.

4. The parties were duly notified of this designation and did not manifest any intention to refuse the arbitrator's designation in accordance with the combined provisions of Article 11, no. 1, subsections a) and b) of the RJAT and Articles 6 and 7 of the Deontological Code.

5. Thus, pursuant to the provisions of subsection c) of Article 11, no. 1 of Decree-Law no. 10/2011, of 20 January, as amended by Law no. 66-B/2012, of 31 December, the arbitral tribunal was constituted on 02.06.2014.

6. On 1 February 2015, the Tribunal issued the following order:

Unless express and substantiated opposition is filed, the meeting referred to in Article 18 of the RJAT is hereby dispensed with, considering that there are no exceptions to examine, no need for correction of procedural documents, and that the evidence presented is essentially documentary and is attached to the file.

1. In the present arbitration proceedings, the Claimant requests that the Arbitral Tribunal declare the illegality of the tax assessment for Municipal Tax on Onerous Transfers of Immovable Property (IMT), and that the same be annulled and, consequently, the tax already paid be reimbursed to the Claimant, plus compensatory interest that may be due.

I.A The Claimant's Arguments

1. The Claimant is a company limited by quota shares which, in addition to other activities, engages in the activity of buying and selling immovable property, with CAE ....

2. In the context of this activity, the Claimant acquired by public deed, on 15 September 2009, the autonomous fraction designated by the letter UF, intended for housing, of the urban property recorded in the cadastral register of the parish of ..., municipality of Cascais, under article ..., described in the ...th Land Registry Conservation Office of Cascais under number ..., for the price of € 400,000.00 (four hundred thousand euros).

3. The aforementioned public deed states that the Claimant intends the acquired property for resale, thereby availing itself of the exemption under IMT, in accordance with and for the purposes of Article 7 of the CIMT.

4. According to that provision, in order for acquisitions of properties for resale to be exempt from IMT, it is necessary:

a) That the acquired property is intended for resale;

b) That prior to acquisition, the declaration provided for in Article 112 of the CIRS and Article 117 of the CIRC has been filed;

c) That in relation to the previous year, there has been normal and habitual exercise of the aforementioned activity;

d) That the properties are resold within a period of 3 years;

e) That the properties, although resold within the legal period, are not resold again for resale purposes;

f) That no different purpose is given to the properties acquired for resale.

1. This means that a company whose main activity is the purchase of immovable property for resale and which meets the remaining conditions set out above is exempt from the payment of tax on all purchases of immovable property made with that purpose.

2. The ratio legis of this IMT exemption provided for in Article 7 of the IMT Code is to exclude from IMT taxation a commercial activity in which immovable properties are transacted as merchandise.

3. Exchange (barter) is merely an onerous contract, bilateral in nature, by means of which a property is transferred and, in return, another property is received.

4. The exchange of immovable property thus consists of the alienation of an immovable property, receiving in return another immovable property.

5. That is, and taking into account the essential effects of the purchase and sale contract referred to above, exchange differs from the latter only as to the agreed consideration, because, otherwise:

a) By means of exchange, a transfer of ownership of the thing occurs and, in this case, of the right's title;

b) The obligation to deliver the thing is determined; and

c) The obligation to pay the price is similarly determined (even if the consideration is not monetary, but rather another property).

1. It is to be concluded, therefore, that notwithstanding the determination of non-monetary consideration (although monetarily valued), the nature of the exchange contract is, for the purposes of IMT, identical to that of the purchase and sale contract.

2. The restriction of the exemption when the acquisition occurs for resale to the purchase and sale contract violates the principle of equality constitutionally protected by treating and applying differently two realities which, in substance, are equal.

3. We cannot discern what differences exist between the purchase and sale contract and the exchange contract that lead the Tax Administration to consider that this is not a true resale.

4. Both in legal terms and in economic terms, both contracts produce the same result, namely the transfer of ownership of a specific property, in this case an immovable property.

5. The principle of fiscal equality is based on the general principle of equality provided for in Article 13 of the Constitution of the Portuguese Republic (CRP), from which results the principle of contributory capacity which, by constitutional imperative, is the prerequisite and criterion of taxation.

6. The manifest violation of the principle of fiscal equality is evident in the case at hand.

7. By arguing that the Tax Administration proposes that resale is restricted to the transfer of ownership only through purchase and sale, it would always be unconstitutional for violating this principle, and these are precisely the arbitrary solutions that are forbidden to the fiscal legislator by the constitutional commands referred to above.

8. The principle of legal certainty guarantees the taxpayer a predictability of the applicable law.

9. The importance of the principle of legal certainty is highlighted by our case law, an example of which is the judgment of the Supreme Administrative Court (STA), dated 13 November 2007, issued in the context of case 0164A/04:

The principle of the rule of law is realized through elements derived from other principles, namely, legal certainty and protection of citizens' confidence. Such principle is expressly enshrined in Article 2 of the CRP and should be regarded as a politically configured principle that explains the fundamental valuations of the constitutional legislator. The aforementioned principles of legal certainty and protection of confidence are established as classifying principles of the democratic rule of law, and which imply a minimum of certainty and security in the rights of persons and in the legally created expectations which inherent to them is an idea of protection of citizens' confidence and of the community in the legal order and in the action of the State.

1. The Tax Administration failed to comply with the duty to justify the calculation of compensatory interest, the Claimant being unaware of the decision-making reasoning underlying it and its respective causes regarding its essential requirements.

2. Finally, the Claimant petitions for payment of compensatory interest.

I.B The Tax Administration's Response

1. Although the Claimant declared in the purchase and sale deed that the property was intended for resale, the fact is that on the same day it executed the purchase and sale deed, it executed an exchange deed.

2. The Claimant knew that the purpose of the property it acquired was intended for exchange and not for resale.

3. The characteristic element of the exchange or barter contract is the absence of any monetary object that in the contract performs the function of means of payment, that is, the absence of any object that can be qualified as price, in accordance with the provision of the Supreme Court of Justice judgment, of 25 March 2013.

4. In the extreme case, a real estate company that limited itself to exchanging its properties could never distribute profits to its partners or obtain the necessary liquidity to meet expenses.

5. In the situation at hand, the Claimant did not resell the property but rather exchanged fraction UF for fraction C, and it is undeniable that in the case of exchange, the properties cannot be considered merchandise that is transacted in business dealings within the commercial object of the SP, as occurs in the case of purchase and sale.

6. Indeed, without sale, there cannot be resale, and exchange is not a sale.

7. As the Claimant correctly points out, Article 7 of the CIMT does not provide for exemption in exchange situations.

8. Tax benefits, including exemption from taxation, are, by nature, of an exceptional character, because they contain a derogation from the general principles governing taxation, since, in a sense, they derogate from the principles of contributory capacity, generality and equality of taxation, and only find justification in the protection of constitutionally relevant public interests, superior to those of taxation itself, whether of a political, economic, social or cultural character.

9. As correctly stated in the judgment of the STA no. 0529/12, of 28 November 2012: "Therefore, it is understood that the tax exemption, insofar as it contradicts the principles of generality and equality, is incapable of application to cases that have not been expressly contemplated in the benefit granted. Thus, in a strict interpretation of the provision (Article 11, no. 5 of the CIMT), it must be found that, in the case of exemption for properties acquired for resale, the law requires, without qualification, the effectuation of resale as an essential prerequisite of the exemption, without equating it with any other type of act or contract.

10. This has been the traditional understanding of our case law within the scope of the Code of Municipal Sisa Tax and Tax on Succession and Gifts, whose regime is, in this respect, very similar to the CIMT regime – cf. Judgments of 6(3/1985, rec. no. 2732, of 19.06.1985, appeal no. 002841, of 13.10.1993, rec. no. 15334, of 28.01.2008, rec. no. 642/08, of 07.03.2012 and appeal 01141/11.

11. The correlation between the tax benefit in question and the public interest that motivates it constitutes a material foundation sufficient to treat resale differently from exchange, so it is not materially unfounded, unreasonable or arbitrary a regime that results in the attribution of the tax benefit in cases of resale.

12. Indeed, the exemption for the acquisition of properties for resale is based on the fact that such properties, intended to integrate the exchangeable assets of the acquiring company, constitute "merchandise" of its respective activity.

13. Thus, the exemption has as its ultimate purpose the exclusion of high financial burdens which, although they constitute deductible costs for purposes of determining income subject to tax, would tend to be reflected in the final selling price of the immovable goods.

14. Furthermore, the law establishes a set of prerequisites of the IMT exemption regime for properties acquired for resale that constitute preventive mechanisms against its abusive use and the practice of tax evasion operations (Cf. Article 11, no. 5 of the CIMT), namely:

a) Only companies that are assessed for IRS or IRC purposes in the activity of buying properties for resale may benefit from this exemption (Article 7, no. 1);

b) The exemption regime applies exclusively to properties acquired for resale by companies, not applying to properties acquired for other purposes and subsequently allocated to exchangeable assets;

c) For the exemption to apply, it must be stated in the contract itself that the acquired property is intended for resale;

d) The resale must be carried out within a maximum period of three years, and the concept of resale presupposes the transfer of property of the immovable through the purchase and sale contract;

e) The resale effected within that period cannot have as its purpose new resale.

1. There is no right nor legitimately created expectation in the defense of this right now claimed, therefore all the allegations made in Articles 62 to 70 of the learned request for arbitral decision are not upheld.

2. The assessment complies with all prerequisites set forth in Article 77 of the General Tax Law (LGT).

3. Since there is no error by the services in the application of the law to the facts in question, there is no entitlement to payment of compensatory interest.

I.C Allegations

No allegations were presented.

II. CASE MANAGEMENT

1. The Tribunal is competent and is regularly constituted, in accordance with Articles 2, no. 1, subsection a), 5 and 6, all of the RJAT.

2. The parties have legal personality and capacity, are legitimate and are legally represented, in accordance with Articles 4 and 10 of the RJAT and Article 1 of Ordinance no. 112-A/2011, of 22 March.

3. There are no preliminary questions to be examined nor defects that would invalidate the proceedings.

4. It is now necessary to examine the merits of the claim.

III. THEMA DECIDENDUM

The issue in the present proceedings consists of determining whether the operation carried out meets or does not meet the legal prerequisites upon which the application of the resale exemption provided for in Article 7 of the CIMT depends.

IV. FACTUAL MATTERS

IV.1. Facts Found Proven

Before entering into the examination of the issues, it is necessary to present the factual matters relevant to their understanding and decision, which, having examined the documentary evidence and the administrative tax proceedings attached to the file and taking into account the facts alleged, is established as follows:

i. The Claimant is a company limited by quota shares which, in addition to other activities, engages in the activity of buying and selling immovable property, with CAE ....

ii. In the context of this activity, the Claimant acquired by public deed, on 15 September 2009, the autonomous fraction designated by the letter UF, intended for housing, of the urban property recorded in the cadastral register of the parish of ..., municipality of Cascais, under article ..., described in the ...th Land Registry Conservation Office of Cascais under number ..., for the price of € 400,000.00 (four hundred thousand euros).

iii. The purchase of the property and its respective IMT exemption was carried out on the condition of resale within three years or that a different purpose not be given to it.

iv. On the same day, 15 September 2009, the Claimant entered into an exchange deed which had as its object the aforementioned property.

v. The Claimant was subject to an internal inspection action, authorized by Service Order no. ..., issued by the Finance Management of Évora, focusing on the Municipal Tax on Property and Stamp Tax for the financial year 2009.

IV.2. Facts Found Not Proven

There are no relevant facts that have not been found proven.

IV.3. Justification of the Decision on Factual Matters

The determination of the factual matters was based on the administrative proceedings and the documents attached to the file.

V. APPLICATION OF LAW TO FACTS

Pursuant to Article 7 of the CIMT:

1 – Acquisitions of properties for resale are exempt from IMT, in accordance with the following article, provided that it is verified that the declaration provided for in Article 112 of the Code of Personal Income Tax (IRS) or in subsection a) of Article 109, no. 1 of the Code of Corporate Income Tax (IRC), as the case may be, has been filed prior to acquisition, relating to the exercise of the activity of buyer of properties for resale.

2 – The exemption provided for in the foregoing article does not prejudice the calculation and payment of the tax, in accordance with general provisions, unless it is recognized that the purchaser normally and habitually exercises the activity of buyer of properties for resale.

3 – For the purposes of the latter part of the foregoing article, the passive subject is considered to exercise the activity normally and habitually when it proves its exercise in the previous year by means of a certificate issued by the competent finance service, and it must always be stated in such certificate whether, in the previous year, any property was acquired for resale or any property previously acquired for that purpose was resold.

4 – When the property has been resold without being resold again for resale purposes, within a period of three years, and tax has been paid, it shall be cancelled by the head of finances, at the request of the interested party, accompanied by documentary evidence of the transaction.

Furthermore, pursuant to Article 11, no. 5, of the CIMT (expiration of exemptions), "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 have been given a different purpose or that they have not been resold within the period of three years or have been resold again for resale purposes."

The regime described is already provided with identical contours in Article 11, point 3 of the Code of Municipal Sisa Tax and Tax on Succession and Gifts ("Sisa Code"), according to which: "The following are exempt from Sisa: (...) 3. Acquisitions of properties for resale, in accordance with Article 13-A, provided that it is verified that the declaration provided for in Article 105 of the Code of Personal Income Tax (IRS) or in subsection a) of Article 94, no. 1 of the Code of Corporate Income Tax (IRC), as the case may be, has been filed prior to acquisition, relating to the exercise of the activity of buyer of properties for resale". The Sisa Code also provided (Article 16, point 1) that the exemption would expire as soon as it was verified that "different purposes were given to the properties acquired for resale (...)".

Having established the law, it is now necessary to address the facts that are relevant to the examination of the question of qualification of the operation carried out.

The acquisition, for € 400,000.00 (four hundred thousand euros), of the aforementioned fraction UF benefited, as mentioned, from the exemption provided for in Article 7 of the CIMT, because the properties were intended for resale.

On the same date as the public deed of purchase and sale, namely on 15 September 2009, the Claimant entered into an exchange deed, by means of which it transferred the acquired fraction, receiving in return another fraction, designated by the letter C, to which was equally attributed the value of € 400,000.00 (four hundred thousand euros).

It can be immediately concluded that the operations in question were not capable of generating any profit for the Claimant, since it transferred the fraction it had acquired for € 400,000.00 (four hundred thousand euros) and received in return another fraction to which was attributed the same value.

Notwithstanding that the file does not evidence other operations of the same nature, the fact is that, from this operation, it can be concluded that the exchange, although it may be capable of achieving the same objective as the sale, does not meet the prerequisites required by Article 7 of the CIMT.

Indeed, if the objective of the provision is to exempt resale operations carried out by companies that make such operations the exercise of their respective activity, it seems possible to conclude that resale has underlying a profit motive that was not verified in the operation carried out by the Claimant.

For exercising normally and habitually the activity of buying for resale implies a profit motive which, from the elements attached to the file, did not occur in the situation at hand.

The resale operation, inserted within the scope of a commercial activity and capable of enjoying a tax exemption, implies that the transfer reflects an increase in value which it is intended not be influenced by any hidden tax burden supported in the preceding acquisition.

This will be, among others, one of the reasons why the exemption was established in the acquisition of properties for resale, whose concept in Article 11, no. 3 of the Sisa Code, encompassed only the transfer of the right of ownership effected by a purchase and sale contract, as this is defined in Article 874 of the Civil Code.

Now, the purchase and sale contract, as results from the aforementioned Civil Code article, is translated into the transfer of ownership of a thing or right, against the payment of a price, and this, as has been established since ancient times, should be fixed in money.

Finally, it is added that the interpretation that sustains only the purchase and sale contract is the one that has been followed by case law, as shown in the judgments mentioned by the Tax Administration.

Having considered all of the above, since a different purpose was given to the property from that which sustains the exemption, it can be concluded that the same has expired, and there is no reason, for that reason, to censure, from the point of view of legality, the tax act practiced by the Tax Administration.

Given the sense of the decision, the examination of the remaining issues raised is rendered unnecessary, namely those concerning compensatory and indemnificatory interest.

VI. DECISION

In light of all the foregoing, it is decided to adjudge the present challenge as not upheld, both with respect to the annulment of the IMT assessment in question and with respect to the ancillary claim for condemnation of the Tax Administration to payment of compensatory interest.

The value of the case is fixed at € 23,678.11 (twenty-three thousand six hundred and seventy-eight euros and eleven cents), in accordance with Article 97-A, no. 1, a) of the Code of Administrative Tax Procedure (CPPT), applicable by virtue of subsections a) and b) of Article 29, no. 1 of the RJAT and no. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

The costs are fixed at € 1,224.00 in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, entirely at the charge of the Claimant, in accordance with Articles 12, no. 2, and 22, no. 4, both of the RJAT, and Article 4, no. 4, of the aforementioned Regulation.

Notice hereby given.

Lisbon, 1 June 2015

The Arbitrator

Paulo Lourenço