Process: 458/2015-T

Date: January 4, 2016

Tax Type: IMT

Source: Original CAAD Decision

Summary

This arbitral decision addresses Process 458/2015-T concerning the lapse of an IMT (Municipal Tax on Onerous Transfers of Real Property) exemption. The claimant, A... S.A., acquired 40 urban properties in Porto on January 28, 2011, for €100,000 with an IMT exemption under Article 7 of the IMT Code, declaring the properties were intended for resale. However, instead of reselling the properties directly, the company transferred its contractual position and subsequently sold the properties to a Closed Special Real Estate Investment Fund (E...) on June 16, 2011. Following a tax inspection (2014-2015), the Tax Authority determined the exemption had lapsed and assessed IMT of €309,692.54 plus compensatory interest of €48,804.15. The claimant challenged this assessment at CAAD, seeking complete annulment of the IMT liquidation. Subsidiarily, the claimant requested partial annulment arguing erroneous quantification (reducing IMT to €4,900) or, alternatively, annulment regarding five specific properties due to lack of proper substantiation (reducing IMT by €45,148.05). Additionally, the claimant sought compensation for expenses incurred from providing what it considered unjust security. The arbitral tribunal, constituted on October 1, 2015, under Decree-Law 10/2011 (RJAT), held a hearing on December 18, 2015. This case illustrates key issues in Portuguese tax law: the conditions for maintaining IMT exemptions for resale purposes, the consequences of failing to meet exemption requirements, procedural rights in tax arbitration, and remedies for undue guarantee costs.

Full Decision

ARBITRAL DECISION

The arbitrators Dr. Jorge Manuel Lopes de Sousa (arbitrator-president), Dr. Ricardo Marques Candeias and Prof. Dr. Maria Celeste Cardona, designated by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 01-10-2015, agree as follows:

1. Report

A…, S.A., NIPC …, hereinafter referred to as "Claimant", with registered office at Rua …, n.º …, … ..., came, under Decree-Law No. 10/2011, of 20 January, (Legal Regime of Arbitration in Tax Matters, hereinafter "LRAT"), to file a petition for the constitution of a collective arbitral tribunal, with a view to annulling the assessment of Municipal Tax on Onerous Transfers of Real Property (IMT), relating to the lapse of the exemption verified at the time of acquisition of several urban properties, from the parish of …, municipality of Porto, on 28-01-2011, in the amount of € 309,692.54 as IMT, and respective compensatory interest, in the amount of € 48,804.15.

As a subsidiary measure, the Claimant requests the partial annulment of the assessment, on the grounds of erroneous quantification of the taxable fact, reducing the IMT assessed to € 4,900.00 and, if not upheld, the annulment of the assessment relating to properties U-…, U-…, U-…, U-… and U-… should be annulled, for lack of substantiation, which corresponds to a reduction of € 45,148.05 of the IMT to be borne.

The Claimant further requests that, in any case, the Tax Authority and Customs Authority be ordered to pay compensation to the Claimant for the provision of unjust security, reimbursing it for the expenses incurred resulting from the issuance and maintenance in force of the security, on terms that shall be ascertained in execution of the arbitral decision.

The petition for constitution of the arbitral tribunal was accepted by the President of CAAD and notified to the TAX AUTHORITY AND CUSTOMS AUTHORITY on 04-08-2015.

Pursuant to the provisions of subparagraph a) of No. 2 of Article 6 and subparagraph b) of No. 1 of Article 11 of the LRAT, the Deontological Council designated the signatories as arbitrators, who communicated their acceptance of the assignment within the applicable period.

On 16-09-2015, the Parties were notified of such designation and did not manifest any intention to refuse the designation of the arbitrators, in accordance with the combined provisions of Article 11, No. 1, subparagraphs a) and b) of the LRAT and Articles 6 and 7 of the Code of Ethics.

Accordingly, in compliance with the provision of subparagraph c) of No. 1 of Article 11 of the LRAT, the collective arbitral tribunal was constituted on 01-10-2015.

The Tax Authority and Customs Authority responded defending the lack of merit of the petition for arbitral pronouncement.

On 18-12-2015 a hearing was held for the production of evidence and submissions.

The arbitral tribunal was regularly constituted and is competent.

The parties possess legal personality and capacity (Articles 4 and 10, No. 2, of the same statute and Article 1 of Ordinance No. 112-A/2011, of 22 March) and are duly represented.

The proceedings contain no defects.

2. Factual Matters

2.1. Proven Facts

The following facts are considered proven:

a) The Claimant was constituted on 04-03-1974 and has as its corporate purpose "construction and civil engineering, purchase and sale of real property assets, properties - resale of those acquired for that purpose and lease of real property assets";

b) Following Service Order OI2014… an inspection of the Claimant was carried out, which took place between 18-02-2014 and 08-01-2015.

c) In this inspection a Report of Tax Inspection was prepared, which is contained in the document submitted by the Tax Authority and Customs Authority, the content of which is given as reproduced, in which, among other things, the following is stated:

B - Municipal Tax on Onerous Transfers of Real Property (IMT)

  1. FACTS

1.1 - Urban Rehabilitation Contract of the Intervention Unit of B…

On 29.07.2009 a contract was concluded between the company "C…, SRU - …, SA", taxpayer No. …, and the entity inspected (which hereinafter we shall refer to by its commercial designation – A…), preceded by public tender, the Urban Rehabilitation Contract of the Intervention Unit of B….

Summarily, this contract constitutes its object (Art. 2) the execution of the Urban Rehabilitation Operations of that Block, in particular:

a) Interior Intervention - construction of a parking lot in the basement, an interior space of public access and a space in connection with plots 20 and 34, intended for commerce and/or services and/or facilities;

b) Peripheral Interventions - intended for the rehabilitation of the plots or part of plots, in a coordinated manner, so as to optimize the available areas, providing commercial, services and, primarily, housing areas.

Charged to A… the execution of the Rehabilitation Operations, under the terms and conditions established in the Terms of Reference, in the Strategic Document and in its Proposal (annexes to the Rehabilitation Contract), as well as the carrying out of a set of complementary actions, without which such execution is not legally possible, among which the constitution of horizontal property regime of the development corresponding to the Interior Intervention".

This "interior intervention", in accordance with the provisions of the Strategic Document for the Intervention Unit of B…, dated June 2007 and annexed to said Contract, covers part of the following plots defined in the same Document: 2, 3, 4, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 20, 22, 23, 27, 31, 32, 33, 34, 35, 36, 37, 40, 41 and 42.

With a view to the execution of the Urban Rehabilitation Operations, "C…, SRU" shall transfer to A… the fraction or future fractions corresponding to the parking lot, as well as the properties of which it may become owner (Art. 4).

1.2 - Deed of Purchase and Sale - (C… / A…)

By deed of Purchase and Sale of 28.01.2011, executed at the Notarial Office of D…, the company "C…, SRU", in execution of the Urban Rehabilitation Contract of the Intervention Unit of B… (point 1.1), sold to A… 40 urban properties of the said Block, identified on the attached map (MAP OF PROPERTIES ACQUIRED WITH IMT EXEMPTION) by parish and registration article, for the global price of € 100,000.00 (€ 2,500.00 each), in cash, plus the assets and rights in kind referred to in the same deed.

The second buyer purchaser, A…, declared that the said properties were intended for resale. In this way, with the necessary formal conditions observed, this transfer was exempt from IMT under the terms of Art. 7 of the respective Code.

1.3 - Closed Special Real Estate Investment Fund in Urban Rehabilitation – E…

On 16.06.2011 the Closed Special Real Estate Investment Fund in Urban Rehabilitation – E… was constituted (hereinafter referred to only as FUND), subscribed in its entirety by A…, to implement the rehabilitation project devised by "C…, SRU". This Fund was authorized by the CMVM on 22.12.2010.

1.4 - Agreement for Assignment of Contractual Position - (A… / FUND / C…)

On the same date of 16.06.2011 an Agreement for Assignment of Contractual Position was concluded between A…, the FUND and "C…, SRU", in which A… assigns to the FUND, on a gratuitous basis, its contractual position in the Urban Rehabilitation Contract of the Intervention Unit of B… (see point 1.1).

In this same Agreement "C…, SRU" gives its full consent to the above-mentioned assignment.

1.5 - Deed of Purchase and Sale - (A… / FUND)

Also on the same day 16.06.2011, by deed of purchase and sale executed at the Office of Notary F…, A… sells to the FUND, for the global price of € 144,500.00, the same 40 properties that had been acquired from "C…, SRU" (see point 1.2).

In this transfer the competent IMT was assessed.

1.6 - Work Contract - (FUND / A…)

Still on the date of 16.06.2011 a Work Contract was concluded between the FUND (constituted on the same date) and A… for the execution of the work "Construction of Parking Lot", to be erected in a fraction or fractions of the urban properties acquired by A… from "C…, SRU" and subsequently sold to the FUND (see points 1.2 and 1.5), under the terms of the program of urban rehabilitation operations defined in the Urban Rehabilitation Contract to which we refer in point 1.1 above.

Point B of the Recitals to this Work Contract states the following: On the date of acquisition of the urban properties the then owner and now Contractor (A…) had already begun the construction on them of a parking lot, which is integrated in the "Interior Intervention" of the program of urban rehabilitation operations, envisaged in the Urban Rehabilitation Contract for the Performance of Urban Rehabilitation Operations in the Intervention Unit in B… which was launched by C…, SRU.

And point C of the same Recitals: Under the said Urban Rehabilitation Contract, this parking lot will correspond to a fraction which will result from the constitution in horizontal property regime of the development corresponding to the "Interior Intervention".

It continues at point F: The Owner of the Work (the FUND) intends to complete the construction of the mentioned parking lot, under the terms and conditions referred to in the above Recitals and subsequently to proceed with its operation.

Relevantly, the Contract states in its Clause 11, No. 1, that the contractor (A…) undertakes to execute all work constituting the object of this contract by 15 June 2011, that is, the date prior to the date of constitution of the FUND, the contracting owner of the work.

The global price of the Work was fixed at € 5,000,000.00, to be paid by monthly installments, with its amount determined by monthly measurements (clause 13a).

1.7 - INVOICING OF A… TO THE FUND

In the execution of the Work Contract referred to in point 1.6 above, A… invoiced to the FUND:

  • Invoice No. 22-000105, of 16.06.2011, in the amount of € 4,500,000.00 (VAT due by the purchaser), for the Work "construction of the parking lot of …", supported by measurement report No. 1, of June 2011;

  • Invoice No. 22-000155, of 31.07.2011, in the amount of € 500,000.00 (VAT due by the purchaser), for the Work "construction of the parking lot of …", supported by measurement report No. 2, of July 2011.

In the accounting of A… we verified the recording of invoices issued by subcontractors for work performed in the execution of this work, of which we refer as examples:

1.8 - Constitution of Horizontal Property of the Property of …

By deed of 29.12.2011, executed at the Notarial Office of D…, the FUND constituted, in the horizontal property regime, the property situated in the block (of …) bounded by Rua …, Rua …, Praça … and Largo …, parish of …, municipality of Porto.

In the respective deed (at folio 63 of book 262) the following can be read: by this deed, and as a result of the joint rehabilitation of all properties in this deed identified and in accordance with what is envisaged in the Strategic Document of the Intervention Unit of B…, approved by resolution of the Board of Administration of C… on 28.07.2007, they proceed to the constitution in the horizontal property regime of the property which will have the following configuration...

The new property resulting from this constitution was declared for registration in the respective urban property register on 11.01.2012. Consequently, the registration articles of the properties contained in items 1 to 18 and 25 to 40 of the deeds of purchase and sale of 28.01.2011 (sale by C… to A…) and 16.06.2011 (sale by A… to the FUND), namely articles nos. …, …, …, …, …, … …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, … and …, respectively, all from the parish of …, municipality of Porto, were eliminated and gave rise to the urban property, in horizontal property regime, registered under article No. …, fractions … to ….

The parking lot to which reference is made above constitutes fraction A of this new property registered in horizontal property regime.

The properties contained in items 19 to 24 of the deeds of purchase and sale referred to, corresponding to fractions D to I of the property registered in the urban property register of the parish of … under article No. …, did not give rise to a new registration entry, to the extent that they did not undergo alterations that would necessitate such registration.

All this information related to the registration articles of the properties in question is evidenced in the attached map (MAP OF PROPERTIES ACQUIRED WITH IMT EXEMPTION)

  1. FISCAL TREATMENT OF THE ABOVE OPERATIONS IN THE LEGAL SPHERE OF A…

Under analysis in this Report is the lapse of the IMT exemption by the acquisition of properties for resale, envisaged in Art. 7 of the respective Code, by A…, through the deed of purchase and sale of 28.01.2011 (point 1.2 above).

In this regard, No. 5 of Art. 11 of the IMT Code provides:

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 the same have not been resold within the period of three years or were resold again for resale.

It is a fact that the properties in question were resold within the period prescribed by law. In this context, resale can only be understood as the transfer of the goods in the state in which they were acquired, that is, without having undergone a significant or substantial transformation.

The main issue is in fact and relates to whether a substantial alteration of the properties, the acquisition of which was the subject of IMT exemption, occurred, which determined the deviation of the respective purpose, resulting in the lapse of the exemption under the said provision.

From the combined analysis of the operations reported in point 1 above, it is concluded that there were indeed significant or substantial alterations in the majority of the properties acquired by A… with IMT exemption. Otherwise, as follows:

– A… concluded with "C…, SRU" an Urban Rehabilitation Contract of the Intervention Unit of B…, for the execution of the rehabilitation operations of that block (point 1.1 above);

In these operations was integrated an "interior intervention", in accordance with the provisions of the Strategic Document for the Intervention Unit of B…, which included the construction of a parking lot, an interior space of public access and a connecting space. In light of the Strategic Document, this "interior intervention" would cover plots 2, 3, 4, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 20, 22, 23, 27, 31, 32, 33, 34, 35, 36, 37, 40, 41 and 42;

– A… acquired on 28.01.2011 from "C…, SRU", under the said Rehabilitation Contract, 40 properties, benefiting from IMT exemption because they were intended for resale (1.2 above);

– However, following the acquisition of the properties, it initiated works for the construction of the parking lot, as can be evidenced by the invoices issued by the subcontractors hired (see point 1.7 above), which extended into the 1st semester of 2011;

– On 16.06.2011 several operations took place simultaneously:

– the Closed Special Real Estate Investment Fund in Urban Rehabilitation E… (FUND) was constituted, subscribed in its entirety by A… (point 1.3 above);

– A… assigned to the FUND its position in the Urban Rehabilitation Contract of the Intervention Unit of B… which it had concluded with "C…, SRU" (point 1.4 above);

– the properties acquired from "C…, SRU" were sold to the FUND (point 1.5 above);

– A… concluded a Work Contract with the FUND for the "construction of the parking lot" of …, in whose recitals it is stated that construction of the parking lot had already begun, integrated in the "interior intervention" of the urban rehabilitation program of the intervention unit of …, the deadline for completion of which was set at 15.06.2011, a date prior to the execution of the work contract (point 1.6 above).

– The construction works of the parking lot, performed between the date of acquisition of the said properties and the date of sale of the same to the FUND, were invoiced by A… to the FUND on 16.06.2011 (date of constitution of the FUND and of the work contract for the construction of the parking lot) and 31.07.2011 (see point 1.7 above).

It is clearly evidenced that in the period between the deeds of acquisition and sale of the properties by A…, the construction of the parking lot envisaged in the Strategic Document for the Intervention Unit of B… annexed to the said Rehabilitation Contract, as well as in the Work Contract concluded with the FUND, was carried out.

The construction of this parking lot resulted in a substantial alteration of the majority of the properties comprising B…, the acquisition of which was the subject of IMT exemption under Art. 7 of the respective Code, which determined the deviation of the respective purpose, resulting in the lapse of the exemption in accordance with No. 5 of Art. 11 of the same Code.

  1. IDENTIFICATION OF PROPERTIES THAT LOST THE RIGHT TO IMT EXEMPTION

Based on the deed of acquisition of the properties in question, of 28.01.2011, we prepared the attached map (MAP OF PROPERTIES ACQUIRED WITH IMT EXEMPTION) which evidences the relationship between the same properties and the plots of the Intervention Unit of B… (UIB…).

It has been referred to above that the "Interior Intervention", where the construction of the "parking lot is integrated, in accordance with the provisions of the Strategic Document for the Intervention Unit of B…, covers part of the following plots defined in the same Document: 2, 3, 4, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 20, 22, 23, 27, 31, 32, 33, 34, 35, 36, 37, 40, 41 and 42.

Given the relationship between the plots covered by said "interior intervention" and the properties acquired, it is concluded that only the properties registered under articles …, … and … were not subject to intervention, to the extent that they formed part of plots 1, 38 and 39, outside the scope of that intervention.

As has been referred to above, regarding the properties corresponding to fractions D to I of the property registered in the urban property register of the parish of … under article …, there is no evidence that they were subject to intervention, to the extent that they did not undergo alterations that would necessitate new registration in the register.

In conclusion, the loss of exemption relates to the properties registered in the urban property register of the parish of … under articles …, …, …, …, … …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, …, … and ….

The taxpayer should request the respective assessment, under the terms of Art. 34 of the IMT Code. Since the assessment was not requested under the said terms, the Tax Authority shall promote the official assessment of the IMT that is shown to be due, under the terms of Art. 38 of the IMT Code.

The amount that will serve as the basis for this assessment shall correspond to the sum: of the taxable property values of the properties in relation to which the exemption lapsed, as of the date of the acquisition deed, or resulting from subsequent valuation due to absence of taxable property value, and of the acquisition values when superior to the taxable property value, evidenced on the attached map (MAP OF PROPERTIES ACQUIRED WITH IMT EXEMPTION), in a total of € 4,761,924.10.

d) On 18-03-2015, the Tax Authority and Customs Authority prepared the assessment of IMT in the total amount of € 309,692.54 and compensatory interest in the amount of € 48,804.15 (document attached with the petition for arbitral pronouncement, the content of which is given as reproduced);

e) On 29-07-2009, C… Urban Rehabilitation Company ("C…, SRU") concluded with the Claimant the contract contained in document No. 7 attached with the petition for arbitral pronouncement, the content of which is given as reproduced, relating to the performance by the Claimant of urban rehabilitation works in B…, in which, among other things, it was envisaged, in Article 4, that «with a view to the execution of the Urban Rehabilitation Operations, C…, SRU shall transfer to the Private Partner the fraction or fractions corresponding to the parking lot, identified in subparagraph a) of the nos of Article 2", as well as the properties of which it may become owner, in exchange for the following considerations(...)»;

f) Since October 2009, the properties referred to belonged to C…, SRU and the Claimant was carrying out the construction work of the parking lot of B… on them, in the capacity of contractor, having for that purpose concluded a subcontract and a supply contract subcontract and requested from the City Council of Porto, on 17-02-2010, a license for the installation of a tower crane «with a view to the construction of the Parking Lot of …, the execution of which is being carried out by company A…, S.A.» and obtained, on 06-08-2010, the permit for the occupation of public space with fencing (documents nos. 1 to 5 attached with the petition for arbitral pronouncement, the contents of which are given as reproduced);

g) In compliance with said Article 4 of the urban rehabilitation contract, on 28-01-2011, the Claimant acquired 40 urban properties at the price of € 2,500.00 each property, with IMT exemption, having declared that they were intended for resale, under the terms of Article 7 of the IMT Code (document No. 8 attached with the petition for arbitral pronouncement, the content of which is given as reproduced);

h) At the date of acquisition of the property, in the majority of the registration articles acquired the said parking lot was already under construction, which would be divided into autonomous fractions and constitute horizontal property regime (statements of witnesses I… and J…);

i) On 16-06-2011, an agreement for assignment of the Claimant's contractual position in the urban rehabilitation contract to the Closed Special Real Estate Investment Fund in Urban Rehabilitation E… (FUND) was concluded between the Claimant, C… SRU and the Closed Special Real Estate Investment Fund in Urban Rehabilitation E… (FUND) (document No. 9 attached with the petition for arbitral pronouncement, the content of which is given as reproduced);

j) On the same date, 16-06-2011, the Claimant sold to the Fund the same 40 properties that had been acquired from C… SRU, a transfer in which IMT was assessed and paid (document No. 10 attached with the petition for arbitral pronouncement, the content of which is given as reproduced);

k) Also on 16-06-2011, a work contract was concluded between the Claimant and the Fund for the execution of the work of construction of the Parking Lot in part or parts of the properties sold to the Fund (document No. 11 attached with the petition for arbitral pronouncement, the content of which is given as reproduced)

l) When the properties were sold to the Fund the construction works of the parking lot were already advanced, but not yet completed, which only happened in August 2011 (statements of witnesses I… and J…);

m) On 16-07-2015, the Claimant provided the bank guarantee contained in document No. 13 attached with the petition for arbitral pronouncement, the content of which is given as reproduced, in the amount of € 454,789.10, to suspend the fiscal execution No. …2015… instituted for collection of the amounts assessed, referred to above;

n) On 20-07-2015, the Claimant filed the petition for arbitral pronouncement which gave rise to the present proceedings.

2.2. Reasoning of the Decision on Factual Matters

The facts were given as proven based on the documents attached with the petition for arbitral pronouncement and by the Tax Authority and Customs Authority and on the testimonial evidence regarding the performance of the works.

The witnesses examined appeared to testify with impartiality and with personal knowledge of the facts they referred to.

2.3. Unproven Facts

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

3. Legal Matters

On 28-01-2011, the company "C…, SRU", in execution of the Urban Rehabilitation Contract of the Intervention Unit of B… (point 1.1), sold to the Claimant 40 urban properties of the said Block, for the global price of € 100,000.00 (€ 2,500.00 each), in cash, plus the assets and rights in kind referred to in the same deed.

The Claimant declared in the deed that the said properties were intended for resale, the transfer being exempt from IMT under the terms of Article 7 of the Municipal Tax Code on Onerous Transfers of Real Property (MTCTR).

No. 5 of Article 11 of the IMT Code establishes 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 have been given a different purpose or that they have not been resold within the period of three years or were resold again for resale».

The said properties were resold on 16-06-2011 to the Closed Special Real Estate Investment Fund in Urban Rehabilitation – E…, whereby the resale occurred within the three-year period referred to in No. 5 of Article 11.

However, the Tax Authority and Customs Authority understood, in summary, that

– «resale can only be understood as the transfer of the goods in the state in which they were acquired, that is, without having undergone a significant or substantial transformation» «which determined the deviation of the respective purpose»;

– in the case at hand, «there were significant or substantial alterations in the majority of the properties acquired by A… with IMT exemption»;

– in the period between the deeds of acquisition and sale of the properties by A…, the construction of the parking lot envisaged in the Strategic Document for the Intervention Unit of B… annexed to the said Rehabilitation Contract, as well as in the Work Contract concluded with the FUND, was carried out;

– «the construction of this parking lot resulted in a substantial alteration of the majority of the properties comprising B…, the acquisition of which was the subject of IMT exemption under Art. 7 of the respective Code, which determined the deviation of the respective purpose, resulting in the lapse of the exemption in accordance with No. 5 of Art. 11 of the same Code».

The essential question which is the subject of these proceedings is whether there was an alteration of the said properties that may be considered as giving them a «different purpose», for purposes of No. 5 of Article 11 of the MTCTR.

The evidence produced is unequivocal to the effect that the construction works of the parking lot began before the acquisition of the properties by the Claimant and extended after the sale of the same to the Closed Special Real Estate Investment Fund in Urban Rehabilitation – E….

There is, therefore, no alteration whatsoever of the purpose of the properties acquired between the date of acquisition and resale, as the properties were always intended for the construction of the parking lot, with the works extending from before the acquisition until after the sale.

On the other hand, as understood by the Full Court of the Supreme Administrative Court in the judgment establishing jurisprudential uniformity No. 2/2015, of 17-09-2014, rendered in case No. 01626/13 ([1]),

For purposes of lapse of the exemption of municipal tax on onerous transfers of real property (IMT) deriving from the combination of the provisions contained in Articles 7 and 11 No. 5 of the MTCTR (exemption for acquisition of properties for resale), it does not matter whether or not the property acquired is resold in the precise state in which it was acquired.

What matters is that there be no metamorphosis or substantial alteration of the property that was acquired for resale.

Therefore if the property acquired consists of a plot of land with a residential building already under construction or remodeling according to a determined approved project (whether in rough form, or in an advanced phase of construction/remodeling), the expression for resale does not require that the property be sold as it existed at the moment of acquisition, rather, it admits the possibility of the acquirer performing all the work necessary for the completion of such construction, so as to finish it, license it for the said purpose, constitute the horizontal property regime and dispose of the respective autonomous fractions.

In the case at hand, one is in a situation to which this jurisprudence is applicable, and by a fortiori argument, since between the moment of acquisition and the resale of the properties by the Claimant only the works that were already being performed continued, concretizing and maintaining the purpose that the property already had when it was acquired.

Therefore, it must be concluded that the IMT assessment, which is based on the lapse of the exemption by hypothetical alteration of the purpose of the property, is deficient due to a violation of law, by error as to the factual premises, which underlay the erroneous application of Article 11, No. 5, of the MTCTR.

The assessment of compensatory interest is based on the IMT assessment, whereby it suffers from the same illegality.

This deficiency due to violation of law justifies the annulment of the assessments of IMT and compensatory interest impugned (Article 135, No. 1, of the Administrative Procedure Code of 1991, in force at the time the assessments were made).

Therefore, the principal request formulated by the Claimant is upheld, whereby the examination of the subsidiary requests is rendered moot.

4. Compensation for Unjust Security

The Claimant further formulates a request for compensation for unjust security, «reimbursing it for the expenses incurred resulting from the issuance and maintenance in force of the security, on terms that shall be ascertained in execution of the arbitral decision.».

As results from item M) of the factual matters established, on 16-07-2015, the Claimant provided the bank guarantee contained in document No. 13, attached with the petition for arbitral pronouncement, to suspend the fiscal execution No. …2015…, which was instituted for collection of the amounts assessed by the acts which are the subject of the present proceedings.

In accordance with the provision in subparagraph b) of Article 24 of the LRAT the arbitral decision on the merits of the claim for which no appeal or impugnation is permitted binds the tax administration from the end of the period provided for appeal or impugnation, and the latter must, in the precise terms of the proceeding of the arbitral decision in favor of the taxpayer and until the end of the period provided for spontaneous performance of the judgments of the judicial tax courts, «restore the situation that would have existed if the tax act which is the subject of the arbitral decision had not been performed, adopting the acts and operations necessary for that purpose».

In the legislative authorization on which the Government based itself for approving the LRAT, granted by Article 124 of Law No. 3-B/2010, of 28 April, it is proclaimed, as a primary directive for the institution of arbitration as an alternative form of jurisdictional resolution of conflicts in tax matters, that «the arbitration procedure in tax matters must constitute an alternative procedural means to the procedure for judicial impugnation and to the action for the recognition of a right or legitimate interest in tax matters».

Although Article 2, No. 1, subparagraphs a) and b), of the LRAT uses the expression «declaration of illegality» to define the competence of the arbitral tribunals operating in CAAD and does not make reference to constitutive (annulling) and condemning decisions, it should be understood, in harmony with said legislative authorization, that there are encompassed within its competences the powers that in a judicial impugnation process are attributed to the tax courts with regard to acts whose examination of legality falls within their competences.

Although the judicial impugnation process is essentially a process of mere annulment (Articles 99 and 124 of the CPPT), a judgment condemning the tax administration to pay indemnificatory interest and compensation for unjust security may be rendered therein.

In fact, although there is no express provision in that sense, it has been peacefully understood in the tax courts, since the entry into force of the codes of the fiscal reform of 1958-1965, that a request for condemnation to the payment of indemnificatory interest may be cumulated in a judicial impugnation process with the request for annulment or for declaration of nullity or non-existence of the act, by these codes referring to that the right to indemnificatory interest arises when, in an administrative review or judicial process, the administration is convinced that there was error of fact imputable to its services. This regime was subsequently generalized in the Code of Tax Procedure, which established in No. 1 of its Article 24 that «there shall be entitlement to indemnificatory interest in favor of the taxpayer when, in an administrative review or judicial process, it is determined that there was error imputable to its services», later, in the LGT, in whose Article 43, No. 1, it is established that «indemnificatory interest is due when it is determined, in an administrative review or judicial impugnation, that there was error imputable to the services resulting in payment of the tax debt in an amount superior to that legally due» and finally, in the CPPT in which it was established, in No. 2 of Article 61 (to which corresponds No. 4 in the wording given by Law No. 55-A/2010, of 31 December), that «if the decision that recognized the entitlement to indemnificatory interest is judicial, the payment period is counted from the beginning of the period of its spontaneous performance».

Regarding the request for condemnation to the payment of compensation for provision of unjust security, Article 171 of the CPPT establishes that «compensation in case of bank guarantee or equivalent unjustly provided shall be requested in the process in which the legality of the debt being executed is disputed» and that «compensation must be requested in the administrative review, impugnation or appeal or, if its ground is subsequent, within 30 days after its occurrence».

Thus, it is unequivocal that the judicial impugnation process encompasses the possibility of condemnation to the payment of unjust security and is in principle even the appropriate procedural means for formulating such request, which is justified by evident reasons of procedural economy, as the right to compensation for unjust security depends on what is decided regarding the legality or illegality of the assessment act.

The petition for constitution of the arbitral tribunal and for arbitral pronouncement has as its corollary that it shall now be in the arbitration process that the «legality of the debt being executed» will be discussed, whereby, as results from the express content of said No. 1 of the said Article 171 of the CPPT, the arbitration process is also the appropriate one for examining the request for compensation for unjust security.

Moreover, the cumulation of requests relating to the same tax act is implicitly presupposed in Article 3 of the LRAT, in speaking of «cumulation of requests even if relating to different acts», which suggests that the cumulation of requests is also possible regarding the same tax act and the requests for compensation for indemnificatory interest and for condemnation for unjust security are susceptible to being covered by such formula, whereby an interpretation in this sense has, at least, the minimum verbal correspondence required by No. 2 of Article 9 of the Civil Code.

The regime of the right to compensation for unjust security is contained in Article 52 of the LGT, which establishes the following:

Article 53

Security in Case of Unjust Provision

  1. The debtor who, to suspend execution, provides bank guarantee or equivalent shall be indemnified wholly or partially for the losses resulting from its provision, if he has maintained it for a period exceeding three years in proportion to the success in administrative appeal, impugnation or opposition to execution which have as their object the debt guaranteed.

  2. The period referred to in the above number does not apply when it is verified, in an administrative review or judicial impugnation, that there was error imputable to the services in the assessment of the tax.

  3. The indemnification referred to in No. 1 has as its maximum limit the amount resulting from the application to the guaranteed amount of the rate of indemnificatory interest provided for in the present law and may be requested in the administrative review or judicial impugnation process itself, or autonomously.

  4. Indemnification for provision of unjust security shall be paid by deduction from the tax revenue of the year in which payment is made.

In the case at hand, it is manifest that the error underlying the assessments of IMT and compensatory interest is imputable to the Tax Authority and Customs Authority, as the assessments were of its own initiative and the Claimant in no way contributed to such error being made.

Therefore, the Claimant is entitled to indemnification for the security provided.

As there are no elements that permit determining the amount of the indemnification, the condemnation must be made with reference to what shall be assessed in execution of the present decision (Articles 609, No. 2, of the Code of Civil Procedure and 565 of the Civil Code, applicable in the terms of Article 2, subparagraph d) of the LGT).

5. Decision

Accordingly, the arbitrators of this Arbitral Tribunal agree in:

– Finding that the request for declaration of illegality of the assessment of € 309,692.54 as IMT, and respective compensatory interest, in the amount of € 48,804.15, is upheld;

– Annulling the referred assessments;

– Finding that the request for recognition of the Claimant's right to compensation for unjust security is upheld and ordering the Tax Authority and Customs Authority to pay to the Claimant the indemnification that shall be assessed in execution of the present decision;

– Finding that the examination of the subsidiary requests is moot.

6. Value of the Case

In accordance with the provision in Article 306, No. 2, of the CPC and 97-A, No. 1, subparagraph a), of the CPPT and 3, No. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at € 358,494.69.

7. Costs

Pursuant to Article 22, No. 4, of the LRAT, the amount of costs is fixed at € 6,120.00, pursuant to Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, charged to the Tax Authority and Customs Authority.

Lisbon, 04-01-2016

The Arbitrators

(Jorge Lopes de Sousa)

(Ricardo Marques Candeias)

(Maria Celeste Cardona)

[1] Published in the Official Gazette, I Series, of 18-05-2015.

Frequently Asked Questions

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What happens when an IMT exemption expires after the acquisition of urban properties in Portugal?
When an IMT exemption expires (lapses) after the acquisition of urban properties in Portugal, the Tax Authority will assess the IMT that would have been originally due on the acquisition. In this case, properties acquired with exemption under Article 7 of the IMT Code (for resale purposes) became subject to IMT when the exemption conditions were not fulfilled. The taxpayer must pay the assessed IMT plus compensatory interest calculated from the original acquisition date. The lapse typically occurs when the declared purpose for the exemption (such as resale) is not accomplished within the legal timeframe or when the property is used differently than declared.
Can a taxpayer challenge an IMT liquidation resulting from the expiry of a tax exemption at CAAD?
Yes, a taxpayer can challenge an IMT liquidation resulting from the expiry of a tax exemption at CAAD (Centro de Arbitragem Administrativa). Under Decree-Law No. 10/2011 (Legal Regime of Arbitration in Tax Matters - RJAT), taxpayers have the right to file a petition for constitution of an arbitral tribunal to contest tax assessments, including those arising from lapsed exemptions. The challenge can seek complete annulment of the assessment, partial annulment based on erroneous quantification, or annulment of specific property assessments due to insufficient legal reasoning (falta de fundamentação). Taxpayers can also request compensation for unjust security provision as part of the arbitral proceedings.
What is the legal basis for claiming compensation for an undue guarantee in Portuguese tax arbitration?
The legal basis for claiming compensation for an undue guarantee in Portuguese tax arbitration is found in the RJAT (Legal Regime of Arbitration in Tax Matters) and general principles of administrative law. When a taxpayer is required to provide security (bank guarantee or other collateral) to suspend tax collection during an appeal, and the arbitral tribunal ultimately rules in favor of the taxpayer (annulling the assessment), the security is considered unjust. The taxpayer can request reimbursement of all expenses incurred from issuing and maintaining the guarantee, including bank fees, commissions, and other related costs. This compensation claim can be made directly in the arbitration petition, with the specific amounts to be determined during execution of the favorable arbitral decision.
How is IMT calculated when the exemption lapses on multiple urban properties acquired in a single transaction?
When an IMT exemption lapses on multiple urban properties acquired in a single transaction, the IMT is calculated by applying the applicable tax rates to each property's acquisition value. In this case, 40 urban properties were acquired for a global price of €100,000 (€2,500 per property). The Tax Authority must determine the taxable value for each property (which may be the acquisition price or the higher patrimonial tax value - valor patrimonial tributário) and apply the progressive IMT rates established in the IMT Code based on the property type and value. The total IMT assessed was €309,692.54, suggesting the taxable base exceeded the declared acquisition values, likely calculated using the patrimonial tax values of the properties. Each property is assessed individually, though acquired in one deed.
What are the grounds for partial annulment of an IMT assessment due to insufficient legal reasoning (falta de fundamentação)?
The grounds for partial annulment of an IMT assessment due to insufficient legal reasoning (falta de fundamentação) include the Tax Authority's failure to adequately explain and justify the assessment basis for specific properties. In Portuguese administrative law, all tax assessments must be properly substantiated, explaining the legal basis, calculation methodology, and specific facts supporting the taxation. If the Tax Authority fails to provide sufficient reasoning for certain properties within a multiple-property assessment, the taxpayer can request partial annulment affecting only those insufficiently substantiated properties. In this case, the claimant identified five specific properties (U-...) where the assessment allegedly lacked proper substantiation, seeking a reduction of €45,148.05. This ground respects the fundamental right to be informed and the requirement of administrative transparency in tax proceedings.