Summary
Full Decision
ARBITRAL DECISION
1. Report
On 20-09-2018, the joint-stock company A..., S.A., legal entity no. ..., in its capacity as sole participant of the CLOSED REAL ESTATE INVESTMENT FUND B... (LIQUIDATED), with the tax identification number ..., both with registered office in ..., ..., ..., room ..., ...-... Lisbon, hereinafter referred to as the Claimant, submitted to the Administrative Arbitration Centre (CAAD) a request for constitution of an arbitral tribunal with a view to declaring the illegality of the act of liquidation of Corporate Income Tax (IRC) no. 2018 ... and no. 2018 ... and the liquidation statements and interest no. 2018 ... and no. 2018 ..., relating to the tax periods 2013 and 2014, in the total amount of €194,799.98.
The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD on 21-09-2018 and notified to the Respondent on the same date.
In accordance with and for the purposes of the provisions in no. 2 of article 6 of the RJAT, by decision of the President of the Deontological Council, duly communicated to the parties, within the legally applicable periods, the arbitrators of the Collective Tribunal were appointed on 12-11-2018, which was thus constituted: José Baeta de Queiroz, President Arbitrator and auxiliary arbitrators Suzana Fernandes Costa and Paulo Jorge Nogueira da Costa, who communicated to the Deontological Council of the Administrative Arbitration Centre their acceptance of the assignment within the legally stipulated period.
Thus, in accordance with the provision in subparagraph c), of no. 1, of article 11 of the RJAT, the Arbitral Tribunal was constituted on 03-12-2018.
On 04-12-2018, an order was issued instructing the notification of the Respondent to, within a period of 30 days, file a response and, if it so wished, request the production of additional evidence and send to the arbitral tribunal a copy of the administrative file within the period for filing the response.
On 22-01-2019, the Respondent filed its response and on 23-01-2019 an order was issued dispensing with the meeting provided for in article 18 of the Legal Regime of Tax Arbitration (RJAT), since no request for production of additional evidence was made, nor was any matter raised that is unrelated to the substantive aspects of the case that would warrant discussion. In the same order, the parties were also invited to submit written arguments, if they so wished, within a successive period of ten days, the Respondent's period to be counted from notification of the Claimant's arguments. It was further requested that the documents be sent in Word format.
On 21-02-2019, the Respondent filed the administrative file with the case record. On the same date, the Respondent stated in the case record that it would not present arguments and that it considered the arguments presented in its response to be fully reproduced.
The Claimant chose not to submit arguments.
On 25-02-2019, an order was issued designating 03-05-2019 as the date for the pronouncement of the arbitral decision, requesting the submission of the documents produced in editable Word format, and warning the Claimant to comply with the provision of article 4 no. 3 of the Regulation of Costs in Tax Arbitration Proceedings. On 03-05-2019 an order was issued postponing to 31-06-2019 the pronouncement of the decision.
On 20-03-2019, the Claimant filed with the case record the substitution of representation in favor of Lawyers Messrs. C..., D... and E....
2. Sanitation
The arbitral tribunal is competent and is regularly constituted.
The parties possess legal personality and capacity, are legitimate and are regularly represented (articles 4 and 10 nos. 1 and 2 of the RJAT and article 1 of Ordinance no. 112-A/2011 of 22 March).
The arbitral request is timely, in accordance with article 10 no. 1 subparagraph a) of Decree-Law no. 10/2011 of 20 January and article 102 no. 1 subparagraph a) of the Code of Tax Procedure and Process (CPPT).
The case does not suffer from nullities and no preliminary questions have been raised, nor are there any, of official knowledge, that prevent the appreciation of the merits of the case.
3. Position of the Parties
The Claimant begins by stating that the CLOSED REAL ESTATE INVESTMENT FUND B... (LIQUIDATED) was, at the time of the facts, a closed real estate investment fund of full distribution, constituted by private subscription, in accordance with and under the Legal Regime of Real Estate Investment Funds (RJFII).
According to the Claimant, the Fund was constituted on 13-07-2016, having commenced activities on 28-07-2016, with a planned duration of 5 years, and that the administration, management and representation of the Fund were the responsibility of F..., SA, while the functions of depositary of the fund were assumed by G..., SA, which had custody of all movable assets, with all fund investments being made through this bank.
In accordance with the Claimant, the corporate purpose of the Fund consisted in achieving, from a medium and long-term perspective, an increasing appreciation of capital, through the constitution and management of a portfolio of real estate characterized as "Retail Parks" located outside urban centers and within Portuguese territory.
The Claimant alleges that in pursuit of its objective, the Fund acquired two "Retail Parks", one located in ... and another in ..., both real estates constituted in full ownership with divisions susceptible to independent use.
The Claimant alludes to the fact that on 23-09-2012, the real estate located in ... was destroyed by a fire that devastated it almost entirely, having caused substantial losses to the Fund.
The Claimant states that following the deliberation of the liquidation of the Fund, F... requested from the Tax Authority, in January 2016, the conduct of a general scope tax inspection for the years 2013 and 2014, with the inspection action commencing on 15-06-2016.
Following this inspection, the Claimant indicates that the Fund was notified of the inspection report on 14-05-2018, and of the additional IRC liquidations and interest liquidation statements on 22-05-2018, with an IRC amount in arrears of €171,823.17 being determined, relating to real estate income.
The Claimant states that the real estate income obtained by the Fund came from the two real estates, one located in ... and the other located in ..., and resulted from the payment of rents by merchants with whom the Fund entered into space use contracts.
According to the Claimant's position, the Tax Authority, in the inspection, considered that the rents received should have been considered and not those recorded in accounts, that regarding deductible charges, only those that were actually paid should be considered, that regarding stores that produced no income, no charges should be deducted, and the deduction of charges should be limited to the extent of the income from each store. The Tax Authority also did not accept, according to the Claimant, adjustments for outstanding debts as they did not fit within subparagraph a) of no. 6 of article 22 of the Tax Benefits Statute (EBF), and considered that charges relating to technical consultancy do not form part of the concept of maintenance and conservation expenses, and should not be deducted.
The Claimant further alleges that, as for 2014, the Tax Authority added the amount of €128,135.29 to the income indicated by the Fund, corresponding to net receipts from H..., I... and J....
The Claimant does not agree with the Tax Authority's position of considering that the amounts determined as real estate income result from rents actually received in each of the years, as well as from charges for insurance, Municipal Real Estate Tax (IMI) and conservation of stores that generated income, based on the area occupied.
And for the Claimant, the inspection report is not properly substantiated.
The Claimant alleges that it proceeded to determine the real estate income of the Fund on the basis of relevant accounting income and not actual payments and receipts, citing the basic principle contained in no. 2 of article 3 of the IRC Code, that is, that taxation should be based on the values expressed in the accounts of IRC taxpayers, and nothing to the contrary is mentioned in the tax regime of FII regarding real estate income.
As for the double taxation of rents received, the Claimant mentions that rents that, although having been received in 2013 or 2014, relate to the year 2012 or earlier and have already been subject to taxation should have been disregarded as taxed rents.
The Claimant states that on 31-12-2012, the Fund presented a value to receive from rents of €52,641.00, of which €47,946.13 were received in 2013 and 2014, but which could not be taxed in those years, since they had already been taxed in prior years.
Regarding the disregard of charges with stores that generated no income, the Claimant alleges that the Tax Authority did not accept as deductible the charges incurred with units that were rented but whose tenants did not pay rents. And regarding the non-deduction of charges in an amount greater than rents received, the Claimant disagrees with the Tax Authority's procedure, according to which maintenance and conservation charges should only be deductible up to the limit of rents received, store by store.
Regarding the increase in income from receipts by the Fund from H..., I... and J..., the Claimant states that, as to the first, the correction follows from the cash-based logic adopted by the Tax Authority, which it contests. As to the second, it is a refund of a security deposit, which should be considered as a cost and not as income. And regarding the third in the amount of €24.39, the Claimant does not contest it as it is a trifling amount.
Finally, the Claimant requests reimbursement of the amounts unduly paid.
The Tax Authority and Customs Authority filed a response alleging the legal conformity of the tax act subject to the arbitral request.
The Tax Authority begins by stating that the tax regime provided for in the EBF, as a tax benefit, must be interpreted restrictively, as decided, among others, in the judgment of the Supreme Administrative Court of 28-11-2012, handed down in case no. 0529/12.
And thus, for the Tax Authority, since provisions are not provided for as "charges" deductible for determining real estate income, they cannot be deducted.
Thus, the Respondent states that it only accepts the deduction of real charges (and not accounting charges) and, among these, given the amendment to the norm made for the year 2013, only those actually incurred, and the Respondent also considers only rents actually received.
The Respondent further alleges that it took into account the rents received in the periods under analysis that had already been taxed in prior periods.
The Tax Authority states that the EBF norm provides that from rents deductible charges "actually incurred" be deducted, so never could provisions be deducted and, having the Respondent taken into account, among the rents actually received, those that had already been taxed in prior periods, considering the rents actually received rather than agreed rents (which also include those not received), only determines a result favorable to the Claimant, or just, if preferred.
On the other hand, the Respondent alleges that since the regime applicable to real estate income and not the sum of real estate income, the same must be applied real estate by real estate, which in this case means, unit by unit.
Thus, for the Tax Authority the correction promoted by the tax inspection services does not suffer from any defect, and thus the arbitral request should be judged unfounded.
4. Factual Matter
4.1. Proven Facts:
Having analyzed the documentary evidence produced and the position of the parties contained in the case records, the following facts are considered proven and relevant to the decision of the case:
1. The Claimant was, in 2013 and 2014, the sole participant of the Closed Real Estate Investment Fund B... (liquidated).
2. The Fund was constituted with initial capital of €32,242,705.00, represented by 6,448,541 participation units with a unit value of €5.00.
3. The Fund had the objective of achieving, from a medium and long-term perspective, an increasing appreciation of capital, through the constitution and management of a portfolio of real estate characterized as "Retail Parks" located outside urban centers and, necessarily, within Portuguese territory.
4. The Fund acquired two real estates denominated "Retail Park", one located in..., parish of ..., municipality of ... and registered in the urban property matrix of the parish of ... under article ..., and another located in ..., ..., parish and municipality of ..., registered in the urban property matrix of the parish of ... under article ....
5. Both real estates were constituted in full ownership with divisions susceptible to independent use.
6. On 22-09-2012 a fire destroyed a large part of the Retail Park of ..., with the resolution of the use contracts then in effect.
7. The Fund was subject to a general scope tax inspection action for the years 2013 and 2014, aimed at determining whether the Fund's tax situation was fully regularized.
8. The Claimant was notified, on 14-05-2018, of the tax inspection report, whose content is hereby reproduced.
9. In that report it was understood, in particular:
- that rents actually received should be considered, and not those recorded in accounts;
- that deductible charges should be those actually paid;
- that charges relating to spaces that did not generate income should not constitute a negative component for the purpose of real estate income subject to tax;
- that charges relating to spaces, when greater than the value of their respective rents, should not be deducted beyond that value;
- that charges for technical consultancy should not be deducted, as they do not constitute maintenance and conservation expenses;
- that net receipts from H..., I... and J... constituted real estate income and not refund of security deposit.
10. The amount of €1,545.00, received from I..., constitutes a refund of a security deposit (doc. no. 10, filed with the case record by the Claimant).
11. The Claimant was notified, on 22-05-2018, of the Corporate Income Tax (IRC) liquidations no. 2018 ... and no. 2018 ... and the liquidation statements and interest no. 2018 ... and no. 2018 ..., relating to the tax periods 2013 and 2014.
12. In those liquidations the corrections proposed in the inspection report were implemented.
13. The Claimant filed the present request for arbitral pronouncement on 20-09-2018.
4.2. Unproven Facts
There are no relevant facts that have not been proven.
4.3. Reasoning for the Proven Factual Matter:
The conviction of the arbitrators was based on the documents filed with the case record by the Claimant and on the position of the parties demonstrated in the case records produced.
5. Appreciation of the Legal Matter
In the case sub judice, part of the corrections made by the Tax Authority regarding IRC for the fiscal years 2013 and 2014, relating to real estate income, is under discussion, as better described above.
There is a divergence between the Parties in the interpretation of article 22, no. 6, subparagraph a) of the EBF, whose text, as amended by Law no. 66-B/2012, of 31 December, in force at the time of the facts, provides as follows:
"6 - The income of real estate investment funds, which are constituted and operate in accordance with national legislation, shall be subject to the following tax regime:
a) In the case of real estate income, other than that relating to social housing subject to legal regimes of controlled costs, there shall be taxation, separately, at the rate of 25%, which is levied on net income from maintenance and conservation charges actually incurred, duly documented, as well as from municipal real estate tax, with the payment of the tax being made by the respective managing entity, by the end of April of the year following that to which it relates, and any tax withheld being considered as payment on account of this tax;"
The Claimant understands that the liquidations are illegal on the grounds of: (i) error in the method of determining real estate income; (ii) double taxation of rents; (iii) disregard of charges relating to stores that did not generate receipts; (iv) non-deduction of charges in an amount greater than rents received. Regarding the increase in other receipts, the Claimant contests (v) the increase relating to the receipt of the amount of €1,545.00, from I....
According to the Claimant, the determination of real estate income subject to tax is governed by the legal regime provided for in article 22 of the EBF and other rules applicable to IRC taxpayers, and should be based on relevant accounting income (including with regard to changes in provisions), and therefore considers it illegal for the Tax Authority to have considered cash flows.
In the opposite sense, the Respondent understands that the tax regime provided for in the EBF, regarding the determination of taxable income, rate, mode of liquidation and payment, cannot be mixed with the regime provided for in the IRC.
According to the Respondent, the provision contained in article 22, no. 6, subparagraph a) of the EBF, since it provides a tax benefit, must be interpreted restrictively. And, since provisions are not provided for in the said provision as "charges" deductible, their amounts cannot be deducted.
In this way, the Respondent only accepts the deduction of actual charges (and not accounting charges) actually incurred, and only considers rents actually received.
The Respondent understands that the definition of real estate income applicable to category F of Personal Income Tax (IRS), provided for in no. 1 of article 8 of the Code of Personal Income Tax (CIRS), as well as the broad concept of rent defined in no. 2 of the same article, is applicable. From this it concludes that the existence of leasing is indispensable in order to speak of rents actually received, in accordance with the understanding contained in Circular 20/94-NIR, of 13/07/1994.
However, the Respondent is not correct.
As follows from article 2, no. 1, subparagraph b) of the IRC Code, Real Estate Investment Funds (FII) are IRC taxpayers, being subject to the rules and principles of this tax, with the adaptations arising from the application of special rules provided for certain income, as occurs with the provision contained in article 22, no. 6, subparagraph a), of the EBF. This provision contains a special rule relating to the taxation of real estate income of FII, but does not preclude the applicability of the general norms of IRC as to what is not provided for therein, in particular the principle of periodization (article 18 of the CIRC).
It is important to note that FII are bound by the rules of the Accounting Plan for Real Estate Investment Funds – published in the Official Journal, II Series, No. 96/2005, of 18 May – approved by CMVM Regulation no. 2/2005, and whose point 2.2. of Chapter 2, under the heading "Accounting principles and valuation criteria", adopts, among others, the principle of periodization, in the following terms: "Periodization – The patrimonial elements of the fund shall be valued and recognized in accordance with the periodicity of the calculation of the value of participation units regardless of their receipt or payment, and shall be included in the financial statements of the period to which they relate, as well as their value adjustments resulting therefrom".
In this way, the application of the principle of periodization of exercises is mandatory for FII, which is consistent with the normative provision of article 18 IRC.
There is therefore no legal basis for the Respondent to disregard the application of the said principle.
Nor is there legal basis for disregarding the application of article 17, no. 1, of the Code of Corporate Income Tax (CIRC), referring to the determination of taxable profit, which provides that "[t]he taxable profit of legal entities and other entities mentioned in subparagraph a) of no. 1 of article 3 is constituted by the algebraic sum of the net result of the period and the positive and negative patrimonial variations verified in the same period and not reflected in that result, determined on the basis of accounts and possibly corrected in accordance with this Code".
As stated in the Arbitral Award handed down within Case no. 653/2017-T, of 21 August 2018, "… FII, as IRC taxpayers (v. article 2 of the CIRC), must be taxed in accordance with the rules of that Code, with the necessary adaptations to the application of article 22/6 of the EBF, which means, among other things, the application of article 17/1 of the CIRC applicable, that is, and as far as real estate income is concerned, its determination on the basis of accounts and possibly corrected in accordance with the CIRC".
In this sense, the relevance of provisions when real estate income is involved must be admitted, in accordance with the general terms provided for in the CIRC (article 39), contrary to what the Respondent argues.
That is, it is the tribunal's understanding that the deductibility of "maintenance and conservation charges actually incurred" provided for in article 22, no. 6, subparagraph a) of the EBF does not preclude the deductibility of provisions in accordance with the general terms provided for in the CIRC.
For the reasons exposed, the Respondent is also incorrect when it argues that, since the regime [provided for in article 22, no. 6, subparagraph a) of the EBF] is applicable to real estate income, and not to the sum of real estate income, that regime must be applied real estate by real estate, nor when, following the same line of reasoning, it argues that it is not possible, for each real estate, to deduct charges in an amount greater than the value of rents actually received.
As argued in the Arbitral Award handed down within Case no. 163/2018-T, of 28 December 2018, since FII are IRC taxpayers, they must "… consider as real estate income those which under accounting rules may be qualified as such, deducted from expenses which by their nature may be considered as such, without any other type of restriction", and that "[t]his is not opposed by the fact that the costs admitted are greater than the income".
In summary, the tribunal understands that there are no legal grounds for the Respondent, in the case sub judice, regarding the years 2013 and 2014, to have considered rents actually received and charges actually paid, to have disregarded charges relating to stores that generated no income, to have disregarded adjustments for outstanding debts and to have failed to admit the deduction of charges in an amount exceeding the value of rents. This results in the illegality of the additional liquidations to the extent of the corrections that had such motivation.
Considering the tribunal the corrections made on the basis of the consideration of cash flows to be illegal, there is no need to appreciate the Claimant's argument regarding the alleged double taxation of income.
As for the increase in other receipts, it follows from the above that the amount received from H... should be considered in the fiscal year 2013, and not in 2014, which, in any event, has no impact on the determination of the aggregate tax for said fiscal years.
The Claimant contests the increase relating to the receipt of the amount of €1,545.00, from I..., on the grounds that it is a refund of a security deposit, and therefore should be considered by the Respondent as a cost and not as income. On this question the Claimant is correct, considering the documentation filed with the case record (Doc. no. 10), which shows that it is, indeed, a refund of a security deposit.
6. Decision
For these reasons, this Arbitral Tribunal decides:
a) To find the arbitral request filed to be well-founded and, consequently, to declare the partial illegality of the following liquidations, relating to the tax periods 2013 and 2014:
i. Corporate Income Tax Liquidation no. 2018..., of 14 May 2018;
ii. Interest Liquidation no. 2018..., of 16 May 2018;
iii. Corporate Income Tax Liquidation no. 2018..., of 14 May 2018;
iv. Interest Liquidation no. 2018..., of 17 May 2018;
b) To annul the liquidation acts identified in the preceding subparagraph, except for the part resulting from the corrections not contested by the Claimant;
c) To order the Respondent to refund the amounts paid by the Claimant;
d) To order the Respondent to pay the costs of the proceedings, in the amount set out below.
7. Value of the Case
In accordance with the provision of article 306, no. 2, of the CPC, 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 set at €194,799.98.
8. Costs
In accordance with article 22, no. 4, of the RJAT, the amount of costs is fixed at €3,672.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Respondent.
Let notification be made.
Lisbon, 31 May 2019
The President Arbitrator
(José Baeta de Queiroz)
The Arbitrator Vogal
(Suzana Fernandes da Costa)
The Arbitrator Vogal
(Paulo Nogueira da Costa)
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