Process: 464/2017-T

Date: March 7, 2018

Tax Type: Selo

Source: Original CAAD Decision

Summary

This arbitration case before CAAD concerns a Stamp Tax assessment of €814,183.04 for 2016 related to financial guarantees. The dispute arose from a 2013 syndicated financing arrangement where the claimant received €56.3 million from banks, secured through multiple financial pledges on participation units of a real estate investment fund. While Stamp Tax was paid on the financing contract and bond issuances under item 17 of the General Table of Stamp Duty (GTSD), no tax was initially paid on the guarantee constitutions. The Tax Authority later assessed Stamp Tax on these guarantees for 2016. The company challenged this assessment through CAAD arbitration under Decree-Law 10/2011 (RJAT), seeking annulment and compensatory interest. The case raises critical issues in Portuguese Stamp Tax law: whether financial pledges securing bank financing are subject to Stamp Tax when the underlying obligations were already taxed, the proper calculation of the tax base for guarantees, potential double taxation concerns, and the availability of compensatory interest when unlawful assessments are annulled. The arbitral tribunal was properly constituted with three arbitrators and conducted hearings with witness testimony before proceeding to written submissions. This case demonstrates taxpayers' right to challenge Stamp Tax liquidations through administrative arbitration rather than traditional judicial courts, providing a faster and specialized alternative dispute resolution mechanism for tax controversies in Portugal. The outcome will have significant implications for financial institutions and companies regarding the taxation of security interests and guarantees.

Full Decision

Arbitral Decision

The arbitrators Counsel Jorge Lopes de Sousa (arbitrator-president), Prof. Doctor Fernando Borges de Araújo and Dr. Olívio Mota Amador (arbitrator-members) appointed by the Deontological Council of the Center for Administrative Arbitration to form the Arbitral Tribunal, constituted on 09-11-2017, hereby agree as follows:

1. Report

A…, S.A. (hereinafter simply "A…" or "Claimant"), holder of the single identification number in the Commercial Registration Conservatory and collective legal entity identification number …, with registered office at Avenue …, no. …, parish of …, municipality of …, …-… …, has, pursuant to the provisions of articles 2nd, no. 1, subparagraph a), 10th, no. 1, subparagraph a) and no. 2, all of Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT"), requested the constitution of an Arbitral Tribunal.

The Claimant seeks the annulment of the Stamp Duty assessment, in the amount of € 814,183.04, relating to the year 2016, and the decision dismissing the administrative review claim which it filed against that act.

The Claimant further requests the reimbursement of the amount paid plus indemnification interest.

The Respondent is the TAX AND CUSTOMS AUTHORITY.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 04-08-2017.

Pursuant to the provisions of subparagraph a) of no. 2 of article 6th and subparagraph b) of no. 1 of article 11th of the RJAT, as amended by article 228th of Law no. 66-B/2012, of 31 December, the Deontological Council designated as arbitrators of the collective arbitral tribunal the undersigned, who communicated acceptance of the appointment within the applicable period.

On 17-10-2017, the parties were duly notified of such appointment and manifested no intention to decline the designation of the arbitrators, in accordance with the combined provisions of article 11th, no. 1, subparagraphs a) and b) of the RJAT and articles 6th and 7th of the Deontological Code.

Thus, in accordance with the provisions of subparagraph c) of no. 1 of article 11th of the RJAT, as amended by article 228th of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 09-11-2017.

The Tax and Customs Authority presented a Response in which it defended the lack of merit of the request for arbitral pronouncement.

On 08-02-2018, the meeting provided for in article 18th of the RJAT was held, in which witness testimony was produced and it was decided that the proceedings should continue with written submissions.

The Parties presented written submissions.

The arbitral tribunal was regularly constituted, in accordance with the provisions of arts. 2nd, no. 1, subparagraph a), and 10th, no. 1, of Decree-Law no. 10/2011, of 20 January, and is competent.

The Parties are duly represented and enjoy legal personality and capacity, are legitimately entitled, and are represented (arts. 4th and 10th, no. 2, of the same statute and art. 1st of Administrative Order no. 112-A/2011, of 22 March).

The proceedings do not suffer from nullities.

2. Statement of Facts

2.1. Proven Facts

The following facts are considered proven:

  • On 20 November 2013, Bank B…, S.A. (hereinafter "B…"), which was later integrated by C…, S.A. (hereinafter "C…"), and Bank D…, S.A. (hereinafter "D…"), jointly granted to Claimant A… financing in the amount of € 56,315,739.48, through the execution of a syndicated banking financing contract (Document no. 2 attached to the request for arbitral pronouncement, the contents of which are hereby reproduced);

  • The total amount of financing agreed (€ 56,315,739.48) was divided into the following tranches:

    • Tranche A, in the amount of € 7,000,000.00 (of which €5,000,000.00 are allocated to B… and € 2,000,000.00 to D…);
    • Tranche B, in the amount of € 15,000,000.00 (entirely allocated to D…);
    • Tranche C1, in the amount of € 2,281,250.00 (entirely allocated to D…);
    • Tranche C2, in the amount of € 1,781,250.00 (entirely allocated to D…);

  • On the same day, within the scope of the reorganization plan of activity and restructuring of banking liabilities, A… issued:
    (i) 2,970 zero-coupon bonds, with total nominal value of € 29,700,000.00 - the "A… Zero-Coupon Bonds 2013/2017" (hereinafter "Bonds"); and
    (ii) 500,000 bonds mandatory convertible into shares, in the total amount of € 15,000,000.00 - the "A… 2013/2027 Bonds Mandatory Convertible into Shares" (hereinafter "MCBS") (Document no. 3 attached to the request for arbitral pronouncement, the contents of which are hereby reproduced);

  • To guarantee the obligations arising from the banking financing contract described, as well as from the issuance of the Bonds and the MCBS, the following contracts were simultaneously executed (on 20 November 2013):
    (i) the Pledge Contract of Participation Units ("PU's") of Fund F… and
    (ii) the Guarantee Contract between the Banks, A… and its shareholder E…;

  • Fund F… - Special Closed-End Real Estate Investment Fund (hereinafter "Fund F…") consisted of a Collective Investment Body, registered under collective legal entity number …, administered, in completely independent manner, by company G… – Investment Fund Management (hereinafter "G…");

  • As of that date, A… was the holder of 33,544 book-entry PU's, with no nominal value, of Fund F…, registered in account no. … with B…, as well as 21,452 book-entry PU's, with no nominal value, of Fund F…, registered in account no. … with D…, totaling 54,996 book-entry PU's, with no nominal value, representing 100% of the capital of Fund F…, all then held by A…;

  • To guarantee proper payment of all obligations arising to A… from non-timely and full performance of any obligation resulting from Tranche B and Tranche E of the syndicated banking financing contract, a first financial pledge was constituted on all PU's of Fund F… in favor of D… (clause 3rd of the Pledge Contract of PU's F… which appears in Document no. 4 attached to the request for arbitral pronouncement, the contents of which are hereby reproduced);

  • To guarantee proper payment of all obligations arising from non-timely and full performance of any obligation resulting from the issuance of the Bonds and the MCBS, A… constituted a second financial pledge on all PU's of Fund F… in favor of B… (clause 4th of the Pledge Contract of PU's F… attached as Document no. 4 and the Guarantee Constitution Contract attached as Document no. 5 attached to the request for arbitral pronouncement, the contents of which are hereby reproduced);

  • To guarantee proper payment of all obligations arising to A… from non-timely and full performance of any obligation resulting from Tranche C1 of the syndicated banking financing contract, a third financial pledge was constituted on all PU's of Fund F… in favor of D… (clause 5th of the Pledge Contract of PU's F… attached as Document no. 4);

  • To guarantee proper payment of all obligations arising to A… from non-timely and full performance of any obligation resulting from Tranche A, Tranche C2 and Tranche D of the syndicated banking financing contract, a fourth financial pledge was constituted on all PU's of Fund F… in favor of B… and D… in proportion to their respective credits (clause 5th of the Pledge Contract of PU's F… attached as Document no. 4);

  • With respect to the financing granted through the syndicated banking financing contract, as well as to the issuance of the Bonds and MCBS of A…, B… and D… paid the due Stamp Duty in accordance with item 17 of the General Table of Stamp Duty ("GTSD") (Documents nos. 3 and 6 attached to the request for arbitral pronouncement, the contents of which are hereby reproduced);

  • With respect to the constitution of the guarantees (the financial pledges of the PU's of Fund F…), B… and D… did not pay any amount in Stamp Duty, as their constitution was not subject to taxation under Stamp Duty in accordance with item 10 of the GTSD;

  • Fund F… was constituted on 17 November 2006, and its duration was stipulated for 10 years from the date of its constitution (Document no. 7 attached to the request for arbitral pronouncement, the contents of which are hereby reproduced);

  • Fund F… entered dissolution on 17 November 2016, as communicated on that date by G… to the Securities Market Commission and published in the information dissemination system (Document no. 8 attached to the request for arbitral pronouncement, the contents of which are hereby reproduced);

  • From its constitution until the date of its dissolution, Fund F… owned the following three real properties:

    • Urban property, denominated "Building Intended for an Industrial Unit", located at Avenue …, nos. … and …, parish of …, municipality of …, composed of basement building, ground floor and two upper floors, described in the Land Registry Conservatory of … under no. …, of said parish, and registered in the respective matrix under article …, with patrimonial tax value of € 12,305,280.00;
    • Urban property, denominated "Building Intended for an Industrial Unit", located at Avenue …, no. …, parish of …, municipality of …, composed of building with ground floor and four upper floors, described in the Land Registry Conservatory of … under no. … of said parish, and registered in the respective matrix under article …, with patrimonial tax value of € 9,200,940.00; and
    • Urban property, denominated "Building Intended for an Industrial Unit", located at Avenue …, nos. … and …, parish of …, municipality of …, composed of building with ground floor and one upper floor, described in the Land Registry Conservatory of … under no. …, of said parish, and registered in the respective matrix under article … (prior article …), with patrimonial tax value of € 2,098,270.00 (Documents nos. 9, 10 and 11 attached to the request for arbitral pronouncement, the contents of which are hereby reproduced);

  • For purposes of distribution of the assets of Fund F…, composed of those three real properties, A…, as holder of all of its PU's, resolved to acquire the same through distribution in kind of assets;

  • With the dissolution of Fund F…, the PU's held by A… and given as collateral (commonly known as financial pledge) to B… (in 2016 in the form of C…) and to D… in the scope of the above-described contracts would naturally be extinguished;

  • As a condition for consenting to the dissolution and distribution of Fund F…, the Banks imposed, as pledging creditors of said PU's, the constitution, in substitution of the financial pledges of said PU's of Fund F…, of mortgages in their favor on the real properties acquired by A… as a result of the distribution in kind of assets of said Fund;

  • On 29 November 2016, the public deed of distribution of assets of Fund F… and closure of its respective liquidation were executed (Document no. 12 attached to the request for arbitral pronouncement, the contents of which are hereby reproduced);

  • Given the existence of financial pledges constituted on the PU's of Fund F…, more precisely, on the 54,996 PU's, C… and D… were parties to the distribution deed (Document no. 12);

  • As pledging creditors of said PU's of Fund F…, C… and D… consented – through acceptance by A… of the conditions imposed by the Banks and which were translated into the substitution of financial pledges with mortgages in their favor on the above-referenced properties – that A… authorize the distribution in kind of real property assets of the Fund (Document no. 12);

  • The three real properties held as of that date by the Fund, listed in article 26th above, were acquired by A… by virtue of the distribution in kind of assets of Fund F…;

  • In substitution of the financial pledges constituted in 2013 on the PU's of Fund F…, which would be extinguished as a result of the dissolution of Fund F…, four voluntary mortgages were constituted in favor of the Banks on the three real properties that passed, as a result of the distribution of the Fund, into the sphere of A…, through public deed executed on that same 29 November 2016, such mortgages with the same order of priority to which the prior constitution of guarantees was subject (Document no. 13 attached to the request for arbitral pronouncement, the contents of which are hereby reproduced);

  • The sum of the maximum amounts secured by those mortgages amounted then to € 135,697,174.04, which corresponds to the amount to be secured of the obligations arising from the secured contracts, that is, from the syndicated banking financing contract and the Bonds and MCBS issuance contract of A… concluded in 2013 (Document no. 13);

  • The constitution of those mortgages did not result from the need to secure any new obligation that had meanwhile arisen, but rather to secure the obligations that already arose from the secured contracts concluded in 2013 and that were secured by the financial pledges which, as a result of the respective dissolution and distribution of Fund F…, perished;

  • To execute the deed, A…, on 29-11-2016, proceeded to pay the Stamp Duty relating to the constitution of the four above-mentioned mortgages, in accordance with item 10.3 of the GTSD, in a total of € 814,183.04 (eight hundred and fourteen thousand one hundred and eighty-three euros and four cents), corresponding to 0.6% of the sum of the maximum amounts of € 135,697,174.04 of the mortgages listed above (Document no. 13);

  • A… considered that the Stamp Duty assessment was illegal and regarding the constitution of the mortgages in substitution of the financial pledges that it had constituted on the PU's of Fund F…, for which it presented an administrative review claim against the Stamp Duty assessment act on 29 March 2017 (Document no. 14 attached to the request for arbitral pronouncement, the contents of which are hereby reproduced);

  • The Claimant was notified to exercise the right to be heard with respect to a draft decision to dismiss the administrative review claim, based on information contained in the administrative file, the contents of which are hereby reproduced, which references, among other things, the following:

  1. Through the elements included in the file and known by the Services, it is found that:

  2. On 29 November 2016, the real properties registered in the urban matrix of the parish of …, municipality of …, under articles …, … and …, were awarded to the claimant, having made payment of IMT and Stamp Duty item 1.1, in accordance with the deed attached to the record.

  3. On the same day (29/11/2016), a mortgage constitution deed was executed in which the Claimant provided as guarantee of payment the real properties registered in the urban matrix of the parish of …, municipality of …, under articles …, … and …, having made payment of Stamp Duty item 10.3 in the amount of € 814,183.04, payment made on 13/12/2016 through the guide … with payment reference …, issued in the name of Institute of Registries and Notaries, IP, NIF: ….

Regarding the non-subjection to Stamp Duty on the substitution of guarantees, it is important to note:

  1. The Stamp Duty Code (SDC), in its art. 1st, no. 1, establishes the objective incidence of stamp duty, determining that the same "is incurred on all acts, contracts, documents, titles, books, papers and other facts provided in the General Table, including gratuitous transmission of goods."

  2. With respect to guarantees of obligations, as is the case with mortgage and bank guarantee, the General Table of Stamp Duty, in item 10, provides that stamp duty is incurred on such acts "whatever their nature or form, namely endorsement, pledge, autonomous bank guarantee, guarantee, mortgage, pledge, surety bond, except when materially ancillary to contracts specially taxed in this Table and constituted simultaneously with the secured obligation, even if in different instrument or document (...)".

  3. For its part, art. 5th, of the same Code, relating to the birth of the tax obligation, determines that the tax obligation is considered constituted, namely: - "in acts and contracts, at the moment of signature by the parties" [subparagraph a)].

  • "in operations carried out by or with intermediation of credit institutions, financial companies or other entities legally equivalent to them, at the moment of collection of interest, premiums, commissions and other consideration, considering effectively collected (...) the interest and commissions charged in current accounts by whoever is entitled to them." [subparagraph h)].

  1. In accordance with Circular Notice no. 40091, of 17 September 2007 of the Directorate of Services for Municipal Tax on Onerous Property Transfers, Stamp Duty, Road Taxes and Contributions: "A mortgage has an ancillary nature when there is a credit right associated with its fate: the notion of ancillarity expresses then the temporal connection between the guarantee and the secured credit. Thus, when ancillarity exists and if the credit is extinguished or reduced, the guarantee ends or diminishes. There is no ancillarity when the mortgage is intended to secure not only the obligations arising from a lending contract, but also the obligations assumed or that may be assumed by the borrower with the credit institution and arising from any other banking operations."

  2. Thus: the understanding resulting from Circular Notice no. 40091 is compatible with the provisions of item no. 10 of the GTSD, and is applicable to all guarantees constituted in accordance with the same item.

D. CONCLUSION

  1. Thus, in accordance with the provisions of no. 1, of art. 1st, of the SDC, combined with items 10 and 10.3 of the General Table of such tax, the mortgage, even if unilateral, is subject to Stamp Duty.

  2. In view of the foregoing, it does not appear to me that the claimant has grounds, for which I propose the dismissal of the present administrative review claim.

  • The Claimant exercised the right to be heard;

  • The administrative review claim was dismissed through Official Notice no. …, dated 05 May 2017, notified to A… on 9 May 2017 (document no. 1 attached to the request for arbitral pronouncement, the contents of which are hereby reproduced);

  • The decision dismissing the administrative review claim manifests agreement with information, the contents of which are hereby reproduced, which references, among other things, the following:

It is verified that on 29 November 2016 a deed of distribution and closure of liquidation of an investment fund was executed, which states that:

  • That the net global value of the Fund as of liquidation date is € 42,382,964.47, divided by 154,976 participation units.

  • A… S.A. is holder of one hundred percent of the fund

  • The fund dissolved upon expiration of the period for which it was constituted (ten years).

Given that on 29 November 2016, the real properties registered in the urban matrix of the parish of …, municipality of …, under articles …, … and …, were awarded to the claimant, having made payment of IMT and Stamp Duty item 1.1, in accordance with the said deed attached to the record, and on the same day (29/11/2016) a mortgage constitution deed was executed in which the Claimant provided as guarantee of payment the said real properties registered in the urban matrix of the parish of …, municipality of …, under articles …, with the patrimonial value of € 12,305,280.00, with the patrimonial value of € 9,200,940.00 and … with the patrimonial value of € 2,098,270.00, and A… S.A. bonds mandatory convertible into shares, having made payment of Stamp Duty item 10.3 in the amount of € 814,183.04 (on the amount corresponding to the sum of maximum amounts of € 135,697,174.04).

Thus, the understanding resulting from Circular Notice no. 40091 "A mortgage has an ancillary nature when there is a credit right associated with its fate: the notion of ancillarity expresses then the temporal connection between the guarantee and the secured credit. Thus, when ancillarity exists and if the credit is extinguished or reduced, the guarantee ends or diminishes. There is no ancillarity when the mortgage is intended to secure not only the obligations arising from a lending contract, but also the obligations assumed or that may be assumed by the borrower [borrower] with the credit institution and arising from any other banking operations." is compatible with the provisions of item no. 10 of the GTSD, and is applicable to all guarantees constituted in accordance with the same item.

It is thus found that

  • The law used the concept of ancillarity in a formal and not substantive sense, for which, with two acts, both will be taxed, even if one is (substantially) ancillary to the other.

  • And hence the pledge is only to be "excluded" from such taxation when "constituted as ancillary to a contract specially taxed in the table", that is, when carried out by the same act in which the principal obligation was constituted.

  • So that, in the matter at issue, the pledge having been constituted by instrument different from the principal contract (the net global value of the Fund as of liquidation date is € 42,382,964.47 and value of the mortgage € 135,697,174.04), is not "ancillary" to this and, thus, is subject to stamp duty, in accordance with the cited article of the table.

  • On 04-08-2017, the Claimant presented the request for arbitral pronouncement that gave rise to the present proceedings;

2.2. Facts Not Proven

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

2.3. Grounds for Determination of the Statement of Facts

The proven facts are based on documents submitted by the Claimant and which appear in the administrative file.

There is no controversy regarding the statement of facts.

The witness testimony corroborated the facts which appear in the documents.

3. Legal Issues

3.1. Terms in Which the Question at Issue is Posed

It results from the statement of facts that the Claimant contracted financing with banking entities (B…, now "C…", and D…), in 2013, and constituted, to guarantee the obligations arising from the contract (in the amount of € 56,315,739.48), as well as from the issuance of bonds (in the nominal value of € 44,700,000.00), a pledge contract of participation units of "Fund F…", which was the owner of three real properties.

Stamp Duty was assessed with respect to the financing contract but not with respect to the pledge, in accordance with item 10 of the GTSD.

Having occurred the dissolution of "Fund F…", the Claimant, holder of all participation units of that fund, resolved to acquire all of its assets, composed of three real properties, and it was agreed between the Claimant and the banking entities that provided the financing, that a mortgage would be constituted on the three real properties that transitioned from the patrimonial sphere of the Fund to the Claimant, mortgages that were constituted on 29 November 2016, on the real properties acquired by the Claimant with the distribution of "Fund F…", with B… (already "C…") and D… as mortgage creditors.

In the decision of the administrative review claim, the Tax and Customs Authority held that Stamp Duty is owed with respect to the constitution of the mortgages, on the grounds of articles 1st, no. 1, of the SDC and item 10 of the GTSD.

Article 1st, no. 1, of the SDC provides that "stamp duty is incurred on all acts, contracts, documents, titles, papers and other facts or legal situations provided in the General Table, including gratuitous transmissions of property."

Item 10 of the GTSD provides as follows:

  1. Guarantees of obligations, whatever their nature or form, namely endorsement, pledge, autonomous bank guarantee, surety, mortgage, pledge and surety bond, except when materially ancillary to contracts specially taxed in this Table and constituted simultaneously with the secured obligation, even if in different instrument or document - on the respective value, depending on the term, always considering as a new operation any extension of the contract term (...)

The Claimant defends, in summary, that

  • "the mortgages that substituted, through the public deed executed on 29 November 2016, the financial pledges of the PU's of Fund F… maintain material ancillarity with respect to the financing contracts concluded on 20 November 2013, because they are intended exclusively to secure the obligations and liabilities arising from these contracts, on which Stamp Duty was incurred in 2013, and not any other new obligations";

  • "we are not faced with the birth of any new obligation whose need to be secured arose in 2016 upon substitution of financial pledges with mortgages on real properties, this substitution being justified solely by the perishing of the object given in pledge";

  • "the classification of the rule of objective incidence provided in item 10 of the GTSD determines taxation under Stamp Duty only when we are faced with the constitution of guarantees intended to secure obligations that are also new (including, by virtue of an expansion of already constituted obligations), but not when we are faced with mere substitution of guarantees previously provided and that, by natural or legal effect, perished";

  • "item 10 of the GTSD, by subjecting to Stamp Duty the substitution of guarantees, when motivated exclusively by the perishing of guarantees previously provided and intended solely to secure the same obligations previously secured, suffers from material and formal unconstitutionality, by violation of the constitutional principle of tax legality and its corollary of typicality as to tax incidence rules, inherent in no. 2 of article 103rd of the Constitution. It also violates the constitutional principle of proportionality inherent in articles 13th and no. 2 of article 266th of the Constitution";

  • "there is an appeal also to a principle of substance over form, because: both in 2013 through the constitution of financial pledges of the UP's, and in 2016 through the constitution of mortgages on the real properties awarded to the Claimant as a result of the distribution of Fund F…, the effective guarantee of the principal obligations assumed in the aforementioned financing contracts is precisely the real properties that Fund F… held."

The question at issue in the present proceeding is whether Stamp Duty is owed, in light of article 1st, no. 1, of the SDC and item 10 of the GTSD, with respect to this mortgage constitution contract.

3.2. Appreciation of the Question of Classification of the Situation under Item 10 of the GTSD

Item 10 of the GTSD provides for taxation under Stamp Duty for guarantees of obligations "except when materially ancillary to specially taxed contracts in this Table and constituted simultaneously with the secured obligation."

As can be seen, for the constitution of guarantees not to be taxed, it is necessary that, in addition to these being materially ancillary to the taxed contracts (in this case the financing contract, taxed under item 17 of the GTSD), they be "constituted simultaneously with the secured obligation."

In the case of the constitution of guarantees carried out in 2013, there was no taxation by application of this item 10 of the GTSD because the two requirements that exclude it were met: the guarantees were materially ancillary to a financing contract that was taxed under Stamp Duty and the guarantees were constituted simultaneously.

Regarding the guarantees constituted in 2016, material ancillarity with respect to the financing contract is verified, but it is manifest that the requirement of simultaneous constitution is not met.

The principle of prevalence of substance over form, invoked by the Claimant, cannot override a special rule that explicitly removes it, as is item 10 of the GTSD, which imposes taxation despite the existence of material ancillarity with a taxed contract, when the constitution of guarantees is not made simultaneously.

Thus, one cannot but conclude that one of the requirements provided in the final part of item 10 of the GTSD for the non-taxation of guarantees is not met, for which reason the assessed taxation has foundation therein.

The Claimant raises, however, a question of unconstitutionality, whose resolution may result in the non-applicability of this rule, by force of the provisions of article 204th of the Constitution, which provides that "in proceedings submitted to judgment, courts cannot apply rules that infringe the provisions of the Constitution or the principles contained therein."

3.3. Appreciation of the Question of Unconstitutionality of Item 10 of the GTSD

The Claimant argues that "item 10 of the GTSD, by subjecting to Stamp Duty the substitution of guarantees, when motivated exclusively by the perishing of guarantees previously provided and intended solely to secure the same obligations previously secured, suffers from material and formal unconstitutionality, by violation of the constitutional principle of tax legality and its corollary of typicality as to tax incidence rules, inherent in no. 2 of article 103rd of the Constitution. It also violates the constitutional principle of proportionality inherent in articles 13th and no. 2 of article 266th of the Constitution."

Article 103rd, no. 2, of the Constitution provides that "taxes are created by law, which determines the incidence, the rate, tax benefits and the guarantees of taxpayers."

Item 10 of the GTSD has the wording given to it by Decree-Law no. 287/2003, of 12 November, which was approved by the Government in the exercise of the legislative authorization granted by Law no. 26/2003, of 30 July.

The "law" referred to in that article 103rd, no. 2, of the Constitution encompasses the possibility of issuance of decrees by the Government, within the scope of the relative reservation of legislative competence of the Assembly of the Republic, pursuant to legislative authorization, as results from articles 112th, no. 2, 165th, no. 1, subparagraph i), and 198th, no. 1, subparagraph b), of the Constitution.

For this reason, no illegality or unconstitutionality can be seen in item 10 of the GTSD, in light of article 103rd, no. 2, of the Constitution and the principles of tax legality and typicality of rules that create taxes.

Regarding the principle of proportionality to which article 266th, no. 2, of the Constitution alludes, to which article 55th of the General Tax Law (LGT) also refers, it imposes on the Public Administration the adoption of conduct appropriate to the aims pursued, not affecting the positions of individuals beyond what is necessary for those objectives to be achieved (as made explicit in article 7th, nos. 1 and 2, of the Administrative Procedure Code).

One cannot see that this principle has application in the situation at issue, as the assessment is the act appropriate to concretize taxation that is legislatively provided for.

With respect to article 13th of the Constitution, invoked by the Claimant, it enunciates the principle of equality and not proportionality.

The principle of equality, as a limit to legislative discretion, does not require equal treatment of all situations, but rather implies that those in equal situations be treated equally and those in unequal situations be treated unequally, in a manner not to create arbitrary and unreasonable discriminations, because lacking sufficient material foundation. The principle of equality does not prohibit the establishment of distinctions, but rather distinctions devoid of objective and rational justification. ([1])

The situations in which guarantees are provided simultaneously with a financing contract are not identical to those in which guarantees are provided subsequently in an autonomous manner, namely several years later.

In truth, despite Stamp Duty encompassing taxation of manifestly distinct situations ("acts, contracts, documents, titles, papers and other facts or legal situations provided in the General Table, including gratuitous transmissions of property," as stated in article 1st, no. 1, of the SDC), legislatively identified on a scattered basis and with dubious congruence, it is possible to discern that underlying the taxation is the contributory capacity of taxpayers that certain operations reveal. ([2])

From this perspective, the execution of a financing contract with concomitant ancillary provision of guarantees permits the conclusion of the existence of a single contributory capacity at the unique moment when the contracts are executed ([3]), which can justify the avoidance of double economic taxation, while the subsequent autonomous execution of the guarantee provision contract permits identification at the moment of such execution a new manifestation of contributory capacity.

The case at issue demonstrates that there will be reason for the distinction between situations in which there is only one manifestation of contributory capacity and those in which there is more than one, particularly because the amount relevant for taxation under Stamp Duty regarding guarantees provided in 2016 is much higher than what was considered for taxation in 2013, which, from the legislative perspective, is indicative of a new and increased contributory capacity.

It appears, thus, that there is foundation for legislative distinction between situations in which guarantees are provided simultaneously with a financing contract and those in which guarantees are provided at a different moment.

By the foregoing, item 10 of the GTSD cannot be deemed materially or formally unconstitutional.

3.4. Reimbursement of Amount Paid and Indemnification Interest

By the foregoing, the request for arbitral pronouncement is without merit with respect to the question of illegality of the assessment, for which reason the payment of the tax was not wrongful.

The reimbursement and indemnification interest depend on the existence of a wrongful payment (as inferred from article 43rd, no. 1, of the General Tax Law), the lack of merit of the principal request relating to annulment of the assessment entails the lack of merit of the consequential requests.

4. Decision

In accordance with the foregoing, this Arbitral Tribunal hereby agrees:

  • To judge the request for arbitral pronouncement without merit;

  • To absolve the Tax and Customs Authority of the claims.

5. Value of the Proceedings

In accordance with the provisions of art. 296th, no. 1, of the Code of Civil Procedure and 97th-A, no. 1, subparagraph a), of the Code of Tax Procedure and 3rd, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at € 814,183.04.

6. Costs

Pursuant to article 22nd, no. 4, of the RJAT, the amount of costs is fixed at € 11,628.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, charged to the Claimant.

Lisbon, 07-03-2018

The Arbitrators

(Jorge Lopes de Sousa)

(Fernando Borges de Araújo)

(Olívio Mota Amador)

([1]) Essentially in this sense, the following decisions of the Constitutional Court can be seen, among others:

  • no. 143/88, of 16-6-1988, decided in process no. 319/87, published in the Bulletin of the Ministry of Justice no. 378, page 183;

  • no. 149/88, of 29-6-1988, decided in process no. 282/86, published in the Bulletin of the Ministry of Justice no. 378, page 192;

  • no. 118/90, of 18-4-90, decided in process no. 613/88, published in the Bulletin of the Ministry of Justice no. 396, page 123;

  • no. 169/90, of 30-5-1990, decided in process no. 1/89, published in the Bulletin of the Ministry of Justice no. 397, page 90;

  • no. 186/90, of 6-6-1990, decided in process no. 533/88, published in the Bulletin of the Ministry of Justice no. 398, page 81;

  • no. 155/92, of 23-4-1992, decided in process no. 204/90, published in the Bulletin of the Ministry of Justice no. 416, page 295;

  • no. 335/94, of 20-4-1994, decided in process no. 61/93, published in the Bulletin of the Ministry of Justice no. 436, page 129;

  • no. 468/96, of 14-3-1996, decided in process no. 87/95, published in the Bulletin of the Ministry of Justice no. 455, page 152;

  • no. 1057/96, of 16-10-1996, decided in process no. 347/91, published in the Bulletin of the Ministry of Justice no. 460, page 284;

  • no. 128/99, of 3-3-1999, decided in process no. 140/97, published in the Bulletin of the Ministry of Justice no. 485, page 26.

([2]) As stated in the Preamble of Decree-Law no. 287/2003, of 12 November, regarding Stamp Duty, "the 2000 reform marked a trend toward alteration of one of its most ancestral characteristics, which from a tax on documents tends increasingly to assert itself as a tax on operations which, regardless of their materialization, reveal income or wealth" (emphasis added).

([3]) As stated in the decision of the Supreme Administrative Court of 24-10-2012, process no. 0258/12, there is simultaneity "when the guarantee and the secured obligation are born on the same day, even if they are constituted or formalized in different documents."

Frequently Asked Questions

Automatically Created

What is Imposto do Selo (Stamp Tax) on guarantees under Portuguese tax law?
Imposto do Selo (Stamp Tax) is a Portuguese transaction tax applied to various legal acts, documents, and transactions listed in the General Table of Stamp Duty (GTSD). Under item 17 GTSD, guarantees securing financial obligations may be subject to Stamp Tax. The tax applies when guarantees such as financial pledges, mortgages, or sureties are constituted to secure loans or other obligations. The taxable event is the constitution or modification of the guarantee, and the tax base typically corresponds to the value of the guaranteed obligation.
Can taxpayers challenge Stamp Tax liquidations through CAAD arbitral tribunals?
Yes, taxpayers can challenge Stamp Tax liquidations through CAAD (Centro de Arbitragem Administrativa) arbitral tribunals under the RJAT (Regime Jurídico da Arbitragem Tributária) established by Decree-Law 10/2011. This provides an alternative to judicial courts for resolving tax disputes. Taxpayers can request arbitration to annul tax assessments by filing with CAAD. The arbitral tribunal has full jurisdiction to review the legality of assessments and order reimbursement if the assessment is found unlawful.
How is the tax base calculated for Stamp Tax on financial guarantees in Portugal?
The tax base for Stamp Tax on financial guarantees in Portugal is calculated based on the value of the obligation being guaranteed. For financial pledges, mortgages, and similar security interests, the tax base corresponds to the amount of debt or obligation secured by the guarantee. When guarantees secure multiple tranches of financing with different amounts, each guarantee is taxed according to its respective secured amount. The applicable rate under item 17 GTSD is applied to this base amount to determine the Stamp Tax due.
What are the grounds for annulment of a Stamp Tax assessment in arbitration proceedings?
Grounds for annulment of a Stamp Tax assessment in arbitration proceedings include: (1) incorrect legal interpretation or application of Stamp Tax legislation; (2) the taxed transaction not falling within the scope of taxable events under GTSD; (3) double taxation where both the underlying obligation and guarantee are taxed; (4) incorrect calculation of the tax base; (5) procedural irregularities in the assessment process; (6) violation of taxpayer rights during administrative review; and (7) assessments made outside the applicable limitation period.
Are compensatory interest (juros indemnizatórios) available when a Stamp Tax liquidation is annulled?
Yes, compensatory interest (juros indemnizatórios) is available when a Stamp Tax liquidation is annulled by an arbitral tribunal. Portuguese tax law provides that when tax authorities make unlawful assessments and taxpayers have paid amounts not legally due, they are entitled to reimbursement of the principal amount plus compensatory interest. This interest compensates taxpayers for the improper deprivation of their funds and runs from the date of payment until the date of reimbursement.