IMI Property Tax Exemption for Real Estate Companies Under Article 9(1)(e) CIMI - CAAD Decision 47/2015-T

ARBITRAL AWARD

The arbitrator Judge José Poças Falcão (President), the arbitrator Prof. Doctor Nina Aguiar and the arbitrator Paulo Ferreira Alves (arbitrator-members), appointed by the Deontological Council of the Administrative Arbitration Center (CAAD) to form the Arbitral Tribunal, constituted on 31 March 2015, hereby agree as follows:

I – REPORT

A – PARTIES

On 28 January 2015, REAL ESTATE COMPANY A..., SA., legal entity no. …, with registered office at …, hereinafter referred to as Claimant or taxpayer, requested, pursuant to and for the purposes of the provisions of Articles 2 and 10, both of Decree-Law no. 10/2011, of 20 January, the constitution of this Collective Arbitral Tribunal, with the Defendant being the Tax and Customs Authority (AT) (which succeeded the General Directorate of Taxes, by means of Decree-Law no. 118/2011, of 15 December), hereinafter referred to as Defendant or AT.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD on 29-01-2015, to examine and decide the subject matter of the present case, and was automatically notified to the Tax and Customs Authority on 29-01-2015, as recorded in the respective minutes.

The Claimant did not proceed to appoint an arbitrator, wherefore, pursuant to the provisions of Article 6, paragraph 1 and Article 11, paragraph 1, subparagraph b) of Decree-Law no. 10/2011, of 20 January, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council appointed as arbitrators His Excellency Judge José Poças Falcão, Prof. Doctor Nina Aguiar and Doctor Paulo Ferreira Alves, with the appointment being accepted as legally provided.

On 16-03-2015, the parties were duly notified of this appointment, having manifested no intention to refuse the appointment of the arbitrators, in accordance with Article 11, paragraph 1, subparagraphs a) and b) of the Statute of Arbitration in Tax Matters and Articles 6 and 7 of the Deontological Code.

In accordance with the provisions of Article 11, paragraph 1, subparagraph c) of Decree-Law no. 10/2011, of 20 January, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was duly constituted on 31-03-2015.

Thus, the arbitral tribunal is duly constituted, being materially competent, pursuant to Articles 2, paragraph 1, subparagraph a), and 30, paragraph 1, of Decree-Law no. 10/2011, of 20 January.

Both parties agreed to dispense with the meeting provided for in Article 18 of the Statute of Arbitration in Tax Matters.

The parties have legal personality and legal capacity, are legitimate and are legally represented (Articles 4 and 10, paragraph 2, of the same decree-law and Article 1 of Order no. 112-A/2011, of 22 March).

The case is not subject to vices that would invalidate it.

B – CLAIM

1. The Claimant requests the declaration of illegality of the tax assessment acts for additional Municipal Property Tax (IMI) nos. 2010 ... 2011 ... and 2012 ..., in the amount of € 85,068.44, €83,975.24 and € 82,066.04 in the total amount of € 251,109.72, relating to the years 2010, 2011 and 2012.

C - STATEMENT OF FACTS

1. Before proceeding to examine these matters, it must be stated that the factual matter relevant to its understanding and decision was based on documentary evidence and taking into account the facts alleged.

2. As regards the relevant factual matter, this tribunal establishes as proven the following facts:

3. The Claimant has as its corporate purpose "the urbanization and subdivision of land, construction of real estate on its own account or by contract, acquisition, operation and alienation of real estate, including the sale of acquired properties";

4. In the year 2010, the Claimant completed the construction of a real estate development located in … designated as "Buildings of …", after which it began the sale of the units making up the same;

5. On 15.09.2010, the Claimant delivered a Model 1 declaration for registration of the units in the property tax registry, requesting the suspension of the beginning of taxation (property for resale) of Municipal Property Tax, for a period of three years, based on subparagraph e), of paragraph 1, of Article 8 of the Code of Municipal Property Tax;

6. On 9 April 2013, at a meeting of the Claimant's general assembly, the management report, balance sheet and accounts of the company for the financial year 2012 were approved;

7. In the balance sheet approved at the meeting of 9 April 2013, the asset item 'investment properties' records the value of 27,563,203 euros. For the financial year 2011, the same item presents a value of 1,498,077 euros, according to the same document;

8. In a note to this balance sheet entry, it states: "during the financial year 2012 (…) the administration changed the purpose of the autonomous units from 'available' to 'investment properties'";

9. In the same balance sheet, the item 'inventories' records, for the financial year 2012, the value of 4,794,086 euros; for the financial year 2011, the same item records a value of 32,257,074 euros, according to the same document;

10. On 26 May 2014, at a meeting of the Claimant's general assembly, the board of directors of the Claimant reported to the general assembly having detected accounting errors relating to real estate belonging to the company, following which the company's accounts for the financial year 2012 were corrected;

11. At the same meeting on 26 May 2014, the management report, balance sheet and accounts of the company for the financial year 2012 with corrections were approved;

12. In the corrected balance sheet, approved at the general assembly of 26.5.2014, the item 'investment properties' records a value of 1,929,130 euros;

13. In the corrected balance sheet, approved at the general assembly of 26.5.2014, the item 'inventories' records a value of 30,428,159 euros;

14. Following the aforementioned corrections to the balance sheet, the Claimant submitted a replacement income statement (Model 22), for the financial years 2010, 2011 and 2012;

15. The Claimant was notified, through official notice no. …/…, of 02.06.2014, of a draft inspection report, which concludes that it is necessary to assess Municipal Property Tax on units AC, Af, BI, BJ, BM, CE, CH, CJ, DI, AA, AB, AD, AE, AG, AH, AI, AJ, AL, AM, AN, AO, AP, AQ, AR, AS, AU, AV, AX, AZ, BB, BC, BD, BE, BF, BG, BH, BL, BO, BP, BR, BS, BU, BU, C, CA, CD, CG, CV, D, DA, DB, DC, DE, DG, DM, DQ, E, EF, P, R, S, T, U, V, X and Z of the aforementioned urban property;

16. On 30 June 2014, the Claimant exercised the right of prior hearing by expressing itself in relation to the aforementioned draft report;

17. The Claimant was notified of an assessment of Municipal Property Tax made on 21.8.2014, relating to the year 2010 and concerning the aforementioned units in the amount of 105,693.89 euros. From this amount, the assessment note deducts the amount of 20,625.45 euros as relating to 'prior tax', determining a tax debt to be paid of 85,068.44 euros;

18. The Claimant was notified of an assessment of Municipal Property Tax made on 21.8.2014, relating to the year 2011 and concerning the aforementioned units in the amount of 104,600.69 euros. From this amount, the assessment note deducts the amount of 20,625.45 euros as relating to 'prior tax', determining a tax debt to be paid of 83,975.24 euros;

19. The Claimant was notified of an assessment of Municipal Property Tax made on 21.8.2014, relating to the year 2012 and concerning the aforementioned units in the amount of 102,691.49 euros. From this amount, the assessment note deducts the amount of 20,625.45 euros as relating to 'prior tax', determining a tax debt to be paid of 82,066.04 euros;

20. The Claimant entered into, on 27.1.2012, a residential lease agreement for a period of five years without purchase option for unit AC;

21. The Claimant entered into, at an unproven date, a residential lease agreement for a period of five years with purchase option for unit AF;

22. The Claimant entered into, on 20.4.2011, a residential lease agreement for a period of five years with purchase option for unit BJ;

23. The Claimant entered into, on 25.11.2011, a residential lease agreement for a period of five years with purchase option for unit DI;

24. The Claimant entered into, on 4.10.2011, a residential lease agreement for a period of five years with purchase option for unit CJ;

25. The Claimant entered into, on 4.10.2011, a residential lease agreement for a period of five years with purchase option for unit CH;

26. The Claimant entered into, on 30.8.2012, a residential lease agreement for a period of five years with purchase option for unit BI;

27. The Claimant entered into, on 10.5.2012, a residential lease agreement for a period of five years with purchase option for unit BM;

28. The matter deemed proven was proven on the basis of documentation submitted to the case by the Claimant and as stated by both parties in their procedural pleadings.

D – UNPROVEN FACTS

1. Of the facts with interest for the decision of the case, set out in the application, not all objects of concrete analysis were proven; those not included in the factuality described above were not proven.

E – ISSUES TO BE DECIDED

1. Having regard to the positions of the parties assumed in the arguments presented, the central issue to be resolved is the following, which must therefore be examined and decided:

a. The declaration of illegality of the tax assessment acts for additional Municipal Property Tax (IMI), nos. 2010 ... 2011 ... and 2012 ....

F – MATTER OF LAW

1. Having regard to the positions assumed by the parties in their pleadings submitted, the central issue to be resolved by this arbitral tribunal consists of examining the legality of the acts of assessment of additional Municipal Property Tax (IMI), nos. 2010 ... 2011 ... and 2012 ..., in the amount of € 85,068.44, €83,975.24 and € 82,066.04 in the total amount of € 251,109.72, relating to the years 2010, 2011 and 2012 notified to the Claimant for payment by 31 October 2014.

2. Having regard to the formulation of the Claimant's claim and in particular to the acts of assessment of additional Municipal Property Tax (IMI) in question here, including concerning different tax years, the application of the rules and principles of law, interpretation and application of legislative norms allows the cumulation of the claims made, and essentially allows an application of uniform and common decision to the three assessment acts.

3. The factual matter is established and proven, for which reason we shall now determine the law applicable to the disputed facts.

4. It is important in the first place to make a brief reference to the legal regime of the IMI for the tax periods from 2010 to 2012, relating to the case in question, since it underwent amendments for the 2012 period, by virtue of Law no. 64-B/2011, of 30 December, and in particular regarding the wording of the non-subjection to IMI provided for in Article 9 of the Code of Municipal Property Tax (CIMI).

5. Thus, Article 9, paragraph 1, subparagraph e) of the CIMI tells us for the periods 2010 and 2011:

1 - The tax is due from:

e) The third year following, inclusive, that in which a property has begun to appear in the current assets of a company that has as its purpose the sale thereof.

1. And for the year 2012, Article 9, paragraph 1, subparagraph e) of the CIMI, now had the following wording:

1 - The tax is due from:

e) The 3rd year following, inclusive, that in which a property has begun to appear in the inventory of a company that has as its purpose the sale thereof.

1. There is thus an alteration of one of the conditions of the incidence of the tax, now applying to properties listed in inventory instead of properties listed in current assets, and this follows the amendments made to the Accounting Standards System, and has only as a consequence for companies an alteration at the accounting level.

2. Non-compliance with this requirement in the year 2012 results in a presumption of alteration of the use of the property, other than (re)sale, and thus Article 9, paragraph 2, would apply, which would result in payment of the tax due from its acquisition, inclusive if the taxpayer did not alter the allocation of the properties for those purposes.

3. In light of the above, it is deemed necessary to make some brief considerations regarding the nature and regime of the non-subjection provided for in Article 9, paragraph 1, subparagraph e) and following.

4. This regime aims, in its essence, to allow real estate reseller companies to alleviate the tax burden during a period of 3 years, through non-payment of Municipal Property Tax, recalling indeed that during the sale phase, the property generates no income and generates only costs.

5. This regime, however, has an important safeguard for the present case, since it allows determination of the claimant's intention and the use given to the property.

6. This safeguard results from Article 9, paragraph 2 of the CIMI, where it is expressly provided that if the property is given a different use, the tax is assessed for the entire period elapsed since its acquisition.

7. This safeguard limits, exclusively, this non-subjection to properties for sale, not applying, and obligating the taxpayer to pay the tax from the moment it is due (acquisition), if it alters the use of the property.

8. What is considered as different use, within the scope of Article 9 of the CIMI, is in simple terms any use of the property or unit distinct from (re)sale.

9. For if the Claimant gave a different use to the property, as the most common case of lease, it would have to assess the tax for the entire period elapsed since its acquisition, from 2010.

10. If the property is allocated to another use, for example lease, the owner will have to pay the IMI relating to the three years in which it was not subject, whether it is leased in the 4th or another subsequent year.

11. It is therefore irrelevant whether the property is or is not sold within the three years of non-subjection, it being that the IMI will only be taxed after the third year until the property is resold.

12. The following requirements and assumptions necessary to benefit from the non-subjection result from the aforementioned Article 9 of the CIMI as worded by Law no. 64-B/2011, of 30 December: first, the taxpayer must engage in an activity of purchase and sale of properties; second, the taxpayer must allocate the property for the financial years 2010 and 2011 in the current assets account and in 2012 would have to allocate it in the inventory account, in accounting terms; third, the property must always be allocated for sale; and fourth, the taxpayer must notify the AT within 60 days of the allocation of the property.

13. Additionally, the taxpayer must also comply with the requirements provided for in Article 9, paragraphs 6 and 7 of the CIMI, that the taxpayer may not enjoy the benefit if the entity from which it acquired the property has enjoyed this benefit, and lastly it is not applicable to taxpayers who have their tax domicile in a country, territory or region subject to a clearly more favorable tax regime.

14. In light of the above, it falls to this arbitral tribunal to verify whether the taxpayer complied with the aforementioned assumptions and requirements, in order to be able to benefit from the non-subjection.

15. As to the first assumption, to engage in an activity of purchase and sale of properties, or that is, resale, it is fulfilled, for the following reasons.

16. The corporate purpose of the claimant is "Urbanization and subdivision of land, construction of real estate on its own account or by contract, acquisition, operation and exploitation of real estate, including the sale of acquired properties".

17. It is not raised by the Defendant that the Claimant does not comply with its corporate purpose, and consequently does not engage in the activity of purchase and sale of properties as described, wherefore on these terms this tribunal considers the first requirement of Article 9, paragraph 1, subparagraph e) fulfilled.

18. As to the second and third requirements, and in which it falls to this arbitral tribunal to decide whether they are fulfilled, it consists in the fact that AT considers that a different use would have been given to the properties that benefited from the period of non-subjection to IMI resulting from the formal change of the accounting framework of the autonomous units from the Inventories account to the Investment Properties account, and therefore this assumption is not fulfilled, leading to the issuance of the acts of additional IMI assessment in question here.

19. To determine whether these requirements are fulfilled at the accounting and actual level, it is important first to resort to the jurisprudential position that has already pronounced itself on this matter.

20. In this sense, the jurisprudence of the Supreme Administrative Court, which in award 0873/08 of 02/04/2019, expressly states "consideration that the accounting entry cannot constitute the sole legally relevant factor to be able to conclude that the land plots are or are not intended for construction, instead defining itself as a mere formal instrument for that purpose, within the strict limits of an evidencing index".

21. The aforementioned award of the Supreme Administrative Court further states the following:

"In this regard we shall closely follow the award of the Plenary of the Section of 24-2-99, in appeal no. 21,076, in which the Court examined an identical question in the validity of the previous CCA, it being certain that the legal provisions envisaged there (nos. 1, subparagraphs e) and f) and 2 of Article 10) have a wording entirely consistent with that currently contained in nos. 1, subparagraphs d) and e) and 2 of Article 9 of the CIMI.

Now, the answer to this question rests on the consideration that the accounting entry cannot constitute the sole legally relevant factor to be able to conclude whether the land plots are or are not intended for construction, instead defining itself as a mere formal instrument for that purpose, within the strict limits of an evidencing index.

In fact, the demonstration that this is so is found at once in the law itself, more specifically in paragraph 2 of the aforesaid Article 9 where it is provided that "In the situations provided for in subparagraphs d) and e) of the preceding paragraph, if the property is given a different use, the tax is assessed for the entire period elapsed since its acquisition", and hence it becomes irrelevant the "destination objectified in the intentions of the company and in the bookkeeping that does not come to have realization", since if the accounting entry were valid exclusively then never would "different use" be relevant for the purposes of assessment of the tax for the entire period elapsed since its acquisition.

In the situation "sub judicio", notwithstanding the accounting entry inferring that the land plots when classified as merchandise would be intended for resale, the fact is that the now appellant "A..." in the exemption request it formulated asserts that the land plots are for construction, which is credibly compatible with the fact that at the beginning of the activity it indicated construction of buildings as the activity (1. of the evidentiary).

In this context, raising doubts as to the destination of the land plots, it being unquestionable that the AT always has at its disposal the instrument of correction of tax truth conferred by paragraph 2 of Article 9 of the CIMI, these doubts should be valued in terms of protection of the taxpayer and never of the tax administration, it being known, as it is, that it falls to the administration the burden of proof of the verification of the assumptions of taxation (see Article 75, paragraph 1 of the LGT and 100 of the CPPT)."

1. In light of the above, and the position of the STA, and with the proper adaptations, the accounting element is not the sole legally relevant factor to be able to conclude that the properties were given a different use other than resale, which would fall within the scope of Article 9, paragraph 2, as an instrument of correction of tax truth, the AT the burden of proof that the properties were given another use other than resale.

2. However, as will be demonstrated, the Claimant corrected the accounting element in order to comply with Article 9, paragraph 1, subparagraph e) and further it is stated that it was not proven that the claimant allocated the properties in question to another purpose other than sale.

3. According to the normative evolution already described of Article 9, paragraph 1, subparagraph e), the taxpayer in accounting terms would have to allocate the property for the financial years 2010 and 2011 in the current assets account and in 2012 would have to allocate it in the inventory account.

4. The Claimant in the year 2012 allocated all the properties of its development, whether those leased or those for resale, to the account of investment properties account, which it alleges was merely an oversight and its intention was solely the transfer to the account of investment properties account of the properties that during that period lease agreements were entered into.

5. Indeed, the Claimant alleges that it corrected this error by submission and approval at a General Assembly of a new Report and Accounts, relating to the financial year 2012 alteration of the accounting framework of the autonomous units, in question here, transferring them from the inventories account to the investment properties account, wherefore this requirement of Article 9, paragraph 1, subparagraph e) would be fulfilled.

6. Thus on 26.05.2014 the Claimant submitted a new report of accounts relating to the financial year 2012, with the object of rectifying the previous report, having equally submitted replacement income statement declarations Model 22, as well as new simplified information.

7. The issue that arises here consists in determining whether the taxpayer can proceed to alter, correct, substitute or revoke a Report and Accounts already previously approved and published, and thus remedy or confirm some nullity or voidability.

8. The answer to this issue is affirmative on two essential points: first, the General Assembly has competence to approve the Report and Accounts, therefore it has competence to proceed to any alteration, correction, substitution or revocation of the same.

9. And the second point consists in the presumption that the deliberations of the General Assembly were taken correctly and within the procedures of the law, and only in situations where there is a judicial decision that has become final determining its invalidity, whether on grounds of nullity or voidability, must this tribunal accept its invalidity.

10. Let us see:

11. In the present case the deliberation of the Claimant's General Assembly is taken on 26.05.2014, which, in sum, proceeded to alter and correct the Report and Accounts, of the year 2012, it is presumed that this deliberation is valid.

12. The new report of accounts approved by the General Assembly of the shareholders of A..., on the basis of the error and correction of the previous accounts, does not need to be decreed judicially.

13. Therefore, it is not necessary for the Claimant to resort to judicial proceedings to remedy a nullity or voidability, if the same is remedied or confirmed by those legally competent.

14. This results from the legal regime provided for in Articles 287 and 288 of the Civil Code, given that nullity is remediable, as is voidability through confirmation, and the remedy or confirmation is competent to the person to whom the right of nullity and avoidance belongs, which in the present case falls to the General Assembly of the Claimant.

15. And, also, what results from Article 62 (Renewal of deliberation) of the Commercial Companies Code with the following wording:

1 - A deliberation null by force of subparagraphs a) and b) of paragraph 1 of Article 56 may be renewed by another deliberation and to this may be attributed retroactive effect, without prejudice to the rights of third parties.

2 - The voidability ceases when the shareholders renew the voidable deliberation by means of another deliberation, provided that this does not suffer from the vice of the preceding one. The shareholder, however, who has an appreciable interest in this may obtain annulment of the first deliberation, relatively to the period prior to the renewal deliberation.

3 - The court in which a deliberation has been challenged may grant the company a time period, at its request, to renew the deliberation.

1. That is, a deliberation of the General Assembly can always correct a nullity or voidability, it not being necessary a judicial decision.

2. Indeed all interested parties and third parties who consider themselves injured by this deliberation of the General Assembly can resort to the normal means to request its nullity or avoidability, including here the AT, if it considers that the deliberation taken on 26.05.2014 is not valid and suffers from a vice, it will have as interested party and third party, to resort to the general rules of nullity, provided for in Article 286 and following of the C.C. and Articles 53 and following of the CSC, ex officio within the scope of a judicial proceeding.

3. In this same sense, those injured/interested by the deliberation of the General Assembly, which initially approved the 2012 Report, may request its nullity or avoidance, given that to the properties for sale an incorrect accounting framework was given (from the Inventories account to the Investment Properties account), and which would not correspond to reality.

4. Those injured/interested are forthwith the shareholders of the claimant.

5. Not existing any norm that prohibits the General Assembly from proceeding to alter, correct, substitute or revoke the same, it is permitted to the General Assembly to correct errors in its declarations, even if the accounts are public, otherwise one would be creating unsustainable situations.

6. This situation may also be understood in another way, in the sense that the Claimant, by placing at a purely accounting level the properties for sale in the investment properties account instead of in the inventory account, was committing an error at the accounting level, since the properties for sale belong in the inventory account.

7. That is, the initial Report and Accounts contained an error, an error that did not correspond to reality.

8. In the face of the existence of that error, the shareholders and other interested parties could request nullity or voidability by judicial means or by means of remedy or confirmation.

9. This remedy or confirmation is done by means of a deliberation of the General Assembly.

10. That is, the Claimant, in the face of an error committed by itself, could within the procedures of the law correct that error, to admit that it is not permitted to correct errors in the same way as they were created, through the declaration of the General Assembly, is not what the law establishes by allowing remedy or confirmation.

11. Therefore, understanding that the declaration of the General Assembly of 26.05.2014, came to correct a nullity or voidability, by means of remedy or confirmation is within its competencies.

12. However, it is the exclusive competence of the judicial courts to decree the nullity or avoidability of the declaration of the General Assembly of 26.05.2014, if the interested parties (shareholders and third parties) understand that it is null or avoidable, and is not remedied or confirmed by the General Assembly.

13. It is further stated that this arbitral tribunal does not have competence to decide on the validity of General Assembly deliberations, its competence is limited in accordance with Article 2, paragraph 1, subparagraph a) of the Statute of Arbitration in Tax Matters "The declaration of illegality of acts of assessment of taxes, of self-assessment, of withholding at source and of payment on account;".

14. Thus there is no other solution but to understand that the General Assembly of 26.05.2014 is valid.

15. Verified the factual matter proven, and the positions assumed by the parties, it results that the accounting error is verified in the Report and Accounts primarily approved, which did not correspond to reality, since the properties intended and exclusively for sale, without any other use, having been placed in an incorrect accounting account, thus an error existed.

16. Existing an error and a vice, only with the approval of the new Report and Accounts and with the presentation of the replacement income statement declaration Model 22 was that error and vice corrected.

17. In considering that the Report and Accounts approved by the General Assembly of 26.05.2014 is not valid nor legal is it to prevent the Claimant and taxpayer from correcting an error of its own, including when that error does not represent its will and reality.

18. In this sense, neither is limiting Article 9, paragraph 2 of the CIMI, as to the requirement of different use that is limited only to inclusion of the inventory account, for it does not detract from reality. It is more of a safeguard, being another indication of the intention of the defendant in resale, and of the allocation of those properties to the same.

19. What is meant to be said here is that this article also applies in situations in which the properties are in the company's inventory but their use diverges from sale, such as the example of lease.

20. If it can in these situations, it can also in situations in which the taxpayer maintains the use of the property for sale, and through error, subsequently corrected, does not place the property in the inventory account.

21. It is in this sense, in harmony with award 0873/08 of 02/04/2019 of the STA, in which it is understood that the accounting element cannot constitute the sole legally relevant factor, taking precedence over this the tax truth.

22. The sole argument and proof presented to substantiate the different use of the requirement provided for in Article 9, paragraph 2 of the CIMI, is that it did not come to be listed in the company's inventory, maintaining the intention and purpose of sale.

23. And since the Claimant corrected that error and the properties came to be listed in the inventory account, the requirements of Article 9, paragraph 1, subparagraph e) and paragraph 2 of the CIMI thus come to be fulfilled.

24. As to the third requirement, which consists in the duty of the taxpayer in accordance with Article 9, paragraph 4, "For the purposes of the provisions of subparagraphs d) and e) of paragraph 1, taxpayers must notify the tax office of the area of the situation of the properties, within 60 days counted from the verification of the fact determining its application, the allocation of the properties to those purposes.".

25. The Claimant proceeded to the urbanization of a real estate development completed in the year 2010, and on 15.09.2010, proceeded to submit the IMI Model 1 Declaration, for the registration of the units in the property tax registry.

26. In that declaration the Claimant, opted in accordance with Article 9, paragraph 1, subparagraph e) of the CIMI for the modality of suspension of beginning of taxation for a period of 3 years, with the objective of properties for resale.

27. This requirement is likewise fulfilled.

28. In light of all that has been set out and on the basis of the jurisprudence cited above and doctrine presented, we can only draw the conclusion that the accounting element cannot constitute the sole legally relevant factor to set aside the non-subjection, an element which was corrected and fundamentally it was demonstrated that the properties are for sale, this being the tax truth, which takes precedence over the accounting truth.

29. Therefore, it is decided in the sense that the taxpayer complies with the necessary requirements for the non-subjection of payment of IMI provided for in Article 9, paragraph 1, subparagraph e) of the CIMI, wherefore it is illegal the acts of assessment of additional Municipal Property Tax (IMI), nos. 2010 ... 2011 ... and 2012 ..., in the amount of € 85,068.44, €83,975.24 and € 82,066.04 in the total amount of € 251,109.72.

G – DECISION

Therefore, taking into account all that has been set out, this Arbitral Tribunal decides:

a) To declare well-founded the request for declaration of illegality of the tax assessment acts in the Municipal Property Tax (IMI), nos. 2010 ... 2011 ... and 2012 ..., which established a total tax to be paid of 251,109.72 € (two hundred fifty-one thousand one hundred nine euros and seventy-two cents), by error regarding the assumptions of law, which justifies the declaration of its illegality and annulment;

b) To condemn the Defendant to refund to the Claimant that amount illegally assessed and paid.

Value of the case

The value of the case is fixed at € 251,109.72 based on the value of the assessment, taking into account the economic value of the case assessed by the value of the tax assessments impugned.

Costs

The amount of costs is fixed at € 4,896.00 € (four thousand eight hundred ninety-six euros), at the charge of the Defendant in accordance with Article 12, paragraph 2 of the Statute of Arbitration in Tax Matters, Article 4 of the Regulation of Costs and the Arbitration Procedure, and Table I attached to the latter. – no. 10 of Article 35, and nos. 1, 4 and 5 of Article 43 of the General Tax Law, Articles 5, paragraph 1, subparagraph a) of the Regulation of Costs and the Arbitration Procedure, 97-A, paragraph 1, subparagraph a) of the Code of Administrative Procedure and 559 of the Code of Civil Procedure).

Let it be notified.

Lisbon, 20-11-2015

The Collective Arbitral Tribunal,

José Poças Falcão

(President)

Paulo Ferreira Alves

(arbitrator-member)

Nina Aguiar

(arbitrator-member)

Case no. 47/2015-T CAAD

DISSENTING OPINION

I disagreed with the prevailing position for the following reasons:

Article 9, paragraph 1, subparagraph e) of the Code of Municipal Property Tax states:

"The tax is due from:

(…)

e) The 3rd year following, inclusive, that in which a property has begun to appear in the inventory of a company that has as its purpose the sale thereof."

Paragraph 2 of the same provision states:

"In the situations provided for in subparagraphs d) and e) of the preceding paragraph, if the property is given a different use, the tax is assessed for the entire period elapsed since its acquisition."

The rationale for this non-subjection rests on considering that properties held by a merchant who acquired them for sale – when that merchant has as a regular activity the sale of properties – just like any merchandise of any merchant, do not reveal wealth, and therefore do not indicate capacity to contribute.

However, properties may be acquired not to be intended for sale, but to be used in its activity or even as an investment.

What distinguishes the two situations is, mainly, its subjective element – or volitional element – i.e., the intention of the merchant as to the use of the asset.

The intention of the merchant in relation to real estate held by it is objectified in the accounting treatment given to them.

Thus, if the property has in the merchant's assets the function of a commodity, intended to be sold in a short space of time, that property should appear in inventory.

According to International Accounting Standard no. 2 (contained in Commission Regulation (EC) no. 1126/2008 of 3 November 2008, which adopts certain international accounting standards in accordance with Regulation (EC) no. 1606/2002 of the European Parliament and of the Council):

"Inventories are assets:

a) held for sale in the ordinary course of business;

b) in the process of production for such sale; or

c) in the form of materials or consumables to be consumed in the production process or in the provision of services."

This accounting standard is law of the European Union, fully applicable in the Portuguese legal system by force of the principles of direct effect and the primacy of European Union law.

Thus, if the merchant, who has as an activity or as one of its activities the sale of properties, holds in its assets a certain real estate property for sale, that real estate property should, in the merchant's balance sheet, appear recorded in inventory.

Subparagraph e) of paragraph 1 of Article 9 of the CIMI, already transcribed, in consonance with accounting regulation, makes the non-subjection of the asset to tax dependent on the condition that it be recorded in the merchant's inventory.

Taking this normative context as the systematic framework of subparagraph e) of paragraph 1 of Article 9 of the CIMI, the requirements for a property to benefit from the non-subjection to tax provided for in that provision can be listed as follows:

i) That the merchant has as an activity the sale of properties;

ii) That the property has been recorded in the merchant's inventory;

iii) That the merchant notify the tax office of the area of the situation of the property, within 60 days counted from the verification of the fact determining its application, the allocation of the properties to the purposes referred to (paragraph 4 of Article 9).

The situation of non-subjection ceases, without retroactive effects, when the sale of the property is delayed by a fact attributable to the taxpayer (paragraph 3 of Article 9).

The situation of non-subjection also ceases, but with ex tunc effects, i.e. covering the entire period of non-subjection, even if this has already fully elapsed, when the property is given a different use.

One of the issues disputed by the parties is the meaning that should be given to the expression "different use". Namely, there is discussion as to whether the allocation of the real estate property to inventory or to fixed assets is determining to assess the use given to it.

We understand, as to this aspect, that the allocation given to the property to inventory or to fixed assets is determining to assess the use given to it, and this is because the requirement for non-subjection to IMI is the recording of the property in inventory. Use different from recording in inventory can only be the classification of the property in another heading other than inventory.

The Claimant invokes, in support of its position, jurisprudence of the Supreme Administrative Court (namely the awards of 4-2-2009, Case no. 873/08 and of 24-2-1999, Case no. 21076), in which the Court recognizes that the "The accounting entry is not the sole and exclusive legally relevant factor (Article 9, paragraph 1, subparagraphs d) and e) of the CIMI) to be able to conclude whether the land plots are or are not intended for construction, instead defining itself as a mere evidencing element, formal, for that purpose, to be considered by the judge with the other factual elements".

We believe, however, that the situations in question are considerably different, requiring different consideration.

In the case decided by the STA in the aforementioned award, the taxpayer had recorded land plots for construction in "merchandise" (which would be correct from the accounting perspective only if it intended to sell them without building) instead of classifying them as "raw materials", treatment which was the correct one if the company intended to build, which was the case.

Now, firstly, land plots are assets which, when recorded in fixed assets, are not depreciable, unlike buildings. Secondly, land recorded in merchandise and land recorded in raw materials are, both, allocated to the current assets of the company, wherefore their accounting treatment is not substantially different.

In the case in question, we are not dealing with land but with urban properties, which, when recorded in fixed assets, are depreciable, reflecting itself in this way in a reduction of the profits (including taxable profits) of the company.

In the case sub judice, the Claimant initially recorded the units in question, precisely, in its inventory. As a consequence, it requested and obtained the suspension of the beginning of taxation for a period of three years, under the aforementioned subparagraph e) of paragraph 1 of Article 9 of the CIMI.

However, in 2012, the Claimant altered the classification of the units, recording them in "investment properties". With this, the Claimant formalized, through its own process, the recognition of an alteration in the economic function of the properties in its assets.

The formalization of this recognition has legal effects. With this recognition, the company assumes that the property is not for sale, which is a management decision.

Furthermore, the property begins to be depreciated. Depreciations are costs, which diminish the profit available to be distributed to the shareholders. The sole shareholder accepted this decision. But furthermore, depreciations diminish taxable profit, which has repercussions in the tax situation of the company.

Now, it is clear that it cannot be accepted the possibility of the taxpayer recording an urban property in "investment properties", practicing on the property annual depreciations, with diminution of taxable profit, and to sustain at the same time, contrary to what appears in the accounting records, that the true function of the property in its assets is that of current asset, claiming thus the non-subjection to IMI, which is reserved to situations in which the properties are not depreciable.

It seems evident that, in this situation, the legal effects of the balance sheet approved and deposited in accordance with the law must be valued and consider, as a consequence, that the transfer of the autonomous units from "inventory" to "investment properties" result, effectively, in giving the assets "a different use", for the purposes of paragraph 2 of Article 9 of the CIMI, under pain of falling into an irresolvable incongruity from a fiscal perspective.

In the case at hand, understanding this impossibility, the Claimant did not limit itself to invoking a discrepancy between the accounting treatment given to the assets and the actual function they would have in its assets. The Claimant alleges that it made an accounting error in transferring the units from "inventory" to "investment properties" and, as a result of the recognition or detection of that accounting error, proceeded to a "rectification" of the balance sheet, returning to record the units in "inventory".

The "rectified" balance sheet, relating to the financial year 2012, was approved already in 2014, and was approved at general assembly and filed in the commercial registry.

There arises here the question of what value this rectification has.

In this matter, one must first clarify the question of the possibility of such a rectification.

On this question, International Accounting Standard no. 8, also included in Regulation (EC) no. 1126/2008, states the following, in its point 41:

"Errors may arise in respect of the recognition, measurement, presentation or disclosure of elements of financial statements. Financial statements are not in compliance with IFRS if they contain material errors or immaterial errors made intentionally to achieve a particular presentation of the financial position, financial performance or cash flows of an entity. Potential errors of the current period discovered in that period are corrected before the financial statements are authorized for issue.

However, material errors are sometimes not discovered until a subsequent period, and these errors of prior periods are corrected in the comparative information presented in the financial statements of that subsequent period."

Point 42 of the same standard states:

"Subject to paragraph 43, an entity shall correct material errors of prior periods retrospectively in the first set of financial statements authorized for issue after their discovery by:

a) restatement of comparative amounts for the prior period(s) presented in which the error occurred; or

b) if the error occurred before the earliest prior period presented, restatement of the opening balances of assets, liabilities and equity for the earliest prior period presented."

From these legal provisions it is drawn that:

• Errors of the current period detected in that period may be corrected until the moment the financial statements are authorized for issue, i.e., approved at general assembly;

• "Material" errors (i.e. significant) detected in a period subsequent to that to which they relate can only be corrected in the comparative information presented in the financial statements of that subsequent period.

In the case at hand, therefore, the balance sheet could have been rectified until the moment it was approved by the general assembly. After that, the rectification could only be effected in the comparative information of the balance sheet of the period in which the error was detected, which in this case was the year 2014.

Outside these two possibilities, there would remain still the possibility, which the Defendant itself points out, of requesting a judicial annulment of the balance sheet.

The general assembly of the Claimant, in approving a "rectified" balance sheet in violation of the legal norm transcribed, took a deliberation in violation of the law.

On this matter, Article 56 of the Commercial Companies Code states:

"(Null deliberations)

1 - The deliberations of the shareholders are null:

(…)

d) Whose content, directly or by acts of other bodies which it determines or permits, is offensive of good morals or of legal provisions that cannot be waived, not even by unanimous will of the shareholders."

Therefore, there is, in our understanding, no possible doubt that the deliberation of "rectification of the balance sheet" is a deliberation null by force of Article 56, paragraph 1, subparagraph d) of the Commercial Companies Code.

The Claimant argues, as to this point, with the possibility, provided for in Article 62, paragraph 1 of the CSC, of renewal of null deliberation.

However, the argument cannot proceed at all, since the deliberation in question – deliberation that approved the 2012 balance sheet in its due time – is not null.

Indeed, Article 62, paragraph 1 of the CSC, on the possibility of the general assembly altering null deliberations, states:

1 - A deliberation null by force of subparagraphs a) and b) of paragraph 1 of Article 56 may be renewed by another deliberation and to this may be attributed retroactive effect, without prejudice to the rights of third parties."

In turn, Article 56 (Null deliberations) states:

1 – Deliberations of the shareholders are null:

a) Taken in general assembly not convened, except if all shareholders have been present or represented;

b) Taken by means of written vote without all shareholders with the right to vote having been invited to exercise that right, unless they have all given their vote in writing;"

It is evident that the provision does not apply in the case at hand because it does not concern a deliberation that is null by force of subparagraphs a) or b) of Article 56, therefore, the deliberation that approved the first balance sheet could never be altered on the basis of Article 56 of the CSC.

Thus, it must be concluded that the deliberation by which the general assembly of the Claimant approved, on 26 May 2014, a "rectified" balance sheet for the financial year 2012 is null, in accordance with Article 56, paragraph 1, subparagraph d) of the Commercial Companies Code.

It should be noted that nullity is cognizable ex officio, in accordance with Article 286 of the Civil Code, it therefore not being prohibited the cognizance of the nullity of the deliberation to this arbitral tribunal.

As that deliberation is null, the balance sheet to be taken into account to assess the right of the Claimant to non-subjection to tax under Article 9, paragraph 1, subparagraph e) of the CIMI is the balance sheet approved on 9 April 2013, the sole valid one.

According to that balance sheet, as also already concluded, the Claimant gave "a different use" to the real estate in question, by allocating them to "investment properties", losing thereby the right to non-subjection to tax under Article 9, paragraph 1, subparagraph e) of the CIMI.

Lisbon, 20-11-2015

The Arbitrator

Nina Teresa Sousa Santos Aguiar