Process: 475/2014-T

Date: March 11, 2015

Tax Type: IMT

Source: Original CAAD Decision

Summary

Process 475/2014-T addresses a critical issue regarding IMT (Municipal Tax on Onerous Transfers) exemption for properties acquired for resale under Article 7 of the Portuguese IMT Code. Company A purchased a residential property for €375,000, claiming the IMT exemption based on intention to resell. Subsequently, Company A sold the property to Company B, which also declared acquisition for resale and claimed the same exemption. The Tax Authority assessed IMT of €24,375.00 plus compensatory interest of €6,782.26 against Company A, invoking Article 11(5) of the IMT Code, which terminates the exemption when properties acquired for resale are 'resold again for resale.' Company A challenged this assessment through CAAD arbitration, arguing the resale declaration was a mistake, that Company B ultimately paid IMT on the transaction, and that no prejudice occurred to the Tax Authority. The company also contested the lack of reasoning for compensatory interest and alleged violations of constitutional principles of Legality, Equality, and Legal Certainty. The Tax Authority countered that the parties could have rectified the deed if it was truly a mistake but failed to do so, and that all parties understood and accepted the deed terms. This case establishes important precedent regarding the interpretation of Article 11(5) and whether the exemption automatically lapses when the subsequent purchaser declares acquisition for resale, even if that subsequent purchaser ends up paying IMT.

Full Decision

ARBITRATION DECISION

The arbitrator Guilherme W. d'Oliveira Martins, designated by the Deontological Council of the Administrative Arbitration Centre (CAAD) to form the present Arbitral Tribunal, constituted on 11.09.2014, decides as follows:

I. REPORT

1. Company A, Lda., NIPC ..., filed a petition for the constitution of a single arbitral tribunal, in accordance with the combined provisions of articles 2nd and 10th of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to as LRAT), in which the Tax and Customs Authority (AT) is the Respondent, with a view to examining the legality of the assessment of Municipal Tax on Onerous Transfers (IMT) in the amount of € 31,157.26.

2. The petition for constitution of the Arbitral Tribunal was accepted by the Honorable President of CAAD and automatically notified to AT on 11.07.2014.

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

4. On 27.08.2014 the parties were duly notified of such designation, and did not manifest any intention to reject the arbitrator's designation in accordance with article 11th, no. 1, paragraphs a) and b) of LRAT and articles 6th and 7th of the Deontological Code.

5. Therefore, in accordance with the provisions of article 11th, no. 1, paragraph c) of Decree-Law no. 10/2011, of 20 January, as amended by Law no. 66-B/2012, of 31 December, the Arbitral Tribunal was constituted on 11.09.2014.

6. On 10.12.2014 the first meeting of the Tribunal took place, in accordance with article 18th of LRAT, and minutes thereof were drawn up, which are also attached to the case file.

7. Upon opening of the meeting, in accordance with article 18th of LRAT, the floor was given to the representatives of the Petitioner and of the Respondent to, in that order, pronounce themselves on (i) procedural matters; (ii) any exceptions that should be examined and decided before the Tribunal addresses the petition; (iii) the need for corrections in the procedural documents submitted; (iv) the need to schedule a new meeting for oral arguments.

8. Having heard the parties and with their agreement, the Tribunal decided to waive oral arguments.

9. The Tribunal set 10.03.2015 as the date for the pronouncement of the arbitration decision.

I2. The grounds of the Petitioner's request are as follows:

- Within the scope of its activity of buying and selling real property, the Petitioner acquired by public deed the unit designated by the letter "D" intended for residential use, of the urban property registered in the cadastral matrix of the parish of ..., municipality of Cascais under Article ..., for the price of € 375,000.00.

- In this context, the Petitioner emphasizes that it intended the property in question for resale, having benefited from the IMT exemption provided for in article 7th of the IMT Code. The purchase of the property and the respective IMT exemption took place on the condition of resale within three years, or that the property be not given a different purpose (cf. article 7th and 11th, no. 5 of the IMT Code).

- By public deed executed on 12.04.2007, the property would be resold to company B – Real Estate Company, S.A., which, in turn, declared it was acquiring the property for resale.

- The Petitioner invokes that when it alienated the unit in question, it did not realize that the acquirer (company B – Real Estate Company, S.A.) also intended to benefit from the exemption provided for in article 7th. The Petitioner states that the deed would not have been executed with such a resale declaration.

- The Petitioner now contests the IMT assessment act relating to the year 2006, concerning the acquisition of the Unit identified above, in the amount of € 24,375.00, plus compensatory interest in the amount of € 6,782.26 (total amount of € 31,157.26).

- According to the Inspection Report resulting from the inspection action carried out pursuant to Service Order no. OI..., the AT alleges non-compliance with the provisions of no. 5 of article 11th of the IMT Code. That is, because the property was sold again for resale, it was determined that the Petitioner ceased to benefit from the IMT exemption.

- Pursuant to number 5 of article 11th of the IMT Code: "5 - The acquisition referred to in article 7th shall cease to benefit from exemption as soon as it is verified that the properties acquired for resale were given a different purpose or that they were not resold within three years or they were resold again for resale."

- Thus, to the taxable value of the property determined in accordance with no. 1 of article 12th of the IMT Code of €375,000.00, the tax rate was applied in accordance with article 17th IMT Code, and compensatory interest was assessed, due in accordance with article 33rd of the same code.

- The Petitioner alleges that this was due to a lapse because both the Petitioner and the Acquirer executed dozens of deeds in the scope of their activity and habitually benefited from such exemption.

- The Petitioner also emphasizes the fact that company B assessed IMT on that property, whereby the IMT exemption of which it benefited should prevail.

- According to the Petitioner, the assessment in question is tainted with illegality, in that, in the present case, although formally reference was made in the deed of 12.04.2007 executed between the Petitioner and company B, to the exemption provided for in article 7th of the IMT Code, the truth is that the company ended up not benefiting from that exemption, with IMT having been assessed.

- The Petitioner further argues the violation of the principles of Legality, Equality and Legal Certainty provided for in the Constitution of the Portuguese Republic (CPR), sustaining that the assessment of compensatory interest in the amount of € 6,782.26 suffers from the defect of lack of reasoning.

- In sum, the Petitioner argues that there was no prejudice whatsoever to the Tax Authority, and all requirements provided for in article 7th of the IMT Code were complied with.

- In light of the foregoing, and considering it manifestly illegal the declaration of lapse of the IMT exemption, in view of non-compliance with a merely formal requirement, it requests the granting of the petition, and that the illegality of the tax assessment act concerning the acquisition of the unit designated by the letter "D" intended for residential use, of the urban property registered in the cadastral matrix of the parish of ..., municipality of Cascais under Article ..., be declared. It should also be recognized the right to compensatory interest calculated at the legal rate from the date of payment of the tax until the date of its complete reimbursement.

I3. In response to the Petitioner's request, the AT:

- As to the defect of violation of law by erroneous interpretation and application of the provisions of article 7th of the IMT Code, the AT argues as follows:

- Although the Petitioner alleges that a lapse occurred in the deed executed on 12-04-2014 with company B, as it did not realize that the acquiring company also intended to benefit from the exemption, the AT understands that the contracting parties could have resorted to the legal means available to rectify the said deed, and nothing of the sort was done.

- The company that acquired the property in question (B Real Estate Company S.A.) from the herein Petitioner, also enjoyed the exemption contained in article 7th of the IMT Code, and no lapse occurred, as, according to what is stated in the deed of sale and purchase, all the parties understood and accepted the terms of the deed which was read and explained to all those present.

- It further emphasizes that the Petitioner, by virtue of executing many deeds, has the increased duty to know the consequences of the terms of the contracts in which it participates.

- Regarding the fact that IMT was assessed by company B, the AT emphasizes the need to distinguish between the obligations of the Petitioner and the tax obligations of company B.

- Now, company B is also a real estate company, which also has in its business purpose the buying and selling of properties for resale, whereby it itself met the conditions to benefit from the exemption of article 7th of the IMT Code. That is, upon acquiring the property in question for resale, company B was also obligated to comply with the requirements of resale within 3 years as a condition of exemption cf. no. 5 of article 11th of the said Code.

- Hence it is understood that the said company came to request payment of IMT from the AT on 09-09 2010, "for not having resold the property", whereby the payment of IMT made by Company B does not prove that it did not acquire the property for resale.

- In this manner, the company herein Petitioner, upon reselling a property that was acquired again for resale, meets the conditions for lapse of the IMT exemption in accordance with the terms of no. 5 of article 11th of IMT, and therefore the tax was properly assessed by the AT.

- As to the alleged lack of reasoning for the assessment of Compensatory Interest, the AT argues that:

- From a simple reading of the petition for arbitration it is clear that the Petitioner understood all the reasoning underlying the assessment of compensatory interest.

- The Petitioner, by stating that compensatory interest is part of the tax debt, also knew that compensatory interest would be assessed in accordance with article 33rd of the IMT Code, and was notified thereof in the Inspection Report. It is stated here that, to the taxable value determined, at the time of official assessment of IMT the proper tax rate will be applied, in accordance with article 17th of the IMT Code, and the proper compensatory interest will be assessed in accordance with article 33rd of the same legislation.

- As no error has been found on the part of the services in the application of the law to the facts at hand, the AT concludes that there is no place for the payment of compensatory interest.

- In these terms, it requests that the petition for arbitration be considered unfounded and not proven, and, consequently, the Respondent entity be absolved of all claims, with all the due and legal consequences.

II. PRELIMINARIES

1. The Tribunal is competent and is regularly constituted, in accordance with articles 2nd, no. 1, paragraph a), 5th and 6th, all of LRAT.

2. The parties have legal personality and capacity, are legitimate and are legally represented, in accordance with articles 4th and 10th of LRAT and article 1st of Ordinance no. 112-A/2011, of 22 March.

3. The process does not suffer from nullities and no preliminary issues of importance have been raised for analysis.

4. The conditions are therefore met for examination of the merits of the petition.

III. REASONING

III.A PROVEN FACTS

Before proceeding to examine the merits of the questions, it is necessary to present the factual matter relevant for its understanding and decision, which, having examined the documentary evidence and the tax administrative process attached to the case file and also taking into account the facts alleged, is established as follows:

1. The Petitioner engages in the activity of buying and selling real property, having acquired by public deed the unit designated by the letter "D" intended for residential use, of the urban property registered in the cadastral matrix of the parish of ... municipality of Cascais under Article ..., for the price of € 375,000.00.

2. The Petitioner intended the property in question for resale, having benefited from the IMT exemption provided for in article 7th of the IMT Code.

3. By public deed executed on 12.04.2007, the property would be resold to company B – Real Estate Company, S.A., which, in turn, declared it was acquiring the property for resale.

4. The AT assessed IMT against the Petitioner, relating to the year 2006, concerning the acquisition of the Unit designated by the letter "D" intended for residential use, of the urban property registered in the cadastral matrix of the parish of ..., municipality of Cascais under Article ..., in the amount of € 24,375.00, plus compensatory interest in the amount of € 6,782.26.

III.B FACTS NOT PROVEN

There are no relevant facts alleged or known by the Tribunal that were not established as proven.

III.C MOTIVATION

The establishment of the factual matter was based on the administrative process, the documents attached to the initial petition or in the course of the present process.

III.D OF LAW

In question, then, lies the IMT assessment against the Petitioner, relating to the year 2006, concerning the acquisition of the Unit designated by the letter "D" intended for residential use, of the urban property registered in the cadastral matrix of the parish of ..., municipality of Cascais under Article ..., in the amount of € 24,375.00, plus compensatory interest in the amount of € 6,782.26 (total amount of € 31,157.26).

Let us examine, then.

In the petition for arbitration, the Petitioner invokes that when it alienated the unit in question, and duly identified, it did not realize that the acquirer (company B – Real Estate Company, S.A.) also intended to benefit from the exemption provided for in article 7th. The Petitioner states that the deed would not have been executed with such a resale declaration.

Although formally reference was made in the deed of 12.04.2007 executed between the Petitioner and company B, to the exemption provided for in article 7th of the IMT Code, the truth is that the company ended up not benefiting from that exemption, with IMT having been assessed. In this manner, it contests the understanding of the AT regarding non-compliance with the provisions of no. 5 of article 11th of the IMT Code, in the sense that, because the property was sold again for resale, it was determined that the Petitioner ceased to benefit from the IMT exemption.

The Petitioner thus contests the IMT assessment act relating to the year 2006, concerning the acquisition of the Unit duly identified, considering it to be tainted with illegality.

In this context, the Petitioner emphasizes that it intended the property in question for resale, having benefited from the IMT exemption provided for in article 7th of the IMT Code. The purchase of the property and the respective IMT exemption took place on the condition of resale within three years, or that the property be not given a different purpose (cf. article 7th and 11th, no. 5 of the IMT Code).

The question being presented, the crux of the discussion that underlies the present case concerns the terms on which the lapse of the exemption provided for in article 7th of the IMT Code is based, under the heading "Exemption for the acquisition of properties for resale".

Article 7th of the IMT Code, under the heading "Exemption for the acquisition of properties for resale", provides as follows:

"1 - Acquisitions of properties for resale are exempt from IMT, in accordance with the following number, provided that it is verified that the declaration provided for in article 112th of the Tax Code on the Income of Natural Persons (IRS) or in paragraph a) of no. 1 of article 109th of the Tax Code on the Income of Legal Persons (IRC), as the case may be, relating to the exercise of the activity of buyer of properties for resale, has been presented before the acquisition.

2 - The exemption provided for in the preceding number does not prejudice the assessment and payment of the tax, in accordance with the general rules, unless it is recognized that the acquirer normally and habitually exercises the activity of buyer of properties for resale.

3 - For purposes of the provision at the end of the preceding number, the taxable person is considered to normally and habitually exercise the activity when they prove its exercise in the preceding year by means of a certificate issued by the competent tax service, and it must always appear in such certificate whether, in the preceding year, a property was acquired for resale or resold if previously acquired for that purpose.

4 - When the property has been resold without being again for resale, within three years, and tax has been paid, it shall be canceled by the chief of finances, at the request of the interested party, accompanied by documentary evidence of the transaction."

Now, number 5 of article 11th of the IMT Code provides that "5 - The acquisition referred to in article 7th shall cease to benefit from exemption as soon as it is verified that the properties acquired for resale were given a different purpose or that they were not resold within three years or they were resold again for resale." [emphasis ours]

The regime described was already provided for with identical contours in article 11th, point 3 of the Tax Code on Municipal Transfer Tax and Tax on Successions and Donations ("Transfer Tax Code"), according to which: Are exempt from transfer tax: "(…) 3. Acquisitions of properties for resale, in accordance with article 13.-A, provided that it is verified that the declaration provided for in article 105th of the Tax Code on the Income of Natural Persons (IRS) or in paragraph a) of no. 1 of article 94th of the Tax Code on the Income of Legal Persons (IRC), as the case may be, relating to the exercise of the activity of buyer of properties for resale, has been presented before the acquisition". Also provided in the Transfer Tax Code (article 16th, point 1) that the exemption lapsed as soon as it was verified that "That the properties acquired for resale were given a different purpose or that they were not resold within three years or they were resold again for resale; (…)".

For purposes of the decision to be rendered in the present process, the question to be analyzed is therefore centered on the interpretation of the referred rules, in order to determine whether the conditions for lapse of the said exemption in IMT are met, and as such for the determination of the respective assessment.

Having analyzed the referred rules, as well as the facts proven here, it is demonstrated that the requirements for determining the lapse of the Petitioner's exemption are met. Indeed, the reading of no. 5 of article 11th of the IMT Code leaves no doubt as to the consequent lapse resulting from the resale option included in the public deed of sale of the property to company B ("5 - The acquisition referred to in article 7th shall cease to benefit from exemption as soon as it is verified that the properties acquired for resale were given a different purpose or that they were not resold within three years or they were resold again for resale.")

We cannot fail to note the very admission by the Petitioner when it states that it did not realize that the acquirer (company B – Real Estate Company, S.A.) also intended to benefit from the exemption provided for in article 7th, and the clear intention of the latter to benefit from the exemption provided for in article 7th of the IMT Code is evident.

As the AT points out, company B is also a real estate company, which also has in its business purpose the buying and selling of properties for resale, whereby it itself met the conditions to benefit from the exemption of article 7th of the IMT Code. That is, upon acquiring the property in question for resale, company B was also obligated to comply with the requirements of resale within 3 years as a condition of exemption cf. no. 5 of article 11th of the said Code.

Having said this, we accept the understanding of the AT regarding the request for payment of IMT by company B. Such a request would be made on 09-09 2010, that is, three years later, "for not having resold the property", whereby the payment of IMT made by Company B merely demonstrates that, upon acquiring the property in question for resale, company B was also obligated to comply with the requirements of resale within 3 years as a condition of exemption cf. no. 5 of article 11th of the said Code.

In a different perspective, and it being true that the Petitioner sustains its lapse in the dozens of deeds resulting from the scope of its activity, in which the benefit of that exemption usually appears – which would only serve to ensure greater care in the conduct of sales to companies of a similar nature -, one cannot fail to understand the additional arguments adduced by the AT. On the one hand, in the act of deed of sale and purchase, all the parties express that they understood and accepted the terms of the deed which was read and explained to all those present, and on the other hand, the contracting parties could have resorted to the legal means available to rectify the said deed.

Having analyzed the obligations of the Petitioner and the tax obligations of company B, we have that the company herein Petitioner, upon reselling a property that was acquired again for resale, does indeed meet the conditions for lapse of the IMT exemption in accordance with the terms of no. 5 of article 11th of IMT, and therefore the tax was properly assessed by the AT. For its part, company B, being also a real estate company, which also has in its business purpose the buying and selling of properties for resale, met itself the conditions to benefit from the exemption of article 7th of the IMT Code. That is, upon acquiring the property in question for resale, company B was also obligated to comply with the requirements of resale within 3 years as a condition of exemption cf. no. 5 of article 11th of the said Code.

As far as the alleged lack of reasoning as to compensatory interest is concerned, it is recalled that, in accordance with article 35th, no. 1 of the General Tax Law, these are due "when, due to a fact attributable to the taxpayer, the assessment of part or all of the tax owed or the delivery of tax to be paid in advance, or withheld or to be withheld within the scope of tax substitution, is delayed" and the assessment act must explain "with clarity the respective calculation" (cf. no. 9 of the same article).

It should be noted that compensatory interest form an integral part of the tax debt itself, with which they are jointly assessed, and are covered by the duty of reasoning, as to the reasons for their existence and the manner of calculation (basis of incidence, interest rate applied, counting period).

It is consistent jurisprudence of the Administrative Court of Appeals that the responsibility for compensatory interest has the nature of civil compensation and, therefore, depends on the nexus of adequate causality between the delay in assessment and the action of the taxpayer, as well as the possibility of making a judgment of censure of their action, by way of intent or negligence (cf. Judgment of the Administrative Court of Appeals, case no. 0587/10, of 16 December 2010).

In this sense, and by considering the assessment of compensatory interest to be reasoned, the arguments also presented by the AT on this matter are shared.

By the understanding presented, there is no place for the payment of compensatory interest.

Thus, the assessment act in question should be maintained.

IV. DECISION

In these terms, and with the grounds set out, the Arbitral Tribunal decides to rule unfounded the petition for arbitration, insofar as it concerns the IMT assessment relating to the unit designated by the letter "D" intended for residential use, of the urban property registered in the cadastral matrix of the parish of ..., municipality of Cascais under Article ..., upholding the challenged assessment.

The value of the case is fixed at € 31,157.26, in accordance with paragraph a) of no. 1 of article 97.-A of the Code of Administrative Court Procedure (CACP), applicable by virtue of paragraphs a) and b) of no. 1 of article 29th of LRAT and no. 2 of article 3rd of the Regulations for Costs in Tax Arbitration Proceedings.

The payment of the arbitration fee, in accordance with Table I of the Regulations for Costs in Tax Arbitration Proceedings, is the responsibility of the Petitioner, in accordance with articles 12th, no. 2, and 22nd, no. 4, both of LRAT, and article 4th, no. 4, of the cited Regulations.

Lisbon, 11 March 2015

The arbitrator,

Guilherme W. d'Oliveira Martins

Frequently Asked Questions

Automatically Created

What is the IMT tax exemption for properties acquired for resale under Article 7 of the Portuguese IMT Code?
Article 7 of the Portuguese IMT Code provides an exemption from Municipal Tax on Onerous Transfers for properties acquired with the declared intention of resale. The exemption is conditional upon the property being actually resold within three years of acquisition and not being given a different purpose during that period. However, Article 11(5) establishes that the exemption ceases if the property is resold again for resale, meaning the subsequent buyer also claims the resale exemption.
How did the CAAD arbitral tribunal rule on the IMT exemption for resale in Process 475/2014-T?
The CAAD arbitral tribunal in Process 475/2014-T examined whether Company A rightfully lost its IMT exemption under Article 11(5) when it resold a property to Company B, which also declared acquisition for resale. The tribunal had to determine if the exemption loss was mandatory despite Company A's claim of mistake and the fact that Company B ultimately paid IMT. The case centered on interpreting the phrase 'resold again for resale' and whether formal compliance or substantive tax collection should prevail.
What are the legal requirements to qualify for IMT exemption when purchasing property for resale in Portugal?
To qualify for IMT exemption when purchasing property for resale in Portugal under Article 7 of the IMT Code, the following requirements must be met: (1) the acquirer must have the declared intention at the time of purchase to resell the property; (2) the property must be actually resold within three years from the date of acquisition; (3) the property must not be given a different purpose during the three-year period; and (4) critically, under Article 11(5), the property cannot be resold to another buyer who also claims the resale exemption, as this triggers automatic loss of the original exemption.
Can a real estate company claim an IMT refund if a property bought for resale is not sold within the legal deadline?
A real estate company can challenge an IMT assessment through CAAD tax arbitration even if the three-year resale deadline was not met, by arguing legal interpretation issues, procedural violations, or constitutional principles. In Process 475/2014-T, Company A sought to recover IMT by arguing that although it resold to a buyer claiming resale exemption (triggering Article 11(5)), this was a mistake and the subsequent buyer actually paid IMT, meaning no tax revenue was lost. The success of such claims depends on the tribunal's interpretation of whether formal compliance or substantive tax collection should govern exemption eligibility.
What is the procedure for challenging an IMT tax assessment through CAAD tax arbitration in Portugal?
To challenge an IMT tax assessment through CAAD arbitration in Portugal, taxpayers must follow the procedure established by Decree-Law 10/2011 (LRAT). The process involves: (1) filing a petition for constitution of an arbitral tribunal with CAAD; (2) acceptance by the CAAD President and automatic notification to the Tax Authority; (3) designation of an arbitrator by the Deontological Council; (4) parties' opportunity to object to the arbitrator designation; (5) formal constitution of the tribunal; (6) scheduling of meetings where parties present arguments and procedural matters are addressed; and (7) issuance of the arbitration decision, typically within the legally established timeframe. Taxpayers can request declaration of illegality and claim compensatory interest from the date of tax payment until full reimbursement.