IUC Subjective Incidence in Financial Leasing: Lessee vs Lessor Tax Liability (CAAD 50/2014-T)

ARBITRAL DECISION

I. REPORT

A, a company with registered office in ..., holder of the single registration and identification number for legal entities ..., hereinafter simply designated "Claimant", filed a request for constitution of an arbitral tribunal in tax matters and a request for arbitral pronouncement, pursuant to the provisions of articles 2 no. 1 a) and 10 no. 1 a), both of Decree-Law no. 10/2011, of January 20 (Legal Framework for Tax Arbitration, briefly designated as "RJAT"), petitioning for the annulment of 119 tax assessments for Single Motor Vehicle Tax (IUC) relating to fiscal years 2009 to 2012, in the total amount of €5,876.00, as well as reimbursement of the same amount, corresponding to the tax paid and payment of corresponding compensatory interest.

To substantiate its request, it alleges, in summary:

a) The Claimant is a credit institution, and within the scope of its activity, grants financing to the automobile sector;

b) As of the date of the tax assessment, the Claimant was no longer the owner of the vehicles given in financial lease;

c) These having been sold to the former lessees, notwithstanding the fact that their property registration was not updated;

d) Even though, on the date on which the IUC became due, the Claimant was recorded in the register as the owner of the vehicles, it is certain that they were subject to a financial lease contract, in which case the responsibility for their payment belongs to the lessees;

e) The Tax Authority (AT) considers that the Claimant, as the lessor entity of the vehicles, is responsible for the payment of the IUC;

f) Pursuant to article 3 of the CIUC, the lessee is equated with the owner of the vehicle to be considered a taxable person for IUC purposes;

g) The failure to register does not affect the validity of the purchase and sale contracts concluded but only their effectiveness, and even this only against third parties acting in good faith, a qualification that the AT does not assume;

h) The AT cannot be considered a third party for registration purposes, by virtue of the fact that the purchase and sale and financial lease contracts would be unenforceable against it;

i) The legislature chose to privilege the criterion of economic ownership, to the detriment of legal ownership;

j) Pursuant to no. 2 of article 3 of the CIUC, as the lessees have the exclusive use of the vehicle, the obligation to pay the tax also falls upon them;

k) In the case of the 119 assessments in dispute, the Claimant is not a taxable person for IUC purposes;

l) The assessments are not substantiated.

The Claimant submitted 4 annexes and 238 documents, having not called any witnesses.

In the request for arbitral pronouncement, the Claimant chose not to designate arbitrators, wherefore, pursuant to the provisions of article 6 no. 2 a) of the RJAT, the undersigned was designated by the Ethics Council of the Administrative Arbitration Center, with the appointment being accepted as legally provided for.

The collective arbitral tribunal was constituted on March 25, 2014.

Notified according to the terms and for the purposes provided in article 17 of the RJAT, the Respondent submitted its response, alleging, in summary, the following:

a) The assessments are duly substantiated, with the Claimant extracting from the contextual motivation the reasons of fact and law that led the AT to make the decision in question;

b) The Claimant alleges that all vehicles in question in the present proceedings were under financial lease, without submitting proof of such fact;

c) The invoices submitted neither prove the lease nor the sale of the vehicles;

d) The Claimant does not submit documentary proof of the price received for the transmission of the automobiles;

e) The legislature expressly and intentionally established that the taxable persons for IUC are the owners, being considered as such the persons in whose name the vehicles are registered;

f) Article 3 of the CIUC does not establish any presumption of ownership, but a true legal fiction of ownership—the legislature does not say that they are presumed to be owners but that they are considered to be owners;

g) The failure to record in the register the changes in ownership or the situations of lease results in the obligation to pay IUC falling upon the registered owner, and the AT cannot assess the tax based on elements not contained in the register;

h) The IUC is owed by the persons who appear in the register as owners of the vehicles;

i) With regard to financial lease contracts, the failure to comply with the obligation provided for in article 19 of the CIUC places upon the Claimant the obligation to pay the tax.

The Respondent submitted 1 document and a copy of the administrative file, having called no witnesses.

On 05/06/2014, the first meeting of the Arbitral Tribunal took place, according to the terms and for the purposes provided in article 18 of the RJAT, with the Claimant requesting the submission to the record of the financial lease contracts concluded and the accounting extracts relating thereto, whose submission was admitted, with the Claimant being notified to submit them in digital format within 10 days. The Claimant was also notified to submit, within the same period, the Annex A together with the initial request in editable format, which it did within the fixed deadline.

Notified of the contents of the clarifications provided and documents submitted by the Claimant, the Respondent submitted its comments in writing.

The parties submitted written submissions within the time limit set for that purpose.

II. ISSUES TO BE DECIDED

Given the positions assumed by the parties, as expressed in the arguments put forward, it is necessary:

a. To determine who is the taxable person for IUC if, on the date of the occurrence of the tax event, a financial lease contract is in force whose object is a motor vehicle;

b. To determine who is the taxable person for IUC when, on the date of the occurrence of the tax event, the motor vehicle originally subject to a financial lease contract has already been disposed of;

c. To determine the legal value of motor vehicle registration for the purposes of IUC, particularly for the purposes of the subjective scope of the tax;

d. To determine whether the failure to update the motor vehicle register permits the persons in whose name the vehicles are registered to be considered as taxable persons for IUC purposes.

III. FACTS

a. Established Facts

With relevance to the decision to be rendered in the present proceedings, the following facts are established:

1. The Claimant is a financial credit institution;

2. Within the scope of its activity, the Claimant grants its clients financing for the acquisition of motor vehicles;

3. The aforementioned financing is, most often, formalized through the conclusion of financial lease contracts;

4. During the period of execution of those contracts, the Claimant maintains the legal position of lessor;

5. The Claimant was notified of 119 (one hundred and nineteen) acts of assessment of IUC relating to the years 2009 to 2012, in the global amount of €5,876.00, and respective compensatory interest;

6. None of the 119 vehicles belongs to categories F or G referred to in article 4 of the CIUC;

7. The 119 assessments relate to vehicles in respect of which, on the date of the occurrence of the tax event, a sales invoice had been issued by the Claimant to a third party;

The Claimant paid the tax assessed by the Respondent and reflected in the assessments now being challenged.

b. Unproven Facts

No other fact was proven with interest in the proceedings.

c. Substantiation of the Facts

Conviction regarding the facts held to be established was formed on the basis of documentary evidence submitted by the Claimant, indicated in relation to each of the points, and whose correspondence to reality was not questioned.

IV. CUMULATION OF CLAIMS

Given the high number of vehicles and the volume of documentation necessary to prove the facts it alleges, the Claimant, invoking the principle of procedural economy, seeks a judgment of illegality encompassing the 119 acts of tax assessment now in question.

Verified the identity of the nature of the tax facts, the grounds of fact and law invoked and the tribunal competent for the decision, nothing prevents, pursuant to article 3 of the RJAT and article 104 of the Code of Tax Procedure and Process, the intended cumulation of claims.

V. PRELIMINARY MATTERS

The Arbitral Tribunal is regularly constituted and is materially competent.

The parties enjoy legal personality and capacity, are legitimate and are regularly represented.

The proceedings do not suffer from vices affecting their validity, there being no exceptions or preliminary matters preventing consideration of the merits and that must be considered ex officio.

VI. LAW

Established as the facts are, it is now necessary, by reference thereto, to determine the applicable law.

Having examined the arguments put forward by the parties, the fundamental issue now at hand is easily discerned: to know whether the rule contained in no. 1 of article 3 of the CIUC contains a legal presumption or not. It should be noted, moreover, that this question has been abundantly raised, giving rise to copious case law—also arbitral—which will be appropriately brought here.

As is known, under the heading subjective scope, article 3 of the CIUC provides that:

"1. The taxable persons for the tax are the owners of the vehicles, being considered as such the natural or legal persons, of public or private law, in whose name the same are registered.

1. Financial lessees, purchasers with reservation of ownership, as well as other holders of purchase option rights by force of the lease contract are equated with owners."

Now, to dispel doubts about the meaning and scope to be attributed to a given legal rule implies undertaking an interpretive task that makes it possible to extract from the linguistic statement a concrete meaning or "content of thought"([1]). However, such a task can only be carried out—thus achieving an understanding of the vis ac potestas legis—through the use of a concrete method, which is based on literal interpretation, on the one hand, and on logical or rational interpretation, on the other.

It should be recalled, before we proceed, that according to the provision in no. 1 of article 11 of the General Tax Law, tax rules are interpreted in accordance with commonly accepted principles of legal hermeneutics, particularly those established, among us, in article 9 of the Civil Code. Let us proceed.

Literal interpretation presents itself, then, as the first stage of interpretive activity. As FERRARA states, "the text of the law forms the substratum from which the interpreter must depart and on which must rest"([2]).

In truth, since the law is expressed in words, the verbal significance they contain must be extracted from them, according to their natural connection and grammatical rules. However, if the words employed by the Legislature are equivocal or indeterminate, it will be necessary to resort to logical interpretation, which considers the spirit of the provision being interpreted.

Logical interpretation, as it has been uniformly understood by doctrine([3]), is based on the rational element, the systematic element and the historical element; weighing them and deducing therefrom the value of the legal rule in question.

By rational element is to be understood the raison d'être of the legal rule, i.e., the purpose for which the legislature instituted it. The discovery of the ratio legis presents itself, thus, as a factor of indubitable importance for the determination of the meaning of the rule.

It happens, however, that a given rule does not exist in isolation, but rather coexists with other rules and legal principles in a systematic and complex manner. Thus, it is natural that the meaning of a concrete rule results clear from the confrontation of this with others. As BAPTISTA MACHADO states, "this element comprises the consideration of other provisions that form the complex of rules of the institute in which the rule being interpreted is integrated, that is, that regulate the same matter (context of the law), as well as the consideration of legal provisions that regulate parallel normative problems or related institutes (parallel places). It also comprises the systematic place that belongs to the rule being interpreted in the overall legal order, as well as its consonance with the spirit or intrinsic unity of the entire legal order."([4]).

Already the historical element, in turn, must refer to and include materials connected with the history of the rule, such as "the evolutionary history of the institute, the figure or the legal regime in question (…); the so-called sources of the law, that is the legal or doctrinal texts that inspired the legislature in the elaboration of the law (…); the preparatory works."

Let us apply what has been said to the case at hand.

Having examined the arguments of the Claimant and Respondent, and as to the literal element, it is easily understood that the focus of disagreement lies in the expression "(…) being considered as such (…)", contained in no. 1 of article 3 of the CIUC.

The question is asked—as was done in the Arbitral Decision rendered in the course of Case no. 73/2013-T([5]): "Does the fact that the legislature chose the word 'being considered' destroy the possibility of us being before a presumption?" No. It is the answer which, we believe, is imperative. And let it not be said that such conclusion is undermined by the circumstance that the legislature did not use the word "are presumed," which it employed in the ancient Regulation of the Motor Vehicle Tax.

Also here we cannot but emphasize what was said in that decision: "examining the Portuguese legal order, we find innumerable rules that establish presumptions using the verb to consider, many of which employed in the gerund form ("considering" or even "being considered"). Examples thereof are the rules enumerated below: In the Civil Code, among others, articles 314, 369 no. 2, 374 no. 1, 376 no. 2, 1629 (…). Also in the tax legal order one can find the verb "to consider," namely the term "is considered" with a presumptive meaning. And thereupon the teaching of LEITE DE CAMPOS, SILVA RODRIGUES and LOPES DE SOUSA is added, which, for the clarity of exposition, is equally transcribed. Thus, the Authors write that "presumptions in matters of tax scope can be explicit, revealed by the use of the expression is presumed or similar (…). However, presumptions can also be implicit in rules of scope, particularly of objective scope, when certain values of movable or immovable property are considered as constituting taxable matter, in situations in which it is not impossible to determine the actual value."

To this point, JORGE LOPES DE SOUSA([6]) states that in no. 1 of article 40 of the IRS Code the expression "is presumed" is used, whereas in no. 2 of article 46 of the same instrument the word "is considered" is used, there being no difference whatsoever between one and the other expression, both meaning, after all, the same thing: a legal presumption.

And what is to be said of no. 4 of article 89-A? Is there any doubt that it is a presumption? And is such conclusion weakened by the fact that the verb to consider is employed therein? It does not seem so to us.

Thus, and as far as concerns us here, it is admissible to assimilate the verb to consider to the verb to presume. Indeed, we can be before a presumption even when the legislature has chosen other verbs, namely the verb to consider. In truth, and contrary to what the Respondent propounds, it is this conclusion that least offends the systematic coherence postulated by the legal order as a whole.

But more: the rational element also authorizes such conclusion.

Let us invoke the explanatory memorandum of Bill no. 118/X, of 07/03/2007, which gave rise to Law no. 22-A/2007, of June 29. The ratio legis becomes clear.

It was intended to undertake a "global and coherent reform of the taxes linked to the acquisition and ownership of motor vehicles" in accordance with the "imperative necessity of bringing clarity and coherence to this area of the tax system and the necessity, even more imperative, of subordinating it to the principles and concerns of an environmental and energy nature that today mark the discussion of motor vehicle taxation."

Thus, "the two new taxes now created, the motor vehicle tax and the single motor vehicle tax, constitute much more than the technical prolongation of the figures created in the 70s and 80s that preceded them, turned predominantly to revenue collection, indifferent to the social cost resulting from motor vehicle circulation. They constitute something different, figures already of the century in which we live, with which it is intended, certainly, to collect public revenue, but to collect it in the measure of the cost that each individual causes to the community."

In a manner congruent with that motivation, the legislature came to establish, in article 1 of the CIUC, the principle of equivalence, making it clear "that the tax, as a whole, is subordinated to the idea that taxpayers should be burdened in the measure of the cost they cause to the environment and the road network, this being the reason for being of this tax figure. It is this principle that dictates the burdening of vehicles in accordance with their respective ownership and up to the moment of scrapping."

It can, moreover, be said that the environmental and energy concerns are so impressive in the IUC context that the principle of equivalence shapes not only the tax base, but also, and above all, the very subjective scope, provided for in article 3.

Once again the Arbitral Decision rendered in the course of Case no. 73/2013-T is invoked: "Taking into account both the systematic place that the principle of equivalence occupies (article 1 of the CIUC)—systematic element—and the historical element embodied by Bill no. 118/X (source of law), and the rational (or teleological) element just analyzed, all point in the direction of the preliminary conclusion reached by us when analyzing the grammatical element, only making sense to conceive in the context of article 3 of the CIUC the expression 'being considered as such' as revealing the presence of a rebuttable presumption (…). In truth, the ratio legis of the tax rather points in the direction of the users of vehicles being taxed, the economic owner, in the words of DIOGO LEITE DE CAMPOS, the actual owners or the financial lessees, as these are the ones who have the polluting potential causing the environmental costs to the community."

The legal nature of the rule contained in no. 1 of article 3 of the CIUC being established, it is now necessary to clarify the question of the subjective scope of the tax during the period of validity of a financial lease contract.

First, however, and to better elucidate the issue now at hand, it must be emphasized that, during the validity of a financial lease contract, notwithstanding that the lessor maintains in its legal sphere the ownership of the leased asset, only to the lessee belongs the right to enjoy, in an exclusive manner, the leased asset; which results from the combined reading of article 1, of subsection b) of no. 1 of article 9 and of subsection a) of no. 2 of article 10, all of Decree-Law no. 149/95, of June 24.

Now, since it is to the lessee that the potential for use of the vehicle belongs, and having regard to the principle informing the IUC—established in article 1 of its respective Code—it is easily understood that it is the lessee who is burdened with the tax obligation by virtue of its qualification as a taxable person, through its equation with an owner. It is this, as far as concerns us here, the meaning to be drawn from nos. 1 and 2 of article 3 of the CIUC.

Now, since the lessee is the potential responsible for the road and environmental costs, it is well understood that it is he, and only he, who is responsible for the payment of the tax.

In light of the foregoing and in accordance with the provision of no. 2 of article 3 of the CIUC, no doubt subsists: if on the date of the occurrence of the tax event a financial lease contract is in force, the object of which is a motor vehicle, the taxable person is the lessee; never the lessor. And an identical solution is imperative, as will be seen below, in the case of the registration of the right of ownership subsisting in the name of the lessor.

And what is to be said if, on the date of the occurrence of the tax event, the motor vehicle subject to the financial lease contract has been disposed of? It must be said, by way of preamble, that the sale to the lessee is a situation that frequently occurs in the economy of the financial lease contract, as indeed also occurs in the present proceedings.

Now, once the purchase and sale is concluded, the lessee will be established, ex contractu, in the position of owner, consequently the provision of no. 1 of article 3 of the CIUC will start to apply to him; i.e., the new owner maintains, for purposes of IUC, the position of taxable person for the tax, but now no longer by virtue of the rule that attributed such quality to him while a lessee (no. 2 of article 3 of the CIUC).

And such a solution is imperative from the moment of perfection of the purchase and sale contract not only because the IUC Code requires it—by stating that the taxable persons for the tax are the owners—but also by the fact that among us the principle of consensuality prevails, which means that the transfer of ownership occurs by mere effect of the contract; as results in the first instance from no. 1 of article 408 of the Civil Code. See also, reinforcing what is said above, subsection a) of article 879 of that same instrument.

It should be noted, further, that the understanding set forth in the preceding paragraph is unanimously propounded by Doctrine([7]) and Case Law([8]), not requiring, thus, further development.

And what has just been said is relevant to support our position regarding the legal value of motor vehicle registration. It should be recalled, however, that according to the general rule seen above the transfer of the right occurs ex contractu, without need for any material act or publicity([9]).

As is uniformly accepted by Doctrine and Case Law, in the face of the silence of Decree-Law no. 54/75, of February 12, regarding the question of the legal value of motor vehicle registration, it becomes necessary to resort to the discipline of land registration; an operation moreover authorized by article 29 of that Decree-Law.

Now, having regard to the Land Registration Code—approved by Decree-Law no. 125/13, of August 30—particularly its article 7, and combining this rule with article 1 of Decree-Law no. 54/75, it is quickly inferred that the primary function of registration (motor vehicle): to give publicity to the legal situation of motor vehicles.

It can then be stated that registration is not constitutive in nature, but merely declaratory, permitting only the presumption of the existence of the right and its ownership. Note: presume and not fictionally create, thus being able to be rebutted by proof to the contrary.

And this is so precisely because, pursuant to the provision of article 408 of the Civil Code, and save the exceptions provided for in the law, the constitution or transfer of real rights over a determined thing occurs by mere effect of the contract, with its validity not depending on any subsequent act, e.g., registration in the register.

In this manner, not providing the law for any exception for the contract of purchase and sale of a motor vehicle, the real effects are produced normally, with the purchaser becoming its owner, independently of the register.

Now, if independently of the register the purchaser becomes the owner, the registered holder ceases concomitantly to be so; despite appearing as such in the register.

In the case at hand, and notwithstanding the failure to register the registrations, the transmissions effected are enforceable against the Respondent, the latter not being able to avail itself of the provision of no. 1 of article 5 of the Land Registration Code.

First and foremost by the fact that the Respondent is not, for the purposes of the provision of that rule, regarded as a third party for registration purposes.

The notion of third parties for purposes of registration is given to us by no. 4 of the same article 5: third parties, for purposes of registration, are those who have acquired from a common author rights incompatible with one another. Such is, manifestly, not the case herein.

The same reasoning must, naturally, be applied to the cases of financial lease, in respect of which also the register has no constitutive effect whatsoever, being nothing more than a presumption that the right exists. A rebuttable presumption, of the same token, by proof to the contrary.

And, in the same manner, the failure to register in the register the financial lease contract does not mean that it does not exist.

Now, notwithstanding the fact that as of the date of the tax assessments the Claimant still appears in the register as the owner of the vehicles, the truth is that it alleges not to be, as of the date of the tax event, its owner, by having already disposed of them.

Thus, and since the presumption resulting from the register is, as we have seen, rebuttable, let us see whether the documents submitted by the Claimant are apt to accomplish such purpose.

With a view to proving that the vehicles referred to in the present proceedings were by it disposed of on a date prior to that of the occurrence of the tax event, the Claimant submitted the respective sales invoices.

It should be noted that the Respondent alleged that the invoices submitted are not regularly issued, not constituting a document minimally apt to prove the existence of the supposed financial lease contracts.

It is verified, first of all, that the Claimant submitted, for each of the registration plates in question, a sales invoice.

This being established, and as results from the proven facts, none of the 119 vehicles involved in the present proceedings belong to categories F or G referred to in article 4 of the CIUC, wherefore the tax event occurs on the date of their respective registration or on each one of its anniversaries.

It further appears from the established facts that, on the date of the occurrence of the tax event, a sales invoice had been issued by the Claimant, in relation to each one of these 119 vehicles, to a third party.

The Respondent sustains that the invoice is not an appropriate document to prove the sale of the vehicle, being nothing more than a document unilaterally issued by the Claimant, alleging that "as is public knowledge, there is no shortage of cases of issuance of invoices relating to transmissions of goods and/or of provision of services that never occurred."

It is true, as the Respondent invokes, that many situations exist in which invoices do not evidence any legal transaction. In the case at hand, however, no element permits us to conclude that the invoices submitted do not evidence any transaction, it being certain that their falsity was not even argued by the Respondent, which limited itself to invoking that various such situations exist, without concretely referring that the situation herein was subsumed to such.

Being thus, in the absence of any elements or grounds that permit us to conclude otherwise, we must, naturally, accept the truthfulness of the documents submitted.

Established the truthfulness of the invoices submitted by the Claimant, we must consider, without need for any other considerations, these to be documents apt to prove the disposition of the vehicles in question.

Indeed, not providing the law for any specific form for the conclusion of a contract of purchase and sale of movable property, it must, necessarily, be accepted as proof of the said contract the invoice issued in accordance with legal terms.

Whereby it is verified that, as of the date of the tax event (date of registration or of each one of its anniversaries), the Claimant had disposed of all 119 vehicles, notwithstanding the fact that the said dispositions were not reflected in the competent register.

Thus, having regard to the fact that, as already set forth, the presumption resulting from the register is rebuttable by proof to the contrary, proof that is deemed sufficient with the presentation of the sales invoices of the vehicles, it is verified that, in relation to these 119 vehicles, the Claimant is not their owner, not being, therefore, a taxable person for the assessed IUC.

In summary:

• The rule contained in no. 1 of article 3 of the CIUC contains a presumption;

• Being that presumption contained in a rule of tax scope, it will always admit proof to the contrary, as results from article 73 of the LGT;

• When, on the date of the occurrence of the tax event, the motor vehicle originally subject to a financial lease contract has already been disposed of, although the right of ownership continues registered in the name of the original owner, the taxable person for IUC is the new owner, provided that the latter rebutts the presumption resulting from the register;

• The transfer of ownership occurs by mere effect of the contract, not requiring any subsequent act;

• Motor vehicle registration is not constitutive in nature, but aims to give publicity to the situation of vehicles through presumptions, rebuttable, of the existence of the right and its respective ownership;

• The AT cannot rely on the failure to update the register to, questioning the perfection of the purchase and sale contracts, attribute to the original owner the quality of taxable person for IUC and, thus, demand of him the fulfillment of the tax obligation.

From all that has been expounded it is clear the absence of legal ground for the acts of assessment of IUC, requiring their annulment, as well as that of the respective compensatory interest, with the other legal consequences.

VII. OPERATIVE PART

In light of the foregoing, it is decided:

a. To render judgment favorable on grounds proven, the request for annulment of the acts of assessment of IUC and of compensatory interest referred to in the Claimant's request;

b. To annul the acts of assessment of IUC and of compensatory interest referred to in a.;

c. To render judgment favorable the request for reimbursement of the amount of €5,876.00, paid by the Claimant, increased by compensatory interest at the legal rate, counted from the undue payments, until full payment to the Claimant of the assessed sums;

d. To condemn the Respondent for the costs of the proceedings.

The value of the proceedings is fixed at €5,876.00, in accordance with subsection a) of no. 1 of article 97-A of the Code of Tax Procedure and Process, applicable by virtue of subsections a) and b) of no. 1 of article 29 of the RJAT and of no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

The value of the arbitration fee is fixed at €612.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, in accordance with no. 2 of article 12 and no. 4 of article 22, both of the RJAT, and of no. 4 of article 4, of the cited Regulation, to be paid by the Respondent as the losing party.

Record and notify.

Lisbon, September 18, 2014.

The Arbitrator,

Alberto Amorim Pereira

Text prepared by computer, in accordance with no. 5 of article 131 of the Civil Procedure Code, applicable by remission of subsection e) of no. 1 of article 29 of Decree-Law no. 10/2011, of 01/20.

The drafting of the present decision follows the old spelling.