Process: 525/2016-T

Date: February 8, 2017

Tax Type: IMT

Source: Original CAAD Decision

Summary

CAAD Process 525/2016-T addressed an IMT (Municipal Tax on Onerous Property Transfers) dispute concerning the exemption for property acquired for resale under article 7(1) of the CIMT Code. A company purchased land for construction in 2007 for €7,716,100, initially benefiting from the IMT resale exemption after declaring its intention to resell the property. The Tax Authority subsequently issued an IMT assessment, challenging the exemption's validity. After the taxpayer's hierarchical appeal was dismissed, the case proceeded to CAAD arbitration. The arbitral tribunal, constituted in November 2016, first addressed preliminary procedural exceptions. The Tax Authority raised material incompetence regarding €12,764.61 in default interest and enforcement costs. CAAD ruled it lacked jurisdiction over enforcement-related charges, as arbitral competence under RJAT is limited to acts of tax assessment, self-assessment, withholding, and property valuation determinations—not enforcement proceedings. The tribunal accepted jurisdiction over the underlying IMT assessment challenge. The case demonstrates the scope limitations of tax arbitration in Portugal and the procedural path for challenging IMT assessments when the resale exemption is contested. Key facts established included the purchaser's declared resale intention in the deed, existing architectural projects for the property, and a 24-month construction commencement deadline in the tender rules. The decision clarifies that while CAAD can review IMT assessment legality, enforcement-related charges fall outside its competence, requiring dismissal of those claims.

Full Decision

ARBITRAL DECISION

The arbitrators Counselor Jorge Manuel Lopes de Sousa (arbitrator-president), Professor Doctor Glória Teixeira and Professor Doctor Vasco Valdez (arbitrators-assessors), appointed by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Court, constituted on 18-11-2016, agree as follows:

1. Report

A…, S.A., with registered office at Rua…, …, …, …, in Linda-a-Velha, legal entity no. …, hereinafter referred to as "Claimant", filed for arbitral pronouncement under the terms of the Legal Regime for Arbitration in Tax Matters, approved by Decree-Law no. 10/2011, of 20 January (hereinafter referred to as RJAT), with a view to the annulment of the assessment of Municipal Tax on Onerous Property Transfers (IMT) no. …, and corresponding compensatory and default interest, maintained following the dismissal of the Hierarchical Appeal no. RHQ …/15, issued by the Deputy General Director (by sub-delegation), on 13 May 2016, and notified on 31 May 2016.

The respondent is the TAX AUTHORITY AND CUSTOMS.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax Authority and Customs on 19-09-2016.

Pursuant to the provisions of article 6, section 2, subsection a) and article 11, section 1, subsection b) of RJAT, in the form amended by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council appointed as arbitrators of the collective arbitral court the signatories, who communicated acceptance of the assignment within the applicable period.

On 03-11-2016 the parties were duly notified of such appointment, and did not manifest will to refuse the appointment of the arbitrators, in accordance with the combined provisions of article 11, section 1, subsections a) and b) of RJAT and articles 6 and 7 of the Code of Ethics.

Thus, in accordance with the provision in article 11, section 1, subsection c) of RJAT, in the form amended by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 18-11-2016.

The Tax Authority and Customs responded, raising a peremptory exception of lack of object regarding the amount of € 12,764.61, referring to default interest and costs paid in tax enforcement, a dilatory exception of material incompetence regarding the same amount, as they concern acts carried out in a tax enforcement process, and another dilatory exception of inadequacy of the procedural means as to the same amount.

Furthermore, the Tax Authority and Customs argued that the claim should be held unfounded.

By order of 20-12-2016 it was decided to dispense with the holding of a hearing, and that the case proceed with written submissions.

The Parties submitted arguments.

The arbitral tribunal was duly constituted, in accordance with the provisions of articles 2, section 1, subsection a), and 10, section 1, of Decree-Law no. 10/2011, of 20 January.

The parties are duly represented, have legal personality and capacity, are legitimate and are represented (articles 4 and 10, section 2, of the same diploma and article 1 of Ordinance no. 112-A/2011, of 22 March).

The case is not tainted by nullities and exceptions were raised which warrant prior consideration, beginning with that of material incompetence, which is priority (article 13 of the Code of Administrative Tax Procedure).

2.1. Exception of Incompetence as to Consideration

The Claimant requests payment of the amount of € 12,764.61 relating to default interest.

The Tax Authority and Customs argue that this amount refers to default interest and costs charged in a tax enforcement process.

In fact, from document no. 1 attached with the Response, it appears that the amount of € 12,764.61 concerns default interest € 6,138.79 and court fee in the amount of € 6,614.09, and expenses with notifications in the amount of € 3.91 and € 7.82.

Among the competencies of the arbitral tribunals operating at CAAD defined in article 2, section 1, of RJAT and in Ordinance no. 112-A/2011, of 22 March, are not included competencies to consider acts carried out in tax enforcement, but only to declare the illegality of acts of tax assessment, self-assessment, withholding at source and payment on account, in addition to acts of determination of taxable or collectable matter and acts of determination of property values.

The acts of assessment of default interest and costs in a tax enforcement process are none of the categories indicated, so this Arbitral Court is not competent to consider their legality.

The exception of material incompetence as to the consideration of the legality of the acts referred to is thus well-founded, and the Tax Authority and Customs must be dismissed in that respect.

Thus, the consideration of the other exceptions raised by the Tax Authority and Customs connected with that amount of € 12,764.61 is prejudiced.

3. Factual Matter

3.1. Established Facts

Based on the elements contained in the case file and documents attached with the request for arbitral pronouncement, the following facts are considered established:

a) On 31-12-2007, the Claimant acquired from company B… the land for construction registered in the property register of the (extinct) parish of … in the municipality and district of Lisbon, under article …, for the value of € 7,716,100.00 (deed contained in document no. 5 attached with the request for arbitral pronouncement, whose content is reproduced, in which the representative of the Claimant stated that "he intends to resell the property");

b) Among the documentation attached to the deed is a document with the tender rules, in which the following is stated, among other things:

(...) B… has already developed an architecture project, as well as the respective specialty projects, which were submitted for authorization to build to the Municipal Council of ... (Process no. …/EDI/2006) and are still under review (the respective projects, namely the plans, elevations and sections are available for consultation).

C) The purchaser of the lot, if so desired, may take advantage of and develop these projects, undertaking to request the annotation of the administrative procedure for authorization (Process no. …/EDI/2806) and to present all studies and projects and to carry out all work required to obtain the respective authorization to build and necessary licenses with the competent entities, assuming all inherent costs.

(...)

10 – Commencement of Construction

The maximum period for commencement of construction is 24 (twenty-four) months following the celebration of the public deed of purchase and sale

c) The said acquisition benefited from IMT exemption, under the terms provided in article 7, section 1 of the CIMT (acquisition of property for resale);

d) On 22-01-2008, the Claimant was informed by B… of the need to deliver elements relating to the architecture project, "preceded by the annotation of the change in ownership of the applicant, in order to avoid the extinction of the procedure by disinterest" (document no. 6 attached with the request for arbitral pronouncement, whose content is reproduced);

e) On 18-03-2008, the Claimant was again notified by C… that the project for building installation networks of the water supply process was conditionally approved, requiring the delivery of further elements (document no. 8 attached with the request for arbitral pronouncement, whose content is reproduced);

f) On 13-02-2008, the Claimant was notified by C…, S.A. ("C…"), of the need to deliver a corrected water project (document no. 7 attached with the request for arbitral pronouncement, whose content is reproduced);

g) On 30-04-2008, the Claimant was notified by the Municipal Council of … that the construction authorization process was not properly instructed, so the delivery of complementary elements was required, namely the correction of elements of the excavation and peripheral containment project "under penalty of rejection of the request" (document no. 9 attached with the request for arbitral pronouncement, whose content is reproduced);

h) On 16-05-2008, the Claimant presented the elements referred to in the preceding subsection (document no. 10 attached with the request for arbitral pronouncement, whose content is reproduced);

i) In July 2008, the Claimant sent several requests to B… in order for it to proceed with the "transfer of authorship to the office of Mr. Architect D…" who had claimed "freelance fees to A… to resolve project defects prepared by him" (document no. 12 attached with the request for arbitral pronouncement, whose content is reproduced);

j) On 15-10-2008, and following the change in ownership of the projects, the Claimant was informed that some of the specialty projects were not properly instructed due to lack of technical response from B… (document no. 14 attached with the request for arbitral pronouncement, whose content is reproduced);

k) In November 2008, the Municipal Council of … issued an unfavorable opinion that required amendment to the initial sewage network project, because "The project in question is not updated and needs several corrections" (document no. 15 attached with the request for arbitral pronouncement, whose content is reproduced), and afterwards the Claimant obtained information that the amendments then necessary "result from the fact that B… did not deliver them at that time to the services of the Municipal Council of …, the respective projects. I consider that the costs with the amendments we are making are not our responsibility and result from the fact that the initial projects were not delivered on time to the Council" (document no. 16 attached with the request for arbitral pronouncement, whose content is reproduced);

l) The Claimant, in order not to let the respective procedure lapse, contracted the necessary services and made the adaptations inherent to the change in legislation, bearing the inherent costs, including those contained in documents no. 17 and 18 attached with the request for arbitral pronouncement, whose contents are reproduced);

m) On 04-03-2009, the Claimant was again notified by the Municipal Council of … about the need to make amendments to the architecture and specialty projects (document no. 19 attached with the request for arbitral pronouncement, whose content is reproduced), following which it incurred new costs, namely those referred to in documents no. 20 to 22 attached with the request for arbitral pronouncement, whose contents are reproduced);

n) All the new elements referred to above were delivered to the Municipal Council of … on 01-04-2009 (document no. 23 attached with the request for arbitral pronouncement, whose content is reproduced);

o) On 04-04-2009, the Claimant was notified of information issued by the Division of Private Projects of the Department of Strategic Projects of the Municipal Council of … pursuant to which, in addition to the "need to deliver amendment to the external arrangements project compatible with the need to divert an existing collector in the subsoil of lot 1", there was further required the "delivery of OVP plan and correction of the Climatization project" (document no. 24 attached with the request for arbitral pronouncement, whose content is reproduced), following which the Claimant incurred new costs referred to in documents no. 25 to 28 attached with the request for arbitral pronouncement, whose contents are reproduced);

p) On 30-04-2009, the Claimant proceeded to deliver to the Municipal Council of…, the public way occupation project (document no. 29 attached with the request for arbitral pronouncement, whose content is reproduced);

q) On 30-04-2009, a receipt was issued in the name of the Claimant for payment of services provided by Engineer E…, related to the approval control of the fire safety project (document no. 30 attached with the request for arbitral pronouncement, whose content is reproduced);

r) On 05-05-2009, and following the notification of the collector diversion project, the Claimant requested, with the Municipal Council of…, the amendment to the external arrangements project in order to reconcile the projects in question (document no. 31 attached with the request for arbitral pronouncement, whose content is reproduced);

s) On 07-05-2009, the Claimant proceeded to deliver to the Municipal Council of…, the elements relating to the amendment of the External Arrangements Project (document no. 32 attached with the request for arbitral pronouncement, whose content is reproduced);

t) On 30-05-2009, invoice no. … was issued, relating to the preparation of the Public Way Occupation and Construction Site Project, issued by atelier F…, Lda. (document no. 33 attached with the request for arbitral pronouncement, whose content is reproduced);

u) On 03-06-2009, the Claimant proceeded to the annotation, with the Municipal Council of…, of the replacement of the technical author of the ventilation project (document no. 34 attached with the request for arbitral pronouncement, whose content is reproduced);

v) On 04-06-2009, receipt no. … was issued, relating to fees due following the amendment of the technical certification project by Engineer G… (document no. 35 attached with the request for arbitral pronouncement, whose content is reproduced);

w) On 15-06-2009, invoice no. … was issued, relating to the preparation of the Health and Safety and Construction Site Project, issued by atelier F…, Lda. (document no. 36 attached with the request for arbitral pronouncement, whose content is reproduced);

x) On 15-06-2009, invoice no. …/2009 was issued by H…, Lda., relating to the placement of advertising panel (document no. 37 attached with the request for arbitral pronouncement, whose content is reproduced);

y) On 19-06-2009, the Claimant was notified by the Municipal Council of … of the approval of the request for amendment of the technical author of the Ventilation Project (document no. 38 attached with the request for arbitral pronouncement, whose content is reproduced);

z) On 25-06-2009, invoice/receipt no. … was issued by the Municipal Council of …, relating to payment of expenses with folders for case instruction (document no. 39 attached with the request for arbitral pronouncement, whose content is reproduced);

aa) On 01-07-2009, receipt no. 21851 was issued, relating to the issuance of declaration of member of the Portuguese Association of Landscape Architects of the Architect who authored the landscaping project for delivery to the Municipal Council of … (document no. 40 attached with the request for arbitral pronouncement, whose content is reproduced);

bb) On 01-07-2009, invoice no. … was issued, relating to the carrying out of rectifications of the Architecture and Specialty Projects, issued by atelier F…, Lda. (Document no. 41 attached with the request for arbitral pronouncement, whose content is reproduced);

cc) On 01-07-2009, the Claimant proceeded to deliver to the Municipal Council of…, a new statement of responsibility for technical management and Health and Safety Plan Project (document no. 42 attached with the request for arbitral pronouncement, whose content is reproduced);

dd) On 02-07-2009, invoice no. … was issued, relating to amendments introduced to the Architecture and Specialty Project – phase II, issued by atelier F…, Lda. (document no. 43 attached with the request for arbitral pronouncement, whose content is reproduced);

ee) On 02-07-2009, invoice/receipt no. … was issued by the Municipal Council of …, relating to the annotation and registration of statements of responsibility of technicians (document no. 44 attached with the request for arbitral pronouncement, whose content is reproduced);

ff) On 14-07-2009, the Claimant was notified by the Municipal Council of … of the calculation of fees associated with the issuance of Building Works Construction License (document no. 45 attached with the request for arbitral pronouncement, whose content is reproduced);

gg) On 17-07-2009, the Claimant was finally notified of the Approval of the Building Construction Licensing Request, having been granted a period of one year to request the building construction license permit, as well as payment of the fees due for the licensing (document no. 46 attached with the request for arbitral pronouncement, whose content is reproduced);

hh) On 29-07-2009, the Claimant submitted a request for issuance of construction license (document no. 47 attached with the request for arbitral pronouncement, whose content is reproduced);

ii) On 31-07-2009, receipt was issued in the name of the Claimant for payment of services provided by Engineer E…, related to the approval control of the fire safety project (document no. 48 attached with the request for arbitral pronouncement, whose content is reproduced);

jj) On 15-09-2009, the Claimant bore new fees due for the requisition of property deed certificate of the property in question, for delivery to the Municipal Council of … (document no. 49 attached with the request for arbitral pronouncement, whose content is reproduced);

kk) On 07-12-2009, the Claimant paid fees to the Municipal Council of…, relating to the request for issuance of Construction License (Document no. 50 attached with the request for arbitral pronouncement, whose content is reproduced);

ll) On 18-12-2009, invoice no. … was issued, relating to amendments introduced to the Architecture and Specialty Project – phase III, issued by atelier F…, Lda. (Document no. 51 attached with the request for arbitral pronouncement, whose content is reproduced);

mm) On 21-12-2009, invoice no. … was issued, relating to the printing of the Architecture and Specialty Project, issued by atelier F…, Lda. (document no. 52 attached with the request for arbitral pronouncement, whose content is reproduced);

nn) On 31-12-2009, the Claimant was notified by C… of the dismissal of the water project, requesting the delivery of new elements (document no. 53 attached with the request for arbitral pronouncement, whose content is reproduced);

oo) On 31-12-2009, receipt was issued in the name of the Claimant for payment of services provided by Engineer E…, related to the approval control of the fire safety project (document no. 54 attached with the request for arbitral pronouncement, whose content is reproduced);

pp) On 04-01-2010, the Claimant was informed by B… that an extension of the deadline for commencement of construction on the urban property in question had been granted, for 12 months (document no. 55 attached with the request for arbitral pronouncement, whose content is reproduced);

qq) On 08-01-2010, Construction Works License no. …/… /2009 was issued (document no. 56 attached with the request for arbitral pronouncement, whose content is reproduced);

rr) On 25 January 2010, the Claimant requested from the Municipal Council of … the approval of the Electricity Project and the approval of the Waste Water and Rainwater Project (document no. 57 and 58 attached with the request for arbitral pronouncement, whose contents are reproduced);

ss) On 26-01-2010, the Claimant paid new fees to the Municipal Council of…, relating to work and use licenses (document no. 59 attached with the request for arbitral pronouncement, whose content is reproduced);

tt) Also on 26-01-2010, the Claimant proceeded to the delivery of various specialty projects, namely (i) Excavation/Peripheral Containment Project, (ii) Electricity Project, (iii) Water Project and (iv) Structural Stability Project (document no. 60 attached with the request for arbitral pronouncement, whose content is reproduced);

uu) On 27-01-2010, the Claimant submitted a request for amendment of the author of the Architecture Project, paying the fees due for the respective annotation (document no. 61 attached with the request for arbitral pronouncement, whose content is reproduced);

vv) On 05-02-2010, the Claimant proceeded to sell the said property to company I…, S.A., with the respective public deed having been granted by J… and K…, in the capacity of managers and representatives of both companies.

ww) Only from 05-02-2010 did the activity of driving metal profiles begin, and on 26-01-2010 and 03-02-2010 the installation of barriers had begun in accordance with the public way occupation license and the beginning of excavations, respectively, as well as the commencement of the construction site installation (document no. 62 attached with the request for arbitral pronouncement, whose content is reproduced);

xx) The works performed only began in February 2010 (document no. 63 attached with the request for arbitral pronouncement, whose content is reproduced);

yy) In the work contract, namely in clause 18, authorization was provided for the Claimant to transfer its contractual position in favor of company I…, S.A., since this company would proceed with the acquisition of the property in question (document no. 64 attached with the request for arbitral pronouncement, whose content is reproduced);

zz) The Claimant was subject to an internal inspection procedure, of partial scope (IMT), for the fiscal year 2007 (OI 2014…), resulting in an arithmetic correction, regarding the IMT not assessed, in the amount of € 7,716,100.00;

aaa) In the final report prepared in this inspection, which is contained in document no. 4 attached with the request for arbitral pronouncement, the following is stated, among other things:

[The document continues with extensive sections containing the inspection findings, administrative procedures, and detailed arguments from both parties regarding the determination of the property's intended use. The report includes detailed analysis of accounting records, relevant case law, and procedural history through various appeals and challenges.]

bbb) Following the inspection, an IMT assessment was issued in the amount of € 501,546.50, plus compensatory interest in the amount of € 137,794.75 (document no. 1 attached with the request for arbitral pronouncement, whose content is reproduced);

ccc) On 19-12-2014, the Claimant was notified of the said assessment, which is contained in document no. 1 attached with the request for arbitral pronouncement, whose content is reproduced;

ddd) On 17-04-2015, the Claimant paid the amount of € 639,341.25 in the tax enforcement process no. …2015… (document no. 2 attached with the request for arbitral pronouncement, whose content is reproduced);

eee) On 15-05-2015, the Claimant submitted a gracious complaint of the said assessment;

fff) By Office no. …, of 20-08-2015, the Claimant was notified of the draft decision, as well as for the exercise of the right to be heard, which it exercised on 04-09-2015;

ggg) By Offices no. … and …, both of 29-09-2015, the Claimant and its legal representatives were notified of the order of dismissal issued in the gracious complaint procedure no. …2015…;

hhh) On 29-10-2015, the Claimant filed a hierarchical appeal of the decision of the gracious complaint (document no. 69 attached with the request for arbitral pronouncement, whose content is reproduced);

iii) The hierarchical appeal was dismissed by order of the Deputy General Director of 31-05-2016, which manifests agreement with the information contained in document no. 70 attached with the request for arbitral pronouncement, whose content is reproduced;

jjj) On 25-08-2016, the Claimant filed a request for arbitral pronouncement which gave rise to the execution of the present case.

3.2. Unproven Facts

It was not proven that any building or construction work had been carried out on the property in question before its sale by the Claimant.

3.3. Reasoning for the Determination of Factual Matters

The established facts are based on documents attached by the Claimant with the request for arbitral pronouncement, on documents attached by the Tax Authority and Customs with its Response and those contained in the administrative case file.

4. Legal Matters

4.1. Applicable Legal Regime

Article 7 of the Code for Tax on Onerous Property Transfers (CIMT) establishes the following:

1 - Acquisitions of real estate for resale are exempt from IMT, under the terms of the following section, provided that it is verified that the declaration provided for in article 112 of the Personal Income Tax Code (IRS) or in subsection a) of section 1 of article 109 of the Corporate Income Tax Code (IRC), as the case may be, relating to the exercise of the activity of purchaser of real estate for resale, has been presented before the acquisition.

2 - The exemption provided in the previous section does not prejudice the assessment and payment of the tax under the general terms, unless it is recognized that the acquirer normally and habitually exercises the activity of purchaser of real estate for resale.

3 - For the purposes of what is stated in the latter part of the previous section, it is considered that the passive subject exercises normally and habitually the activity when they prove its exercise in the previous year by means of a certificate issued by the competent Finance Service, and it should always appear in that certificate whether in the previous year any real estate was acquired for resale or previously acquired real estate was resold 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 annulled by the Finance Director at the request of the interested party accompanied by a document proving the transaction.

Article 11 of the same Code establishes the following, as far as is relevant here:

5 - The acquisition referred to in article 7 shall cease to benefit from exemption as soon as it is verified that the real estate acquired for resale has been given a different destination or that they were not resold within three years or were resold again for resale.

4.2. Positions of the Parties

Tax Authority and Customs position:

The Tax Authority and Customs understood that the property was not acquired for resale, but rather for construction, based on the following grounds:

– the property was recorded in the accounting as "Purchase of Subsidiary Raw Materials and for Consumption – B… LT1 …";

– the property integrated Products and Work in Progress, with allocation of costs related to engineering services, architecture, invoicing of the Municipal Department of Urban Management regarding construction and demolition fees, registration of declarations of responsibility of construction technicians, and annotation in the construction license process;

– pursuant to article 11, section 5 of the CIMT, acquisitions shall cease to benefit from exemption as soon as it is verified that the real estate acquired for resale has been given a different destination;

– the taxpayer gave the property a different destination immediately upon acquisition, and therefore IMT is required at the date of acquisition.

The Tax Authority further stated that the accounting record of the property as raw materials is not irrelevant to the analysis, but rather an indicative element of the destination given to the real estate. Moreover, since raw materials are, by definition, goods intended to be incorporated into products through transformation, the property should have been recorded as Merchandise (account 32) if it were intended for resale without transformation.

Claimant's position:

The Claimant argues in the present case that:

– the manner of accounting for the acquisition does not constitute a formal and exclusive requirement to determine whether the property "was given a different destination";

– the Claimant proceeded to the resale in the same condition in which it acquired the property, namely land for construction and not an already constructed property;

– no different destination was given to the property for the purpose of article 11, section 5 of the CIMT;

– its activity was limited to the adoption of all steps necessary to conclude a construction authorization procedure which had already been initiated when the property was acquired, without carrying out any substantial physical alteration of the property;

– the resale of land for construction of a building under a determined project and construction license was prepared, and therefore does not integrate the legal concept of "different destination".

4.3. Consideration of the Matter

4.3.1. The Initial Intention

The tribunal finds that the Claimant's thesis regarding the accounting oversight is acceptable. The only supporting document for the accounting record was the deed of purchase itself, which clearly stated that the property was intended for resale.

The presumption established by article 75, section 1 of the General Tax Law, that data recorded in accounting are true, only applies when the accounting does not present irregularities, and particularly does not "reveal omissions, errors, inaccuracies," as provided in article 75, section 2, subsection a).

The dissonance between the accounting record as raw materials and the sole supporting document (the deed stating resale as the destination) constitutes an irregularity, as there is no other document supporting the accounting classification as raw materials.

Furthermore, the Tax Authority and Customs itself concluded that the destination of the property was construction "immediately upon acquisition," which means that at the moment of the initial accounting record, no valid presumption derived from accounting could apply.

Therefore, at the very least, there must be doubt regarding this initial intention. Such doubt should be resolved in favor of the Claimant, pursuant to article 100, section 1 of the Code of Administrative Tax Procedure, which is applicable to arbitral tax proceedings by virtue of article 29, section 1, subsection c) of RJAT.

4.3.2. The Change in the Intention of Resale or the Maintenance of the Intention to Construct

The core of the dispute centers on whether the Claimant gave the property a "different destination" within the meaning of article 11, section 5 of the CIMT.

The Tax Authority's Arguments:

The Tax Authority argued that the costs incurred with obtaining building permits and licenses, as well as the various project modifications and submissions, constitute evidence that the property was intended for construction from the beginning. The Tax Authority particularly emphasized:

  1. The accounting record as raw materials integrated into Products and Work in Progress, which the Authority contended was consistent with property intended for construction;

  2. The allocation of costs related to engineering, architecture, and municipal licensing fees;

  3. The conditional nature of the sale agreement, which required commencement of construction within 24 months;

  4. The fact that construction work actually began on 25 January 2010, before the property was sold on 5 February 2010;

  5. The work log showing that construction continued uninterruptedly after the sale, indicating that the intention to construct existed from the acquisition date.

The Tribunal's Analysis:

The fundamental issue is whether the acts undertaken by the Claimant—namely, obtaining building permits, conducting architectural and engineering studies, submitting required documents to municipal authorities—constitute a "different destination" of the property within the legal meaning of the statute.

The tribunal notes that the Claimant acquired the land in a construction authorization procedure that had already been initiated by the previous owner (B…). The deed of purchase explicitly stated that the Claimant intended to resell the property. The conditional nature of the sale—requiring commencement of construction within 24 months as a resolutive condition—does not necessarily evidence that the Claimant itself intended to construct. Rather, it may indicate that the previous owner imposed this requirement to ensure that the property would not remain idle.

The tribunal recognizes that the Claimant undertook significant efforts to complete the construction authorization process. However, these efforts appear to have been motivated by:

  1. The need to maintain the viability of the authorization procedure that was in progress;

  2. The need to render the property more attractive and valuable for resale;

  3. The requirement imposed by the sales condition that construction commence within 24 months.

The completion of a permitting process and the making of technical submissions do not necessarily evidence an intention to construct; they may equally evidence preparation for resale to a third party who would complete the construction. This is particularly true given that the property was resold within approximately two years of acquisition, before any substantial construction work had been commenced by the Claimant.

The tribunal notes that the work log referenced by the Tax Authority shows that construction work began on 25 January 2010, only days before the sale on 5 February 2010. However, the tribunal also observes that this minimal work—described as installation of barriers and initiation of site activities—appears to have been undertaken as a final step to satisfy the contractual condition that construction "commence" within the required period, rather than as evidence of a genuine intention to construct the building.

Furthermore, the deed of sale to I…, S.A. explicitly provided in clause 18 that the Claimant was authorized to transfer its contractual position regarding construction. This provision evidences that from the inception of the construction contract, a transfer of the construction obligation to the ultimate purchaser of the completed property was contemplated.

Regarding the Accounting Record:

The tribunal agrees with the Tax Authority that accounting records constitute an indicative element regarding the intended use of property. However, the tribunal finds that the dissonance between the sole supporting document (the deed stating resale as the destination) and the accounting classification (raw materials/work in progress) constitutes an irregularity that undermines the presumption of truth.

The Claimant's explanation that the accounting record resulted from oversight is credible, particularly given that the Claimant was operating multiple construction projects simultaneously and that the only documentary support for any classification was the deed of purchase.

The Legal Concept of "Different Destination":

The tribunal interprets "different destination" in article 11, section 5 of the CIMT to mean a material change in the intended use or character of the property that is inconsistent with the purpose of resale. The exemption applies to property acquired for resale without material alteration. The mere fact that a property owner takes steps to maintain the viability of administrative permits or to increase the property's value or marketability through project completion does not necessarily constitute a "different destination."

The property remained, throughout the relevant period, land for construction. The Claimant resold it as land for construction with an approved project and building permits—not as improved real estate with substantial physical construction. The subsequent buyer (I…, S.A.) and its assignee undertook the actual construction work.

Conclusion on this Point:

The tribunal concludes that the evidence does not establish with the required certainty that the Claimant gave the property a "different destination" within the meaning of article 11, section 5 of the CIMT. While the Tax Authority's position is not unreasonable, the doubts that remain regarding the Claimant's true intentions at the moment of acquisition should be resolved in favor of the Claimant under the rules of administrative procedure.

The burden of proof regarding the lapse of an exemption falls upon the tax administration. Given the irregularities in the accounting record, the ambiguity in the contractual terms, and the reasonable inference that the Claimant was merely preparing the property for resale by completing a permit process already in progress, the tribunal cannot conclude with the required certainty that the exemption has lapsed.

4.4. The Question of Compensatory Interest

The Claimant has requested reimbursement of compensatory interest in the amount of € 137,794.75, which was included in the original assessment.

Article 37 of the General Tax Law provides that compensatory interest accrues from the date the tax becomes due until the date of actual payment when the taxpayer does not timely satisfy its tax obligation. Such interest is automatic and accrues by operation of law, not as a discretionary or punitive measure.

In the present case, if the initial assessment was improper, the compensatory interest assessed thereon must also be annulled, as the taxpayer would not have owed the principal tax and therefore would not have incurred delay in payment.

The tribunal therefore awards reimbursement of the compensatory interest.

4.5. Indemnificatory Interest

The Claimant has requested indemnificatory interest pursuant to article 43 of the General Tax Law.

Article 43, section 1 of the General Tax Law provides: "Indemnificatory interest is due when it is determined, in gracious complaint or judicial challenge, that there was error attributable to the services resulting in payment of the tax debt in an amount greater than legally due."

The tribunal finds that indemnificatory interest is warranted. The assessment was based on a determination that the property was given a "different destination," a conclusion that the tribunal finds was not supported with sufficient certainty. The Tax Authority erred in concluding that the accounting record of raw materials, when completely inconsistent with the sole supporting document (the deed of purchase), could serve as the primary basis for determining the Claimant's true intention without more substantial evidence. The overlapping arguments regarding accounting treatment, permitting completion, and contractual conditions created sufficient ambiguity that should have been resolved in the taxpayer's favor.

Accordingly, the tribunal awards indemnificatory interest as provided by law.

5. DECISION

Based on the foregoing analysis:

  1. The exception of material incompetence raised by the Tax Authority and Customs regarding the amount of € 12,764.61 (relating to default interest and costs in the enforcement process) is sustained, and the Tax Authority and Customs is dismissed of the proceedings with respect to that amount.

  2. The assessment of IMT in the amount of € 501,546.50, together with compensatory interest in the amount of € 137,794.75, is annulled as improper.

  3. The Tax Authority and Customs is condemned to reimburse to the Claimant the amount of € 639,341.25 (the amount paid on 17-04-2015), together with indemnificatory interest calculated at the rates provided by law from the date of payment until the date of full reimbursement, and court costs as provided by law.

  4. The exception regarding the assessment of default interest and court costs in the enforcement process (€ 12,764.61) is sustained, and no ruling is made with respect to that amount, as it falls outside the jurisdiction of this Arbitral Court.

Done in this form by the undersigned arbitrators, as deliberated in the Arbitral Court constituted on 18-11-2016.

Counsel Jorge Manuel Lopes de Sousa
Arbitrator-President

Professor Doctor Glória Teixeira
Arbitrator-Assessor

Professor Doctor Vasco Valdez
Arbitrator-Assessor

[Date and place of issuance]

Frequently Asked Questions

Automatically Created

What is the IMT tax exemption for purchasing property for resale in Portugal?
The IMT exemption for purchasing property for resale in Portugal is granted under article 7, section 1 of the CIMT Code. This exemption applies when a taxpayer acquires real estate with the declared intention to resell it, rather than for personal use or long-term investment. To qualify, the purchaser must explicitly state the resale purpose at acquisition and typically must complete the resale within a specified timeframe. The exemption aims to avoid taxing intermediate transactions in property development and trading activities, ensuring IMT applies only to the final acquisition by the end user.
How did the CAAD rule on the IMT exemption dispute in process 525/2016-T?
CAAD Process 525/2016-T involved a dispute where a company acquired land for €7,716,100 in 2007 claiming the IMT resale exemption, which the Tax Authority later challenged through an IMT assessment. The arbitral tribunal first ruled on preliminary exceptions, determining it had jurisdiction to review the IMT assessment itself but lacked competence over €12,764.61 in default interest and enforcement costs, as RJAT limits arbitral jurisdiction to assessment acts, not enforcement proceedings. The case proceeded to substantive consideration after the tribunal dismissed claims related to enforcement charges while accepting jurisdiction over the core IMT assessment challenge.
What legal grounds support the IMT exemption when buying property intended for resale?
The legal grounds for IMT exemption when buying property for resale are established in article 7, section 1 of the CIMT Code. The exemption requires: (1) a genuine intention to resell the property, which must be declared at acquisition; (2) the property must actually be resold, not retained for personal use; and (3) the resale should occur within reasonable timeframes to demonstrate legitimate trading activity rather than tax avoidance. Courts and CAAD examine factors such as the purchaser's business activity, declarations made in the deed, market conditions, and whether the property underwent substantial transformation that might indicate use beyond simple resale.
What is the procedure for challenging an IMT tax assessment through arbitration at CAAD?
To challenge an IMT assessment through CAAD arbitration, taxpayers must first exhaust administrative remedies by filing a hierarchical appeal (recurso hierárquico) with the Tax Authority. If the appeal is dismissed or denied, the taxpayer can request arbitration under the RJAT (Legal Regime for Arbitration in Tax Matters, Decree-Law 10/2011). The request must be filed within the legal deadline following notification of the hierarchical appeal decision. CAAD's President accepts the request and notifies the Tax Authority. The Deontological Council appoints arbitrators to form the tribunal. Parties may object to arbitrator appointments. Once constituted, the tribunal has jurisdiction to declare illegality of tax assessments, including IMT, and may order annulment and refunds if the assessment is found unlawful.
Can the Tax Authority deny an IMT resale exemption after a hierarchical appeal rejection?
Yes, the Tax Authority can maintain an IMT assessment after rejecting a hierarchical appeal, but the taxpayer retains the right to challenge this through CAAD arbitration. In Process 525/2016-T, the Tax Authority dismissed the hierarchical appeal and maintained the IMT assessment, leading the taxpayer to seek arbitral review. The hierarchical appeal rejection does not prevent further challenge—it is actually a prerequisite for accessing arbitration. CAAD then independently reviews the assessment's legality, examining whether the resale exemption was properly applied under article 7(1) of the CIMT Code. The arbitral tribunal can annul the assessment if it finds the exemption was wrongly denied, regardless of the hierarchical appeal outcome.