Process: 555/2017-T

Date: June 11, 2018

Tax Type: IMT

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 555/2017-T) addresses two critical issues: whether individual asset transfers from an insolvent estate qualify for IMT (Property Transfer Tax) exemption under Article 270(2) of the Insolvency Code (CIRE), and who has legal standing to challenge such assessments in financial leasing arrangements. The claimant, A... S.A., challenged an IMT assessment of €7,475.07 levied on a property acquired by Bank B... S.A. from an insolvent Spanish company and subsequently leased to the claimant under a financial lease agreement. The claimant argued the transaction should be exempt from IMT pursuant to Article 270(2) CIRE, citing Circular 4/2017, which updated the Tax Authority's interpretation to exempt individual asset sales within insolvency proceedings, not just transfers of entire businesses. The Tax Authority raised a preliminary objection arguing the claimant lacked legal standing (legitimidade), as Bank B... was the actual purchaser, taxpayer, and party obligated to pay IMT under Article 4 of the IMT Code. The Authority contended that the financial lease agreement only binds the contracting parties and cannot confer standing to challenge a tax assessment where the lessee is not the passive subject of the tax relationship. This case highlights the evolution of Portuguese tax authorities' position on IMT exemptions in insolvency contexts and raises important procedural questions about who may seek judicial review of property tax assessments in complex financing structures involving financial leasing arrangements.

Full Decision

Arbitral Decision

The arbitrator, Dr. Henrique Nogueira Nunes, designated by the Deontological Council of the Centre for Administrative Arbitration ("CAAD") to constitute the Arbitral Tribunal, established on 28 December 2017, decides as follows:

1. REPORT

1.1

A..., S.A., with tax identification number..., hereinafter designated as "Claimant", requested the constitution of the Arbitral Tribunal pursuant to articles 2, no. 1, paragraph a) and 10 of Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT").

1.2

The request for arbitral pronouncement has as its object the declaration of illegality of the Transfer Tax (IMT) assessment act in the amount of € 7,475.07, with the annulment of the assessment in question and restitution to the Claimant of the tax improperly paid, plus compensatory interest, from the date of payment of the undue tax until the date of issue of the respective credit note, in accordance with the provisions of articles 43 and 100 of the General Tax Law (LGT).

1.3

To support its request, the Claimant alleges, in summary, that on the basis of article 270, no. 2 of the Insolvency Code (CIRE), there is manifest illegality in the Transfer Tax assessment, an illegality confirmed and evidenced by the content of Circular no. 4/2017.

And that the understanding defended by the Tax Authority that only the transfers of real property encompassing the universality of the insolvent company or its establishment were exempt from Transfer Tax was already controversial and was the subject of various judicial and arbitral decisions to the contrary, for which reason the TA came to update, by circular of the DSIMT (no. 4/2017), its understanding regarding Transfer Tax exemption within the scope of insolvency proceedings, in the sense already widely defended by judicial and arbitral decisions and which has its basis in the applicable legal text.

And that, as such, the isolated transfer of assets of the insolvent company is now exempt from Transfer Tax provided it is part of an insolvency plan or payment plan, or if it concerns acts undertaken within the framework of the liquidation of the insolvent estate, which is alleged to be the case with the real property sold to Bank B..., SA and given in financial lease to the Claimant.

Concluding that, since the transaction is exempt from Transfer Tax, under the terms of article 270, no. 2 of CIRE (an understanding currently also adopted by the TA and set forth in Circular no. 4/2017), the Transfer Tax was improperly assessed in the amount of € 7,475.07, for which reason the act should be annulled and the amount paid by the Claimant should be refunded.

1.4

The Tax Authority (TA), in turn, comes to defend itself by exception, arguing lack of standing of the Claimant, alleging that the terms of the financial lease contract executed have effect only between the contracting parties, being a negotiated and agreed regime between the parties, which concerns and binds only these parties, whereby, it says, the agreement in the lease contract in the proceedings is irrelevant to the present action.

It further states that with regard to the disputed tax legal relationship underlying the acquisition in question, the passive subject of this relationship is Bank B..., as it was obliged to pay the tax as purchaser of the real property as determined by article 4 of the Transfer Tax Code.

And that it was that sole entity responsible for payment of the amount that was assessed as purchaser of the real property, in the amount of € 7,475.07.

Which means, it says, that Bank B... and only this entity, can have direct interest in bringing suit, as well as direct interest in obtaining legitimate legal protection of the claim intended to be enforced.

Having the Claimant not documented that it is the subject of the tax legal relationship underlying the acquisition of the real property - since Bank B... is the purchaser of the real property, and it was the Bank that declared the purchase and appears as the obligated party, and paid the Transfer Tax assessment - it is not apparent, it comes to argue, how the Claimant can claim that it has standing to present the present request for arbitral pronouncement.

In these terms, it concludes that the applicable rules dictate that the Claimant lacks standing to challenge the Transfer Tax assessment act to which the request for arbitral pronouncement refers, which generates the procedural lack of standing of the Claimant, under the terms of paragraph e) of article 577 of the new Civil Procedure Code (CPC), constituting a dilatory exception, which therefore prevents the court from ruling on the merits of the case and gives rise to dismissal of the case, under the terms of paragraph d) of no. 1 of article 278 of the new CPC, applicable ex vi paragraph e) of article 2, paragraph e) of the Tax Procedural Code (CPPT) and paragraph e) no. 1 of article 29 of the Legal Framework for Arbitration in Tax Matters – RJAT.

1.5

The Tribunal, in accordance with the application by the Respondent, which was not opposed by the Claimant, determined to dispense with the holding of the first meeting of the Arbitral Tribunal, in accordance with the provisions of article 18 of RJAT. An exception was identified, and the Claimant, on 15 February 2018, submitted a reply to the exception invoked by the Respondent, wherein it also invoked the nullity of the assessment and requested the intervention of Bank B... or, subsidiarily, its intervention as an assistant. The Respondent, on 1 March 2018, submitted a reply to the reply to the exceptions presented by the Claimant. On 15 March 2018, the Claimant came to the proceedings to request the attachment of two documents, which was admitted by the Tribunal and notified to the Respondent to pronounce itself in accordance with the principle of contradictory procedure. The Tribunal responded to these requests in its arbitral order dated 12 April 2018. The question of the dilatory exception invoked by the Respondent of the alleged lack of standing will be assessed in the present decision.

Both parties were equally notified to submit Submissions, if they so wished, and both opted to do so.

A deadline was set for the issuance of the arbitral decision by the end of the legal period.

1.6

The Tribunal was regularly constituted and is competent ratione materiae in accordance with article 2 of RJAT.

The parties have legal personality and capacity, show themselves to be legitimate and are regularly represented (cf. articles 4 and 10, no. 2 of RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March).

No procedural irregularities were identified.

2. QUESTION TO BE DECIDED

The thema decidendum is to determine, on the basis of article 270, no. 2 of CIRE, whether there is manifest illegality in the Transfer Tax assessment, due to error in the prerequisites, this tax having been improperly assessed by the Respondent, in the amount of € 7,475.07, and whether the act should be annulled and the tax amount refunded to the Claimant.

However, and because the TA raised matters of exception in its Reply, it is important to rule on these first, as their merit would result in the dismissal of the arbitral case and the failure to rule on the claim.

3. FACTUAL MATTERS

With relevance for the assessment and decision on the merits, the following facts are deemed proven:

A) On 13 March 2017, Bank B..., SA acquired from the insolvent estate of C..., SA, a commercial corporation under Spanish law, for the price of € 115,001.00, the autonomous fraction designated by the letter "C" corresponding to an establishment on the ground floor with entrance at no..., which is part of the urban property located at ... and Street ..., no..., ..., ..., ..., ... and ..., of the parish of ..., municipality of Porto, described in the Land Registry of Porto under no.... and registered in the respective property tax matrix under article ... of the Union of parishes of ..., ..., ..., ..., ... and ..., giving it in financial lease to the Claimant. (Cf. Documents nos. 1 and 2 attached by the Claimant with the arbitral request).

B) C..., SA was declared insolvent on 14 July 2006, in the context of Case no. .../06 of the Commercial Court no.... of Madrid, the judgment of which became final on 9 May 2007, the property in question, among others, belonging to the insolvent estate of C..., SA (Cf. Documents nos. 1 and 3 attached by the Claimant with the arbitral request).

C) This real property was not the only property belonging to the insolvent estate of C..., SA, which is owner of 4 other fractions (Cf. Document no. 4 attached by the Claimant).

D) On 10/03/2017, Bank B..., S.A. submitted the Model 1 declaration regarding the acquisition it would make of fraction "C" of the urban article no.... of the Union of parishes of ..., ..., ..., ..., ... and ... from the insolvent estate of "C..., SA." (Cf. Administrative File attached by the Respondent).

E) Bank B..., S.A. on the same date requested the Transfer Tax assessment relating to the acquisition of the aforementioned urban property, having made payment of the DUC no..., in the amount of € 7,475.07 (Cf. Administrative File attached by the Respondent and Document no. 5 attached by the Claimant).

F) In the public deed attached by the Claimant as document no. 1, it appears that Bank B..., S.A. entered into a financial lease contract with it, which has as its object the property in question in the proceedings.

G) It results from said contract (points 3 and 13.1 of the Particular Conditions and article 4, no. 2 of the General Conditions) that the financing did not include the value of the Transfer Tax, with the Claimant being responsible for financially and fully bearing the tax due for the transfer of the property, object of the financial lease.

H) It also results from said contract (point 3.5 of the Particular Conditions) that it is the Lessee who is responsible for challenging and/or contesting and/or claiming any additional Transfer Tax or valuations that the TA may make of the property, the lessor being able to do so as well, but in this case bearing the expenses, costs and charges of these actions at the Lessee's expense.

I) The company D..., Lda, in a declaration dated 5 March 2018, made payment of the Transfer Tax in question in the proceedings, having declared it was reimbursed by the Claimant (Cf. Document attached by the Claimant).

J) The Claimant submitted a request for ex officio review of the Transfer Tax assessment titled by document no.... (Cf. Administrative File attached by the Respondent).

K) On 19 October 2017, the Claimant submitted a request for constitution of the Arbitral Tribunal with CAAD – cf. electronic request in the CAAD system.

4. UNPROVEN FACTS

There are no facts with relevance to the decision on the merits that have not been proven.

5. GROUNDS FOR THE DECISION ON FACTUAL MATTERS

As to the essential facts, the established matter is configured identically by both parties and the Tribunal's conviction was formed on the basis of the documentary (official) evidence attached to the proceedings and discriminated above, whose authenticity and veracity was not questioned by either party.

It should be noted that the Tribunal does not have the duty to pronounce on all the matters alleged, but rather the duty to select only those of interest for the decision, taking into account the cause (or causes) of action that grounds the claim formulated by the Claimant as plaintiff (cf. articles 596, no. 1 and 607, nos. 2 to 4, of the Civil Procedure Code, as amended by Law 41/2013, of 26/6) and to record whether it considers it proven or not proven (cf. article 123, no. 2, of CPPT).

In accordance with the principle of free assessment of evidence, the Tribunal bases its decision, in relation to the evidence produced, on its intimate conviction, formed from the examination and evaluation it makes of the means of evidence brought to the proceedings and in accordance with its experience of life and knowledge of persons (cf. article 607, no. 5, of the Civil Procedure Code, as amended by Law no. 41/2013, of 26/6). Only when the probative force of certain means is pre-established by law (e.g., the full probative force of authentic documents - cf. article 371 of the Civil Code) does the principle of free assessment of evidence not apply to the assessment of the evidence produced.

6. LAW

6.1 Matters of Exception: Alleged Lack of Standing of the Claimant

In accordance with the provisions of article 608, no. 1 of the CPC, applicable by virtue of the provisions of article 29 of RJAT, "(…) the judgment first rules on the procedural questions that may determine dismissal of the case (…)", and the judge must "resolve all questions that the parties have submitted for its assessment, except those whose decision is prejudiced by the solution given to others (…)".

Let us therefore assess the matters of exception invoked by the Respondent.

Article 9 of CPPT provides:

"1 - Have standing in tax proceedings, in addition to the tax administration, taxpayers, including substitutes and liable persons, other tax-obligated persons, parties to tax contracts and any other persons who prove legally protected interest.

2 - The standing of joint and several liable persons results from the requirement against them of performance of the tax obligation or of any tax duties, even if jointly with the principal debtor.

3 - The standing of subsidiary liable persons results from having had the reversal of tax execution ordered against them or any precautionary measure for security of tax claims requested against them.

4 - Have standing in tax judicial proceedings, in addition to the entities referred to in the preceding numbers, the Public Prosecutor and the representative of the Public Treasury."

Faced with this configuration, it is important to verify whether the Claimant, in its individual capacity, has active standing, under the terms of no. 4 of article 9 of CPPT to bring the present arbitral action.

Considering that an arbitral challenge was brought, we are within the scope of judicial proceedings and not within the scope of tax proceedings, which are realities that should not be confused.

And as such, the provisions of no. 4 of article 9 of CPPT apply, which provides that have standing in tax judicial proceedings, in addition to the entities referred to in the preceding numbers of said provision, the Public Prosecutor and the representative of the Public Treasury.

From the conjunction of said no. 4 and no. 1 of article 9 of CPPT, have standing to intervene in tax judicial proceedings taxpayers, including substitutes and liable persons, other tax-obligated persons, parties to tax contracts and any other persons who prove legally protected interest.

As Jorge Lopes de Sousa states, in CPPT, 6th edition, page 490, "One is faced with a legally protected interest when the law does not directly protect a particular interest, but a public interest that, if correctly pursued, will result in the simultaneous satisfaction of the individual interest. In this case, the private party cannot demand of the Administration the satisfaction of its interest, only being able to demand that it does not prejudice it illegally. Therefore, for this requirement to be possible, it is necessary that there exist a norm establishing the manner in which the Administration realizes the public interest in the situation connected to the particular interest, with the consequent prohibition of it acting illegally."

With regard to the disputed tax legal relationship underlying the acquisition in question in the proceedings, there is no doubt that the passive subject of this relationship and the debtor of the tax in question in the proceedings is Bank B..., as it was obliged to pay the tax as purchaser of the real property as determined by article 4 of the Transfer Tax Code.

Before the Respondent, it was Bank B... that was the holder of the tax legal relationship constituted (the transmission constituted the tax event that gave rise to the tax legal relationship), as article 5 of the Transfer Tax Code determines that the tax obligation is constituted at the moment the transmission occurs. Thus, in the case of the proceedings, the moment of transmission occurred with the public deed of purchase and sale, which records that the purchasing party is Bank B....

The Claimant invokes that, as it ultimately bore the payment of this tax - reimbursing company D..., Lda - this fact gives it standing to challenge the tax legal relationship that was constituted between Bank B..., as we have seen, and the Respondent.

As Ana Paula Dourado states, in Lessons in Tax Law, 2015, page 79, "Only the phenomenon of tax shifting implies a different concept, the concept of de facto taxpayer, which is a non-legal concept, because it extrapolates the tax legal relationship and does not confer rights or duties (…). However, our article 18, no. 4, a), after stating that the person bearing the tax burden through legal shifting is not a passive subject, grants it the right to lodge a complaint, appeal, challenge or request for arbitral pronouncement in accordance with tax laws (Law no. 55-A/2010, of 31 December). That is, it recognizes active procedural standing to the final consumer or purchaser of services to lodge an administrative complaint or challenge the tax act judicially."

Continuing, stating that: "(…) legal shifting implies that whoever bears it is a passive subject (legal shifting is what exists in VAT), and only factual shifting, not provided for by law, is what does not confer procedural and procedural standing to whoever bears the tax burden."

(Our emphasis)

Cases of legal shifting, in addition to VAT, also include special consumption taxes.

In the case in question, the shifting that existed was merely factual, not arising from any tax law, nor even from any provision of the legal regime of financial leasing that imposes such obligation on the lessee.

Ruling in a case with contours similar to this, the Supreme Administrative Court in case no. 01898/02[1], 2nd Section, came to consider that tax obligations are not susceptible to transmission by private law contract, unless the law authorizes it.

The case law established in this judgment is transcribed below:

"Under article 9, no. 4, of CPPT, have standing in tax judicial proceedings taxpayers, parties to tax contracts AND ANY OTHER PERSONS WHO PROVE A LEGALLY PROTECTED INTEREST.

It is not enough to have a factual interest by having paid a tax payment. It is necessary that the law give protection to that interest, in terms of allowing its defense in court. It must be a legitimate interest.

Now, an interest is only legitimate or legally protected when it is anchored in law and not in a private law contract.

The relationship considered to be a tax legal relationship is the one established between the tax administration, acting as such, and natural or legal persons and other entities legally equated to these (article 1, no. 2, of the General Tax Law).

In the case in question, the applicant is not the holder of any tax legal relationship with the tax administration, precisely because the holder of that relationship is only the lessor who made the request. On the other hand, no law equates, for tax purposes, the lessee to the lessor. And that is why the person who made the request that was rejected was the lessor and not the lessee.

Under article 9, no. 1, of the General Tax Law, access to tax justice is guaranteed for the full and effective protection of all legally protected rights or interests. This means that if an interest is not legally protected, there is no right of access to tax justice. No law is known that grants protection to the interests of the applicant.

Under article 18, no. 4, al. a), of the General Tax Law, the person bearing the tax burden through legal shifting is not a passive subject of the tax legal relationship, without prejudice to the right to challenge in accordance with tax laws.

Now, the shifting to which the applicant refers is not the legal one, but that resulting from a private law contract that binds only the parties to that contract. On the other hand, no tax law grants the applicant the right to challenge.

In accordance with article 29, no. 3, of the General Tax Law, 'tax obligations are not susceptible to transmission inter vivos, except in cases provided for by law'.

Therefore, the private law contract between lessor and lessee is not susceptible to transmitting to the latter the tax obligation of the former. There is no law that permits that transmission."

What occurred in the proceedings was that responsibility for payment of the tax (which ended up being assumed by the Claimant-lessee in the financial lease contract) resulted, exclusively, from a private law contract, binding exclusively and only the parties to that contract and not the Respondent, which was not even a party to it, with no recognition of the existence of a legally protected interest in the Tribunal's interpretation of it.

For which reason, it is decided in favor of the procedence of the dilatory exception invoked by the Respondent, which dictates its dismissal from the case, under the terms of paragraph d) of no. 1 of article 278 of the new CPC, applicable ex vi paragraph e) of article 2, paragraph e) of CPPT and paragraph e) no. 1 of article 29 of RJAT.

As to the nullity invoked by the Claimant of the tax assessment act in question in the proceedings, the same does not occur, as by virtue of the provisions of paragraph d), of article 2 of CPPT, the regime contained in the Administrative Procedure Code applies to tax proceedings regarding the regime of invalidity of the administrative act, whereby only acts lacking any of the essential elements or for which the law expressly provides that form of invalidity are null, as occurs with the acts provided for in article 161 of that Code, the Claimant not ascribing in its arbitral challenge to the assessment in question the lack of any of these essential elements, nor existing a norm expressly providing for that nullity.

In this regard, it is important to note that the general rule in the regime of invalidity of the tax act is that of voidability, in accordance with the provisions of article 163 of the Administrative Procedure Code, only acts lacking any of the essential elements or for which the law expressly provides that form of invalidity being null, as occurs with the acts provided for by way of example in article 161 of that Code.

The Central Administrative Court of the North, in case no. 00075/02, 2nd Section of Tax Litigation, decided in the case of non-existence or absolute nullity of the transaction, that:

"In the event it is proven that the typical factuality provided for in tax law as the source of the tax obligation did not occur, namely due to the non-existence or nullity of the transaction presupposed by the Tax Administration in the taxation, it must be concluded that the consequent tax assessment act is vitiated by the non-existence of the tax event, which prevents the assessment activity in the face of the principle of tax legality to which the Tax Administration is subject by virtue of article 8 of the General Tax Law. And the acts that it may have undertaken in violation of said principle are voidable, and not null, as the violation of that principle does not fall within the normative provision of said article 133 of the Administrative Procedure Code. And thus being, they cannot be challenged at any time, but only within the period provided for in no. 1 of article 102 of CPPT."

For which reason, in the case in question, there is no nullity of the tax assessment act.

7. DECISION

Based on the foregoing, this Singular Arbitral Tribunal decides as follows:

  • The request for arbitral pronouncement is hereby dismissed, with the Respondent being absolved from the case.

The amount in dispute is fixed at Euro 7,475.07, in accordance with the provisions of articles 3, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT), 97-A, no. 1, paragraph a) of CPPT and 306 of the CPC.

The amount of costs is fixed at Euro 612.00, pursuant to article 22, no. 4 of RJAT and Table I annexed to RCPAT, to be borne by the Claimant, in accordance with the provisions of articles 12, no. 2 of RJAT and 4, no. 4 of RCPAT.

Let notice be given.

Lisbon, 11 June 2018.

The Arbitrator,

Dr. Henrique Nogueira Nunes

Document prepared by computer, in accordance with article 131, no. 5 of the Civil Procedure Code, applicable by referral from article 29, no. 1, paragraph e) of RJAT.

The drafting of this arbitral decision is governed by the spelling prior to the Orthographic Agreement of 1990.

[1] Available at www.dgsi.pt

Frequently Asked Questions

Automatically Created

Is the transfer of individual assets from an insolvent company exempt from IMT under Article 270(2) of CIRE?
Under Article 270(2) of the Insolvency Code (CIRE), transfers of individual assets from an insolvent estate can be exempt from IMT, provided the sale forms part of an insolvency plan, payment plan, or occurs within the liquidation of the insolvent estate. Circular 4/2017 clarified that the exemption is not limited to transfers of the entire business or establishment, but extends to isolated asset sales within these insolvency procedures. This represents a significant expansion of the exemption's scope compared to the Tax Authority's previous restrictive interpretation.
Who has legal standing (legitimacy) to challenge an IMT assessment in a financial leasing arrangement?
Legal standing (legitimidade) to challenge an IMT assessment generally belongs to the passive subject of the tax legal relationship—the party legally obligated to pay the tax. In property acquisitions, this is typically the purchaser under Article 4 of the IMT Code. In financial leasing arrangements, even though the lessee may have contractual obligations to bear the tax cost and ultimately acquires ownership, the initial purchaser (often the financial institution) is the taxpayer with direct interest in the tax assessment. The Tax Authority argues that lessees lack standing because they are not parties to the underlying tax relationship, though contractual arrangements between lessor and lessee regarding tax burdens do not confer procedural legitimacy to challenge assessments.
How did Circular 4/2017 change the Portuguese Tax Authority's interpretation of IMT exemptions in insolvency proceedings?
Circular 4/2017 represented a substantial shift in the Portuguese Tax Authority's interpretation of IMT exemptions under Article 270(2) CIRE. Previously, the Authority maintained that only transfers encompassing the entire universality of the insolvent company or its establishment qualified for exemption. The Circular aligned the Authority's position with contrary judicial and arbitral precedents, acknowledging that isolated transfers of individual assets are also exempt when part of an insolvency plan, payment plan, or liquidation of the insolvent estate. This interpretative change resolved significant controversy and brought administrative practice in line with the legislative text's broader application.
Can a lessee under a financial lease agreement request arbitration to annul an IMT assessment paid on the property acquisition?
A lessee under a financial lease agreement faces significant obstacles in requesting arbitration to annul an IMT assessment on the leased property. The Tax Authority argues that lessees lack legal standing (legitimidade processual) because they are not the passive subjects of the IMT tax relationship. Under Article 4 of the IMT Code, the purchaser (typically the financial institution in leasing arrangements) is the obligated taxpayer. While the lease contract may allocate the economic burden of IMT to the lessee, such contractual arrangements only bind the parties inter se and do not confer procedural legitimacy to challenge tax assessments. The party with direct legal interest and standing is the entity that appears as the purchaser and declared taxpayer in the transaction.
What are the requirements for IMT exemption when assets are sold as part of the liquidation of an insolvent estate?
For IMT exemption when assets are sold as part of liquidating an insolvent estate under Article 270(2) CIRE, several requirements must be met: (1) the property must form part of an insolvent estate subject to formal insolvency proceedings; (2) the sale must occur within the framework of an approved insolvency plan, payment plan, or as part of the liquidation process of the insolvent estate; and (3) following Circular 4/2017, the exemption applies to individual asset sales, not only transfers of the entire business or establishment. The seller must be the insolvent estate acting through its insolvency administrator, and the transaction must serve the legitimate purposes of the insolvency proceeding, such as satisfying creditors or implementing court-approved reorganization plans.