Process: 563/2017-T

Date: September 5, 2018

Tax Type: IMT

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 563/2017-T) addresses the expiry (caducidade) of the IMT (Municipal Tax on Property Transfers) exemption under Article 7(1) of the IMT Code for properties acquired for resale. The claimant, a managing partner in reversed tax enforcement proceedings, challenged an additional IMT assessment against the original debtor, B... Real Estate Company. The core issue involved whether the IMT exemption lapsed when B... sold property to C... under resale conditions, despite C... subsequently transforming the property by obtaining construction licenses for new building plots and ultimately transferring the developed properties to extinguish obligations rather than for genuine resale. The claimant argued that C... never intended to benefit from the IMT exemption, as evidenced by the preliminary contract conditioning payment on construction license approval and the subsequent property transformation, which fundamentally altered the property's nature from urban property to building plots. Alternatively, the claimant contended that if the exemption did lapse, the IMT should be assessed on the original 2004 deed value of €1,251,980 rather than €2,069,920, citing Article 18(2) and (3) of the IMT Code and STA Judgment 0244/15. The Tax Authority defended the assessment, referencing CAAD Decision 475/2014-T and asserting that C...'s public deed explicitly stated engagement in property resale activity, supported by Tax Service certification, thus triggering the exemption lapse. This case highlights critical issues regarding chain transactions with resale exemptions, the impact of property transformation on tax base determination, and the conditions under which fiscal benefits expire in Portuguese real estate taxation.

Full Decision

ARBITRAL AWARD

The Arbitrators, José Poças Falcão (President), Ana Teixeira de Sousa and Fernando Miranda Ferreira, appointed by the Ethics Council of the Center for Administrative Arbitration to form the Arbitral Tribunal, hereby decide as follows:

I – REPORT

  1. A... (hereinafter Claimant), taxpayer no. ..., resident at ..., no. ..., ...-..., ..., filed on 24 October 2017 a request for constitution of a Collective Arbitral Tribunal, in accordance with the combined provisions of Articles 2 and 10 of Decree-Law no. 10/2011 of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter "LRAT"), in which the Tax and Customs Authority (hereinafter "TCA" or "Respondent") is named.

  2. It does so in the capacity of managing partner involved in the tax enforcement proceedings no. ...-2009..., instituted against the original debtor, the company B... - Real Estate Company, Ltd., alleging that the additional assessment of IMT [Municipal Tax on Property Transfers], whose enforcement was reversed against him in the aforementioned tax enforcement proceedings, suffers from a material defect of violation of law and should, consequently, be declared unlawful or, alternatively and without prejudice, the assessment should be corrected for error in determining the taxable base – all with the legal consequences thereof.

  3. He attaches nine documents for evidentiary purposes, intending, as regards some of them, to have their content reproduced for all legal purposes. He does not request the production of witness evidence.

  4. The request for constitution of the Arbitral Tribunal was accepted by His Excellency the President of CAAD and automatically notified to the TCA on 30 November 2017. In accordance with the provisions of paragraph (a) of no. 2 of Article 6 and paragraph (b) of no. 1 of Article 11 of the LRAT, as amended by Article 228 of Law no. 66B/2012 of 31 December, the Ethics Council appointed the arbitrators, who communicated their acceptance of the assignment within the applicable time limit. The Collective Arbitral Tribunal was constituted on 8 January 2018, in accordance with the provisions of Articles 2, no. 1, paragraph (a), 5, 6, no. 1, and 11, no. 1 of the LRAT (as amended by Article 228 of Law no. 66-B/2012 of 31 December).

  5. In the request for arbitral pronouncement, the Claimant invokes, essentially, in its favour, that:

a. In the case at hand, the requirement that prohibits property acquired for resale from being resold again for resale with the respective tax exemption benefit was breached, inasmuch as a deed of sale was executed between the Claimant and company C... when the truth is that neither company had the intention of this benefit being applied.

In effect, on 16/01/2007, the preliminary contract for the purchase and sale of the property was concluded, which contained a clause making the completion of the transaction dependent on the approval of a construction licence for new plots, with the consequent demolition of the sheds existing on the properties. It being certain that, under this deed, it was stipulated that part of the price would be conditional upon obtaining the construction licence.

Construction Licences were even issued relating to the property in question, in the name of company C..., Ltd., thus concluding the licensing process sought by that company.

It is therefore evident, the Claimant argues, that C... could in no way benefit from the IMT exemption on the acquisition of property for resale.

Even if the acquiring company intended to benefit from that IMT exemption, it could never condition the payment of the property price on the issuance of a construction licence, which would completely transform the nature of the property, since in accordance with the provisions of no. 5 of Article 11 of the IMT Code, a different purpose cannot be given to property acquired for resale, under penalty of lapse of the exemption provided for in Article 7 of the IMT Code.

Furthermore, the Claimant continues, the acquiring company C... does not declare in the deed that it intends the property for resale, noting only that it engaged in the activity of purchase and sale of property. It is assumed that, solely on the basis of this mention, the aforementioned transfer was exempted from IMT, which can only, certainly, constitute an oversight of the acquirer.

The properties in question were not resold by C..., they were transformed into building plots where two properties were constructed and, if the latter were alienated to D..., they were so to extinguish an obligation and never as a resale.

It would be manifestly unfair and unlawful for the original debtor to lose the IMT exemption and bear the burden of paying the tax, when it complied with all requirements to benefit from the IMT exemption.

The fact that company C... attached to the public deed a certificate, issued by the Tax Service of ..., according to which it engaged in the activity of purchase of property for resale and did so in the previous year does not constitute, by itself, sufficient fact to cause the exemption of which B... benefited upstream to lapse.

The Claimant concludes that it should be considered that the IMT exemption did not lapse and should be maintained as it met the respective requirements (including that the property was not intended again for resale).

If this view is not accepted,

b- Under the terms of no. 2 of Article 18 of the IMT Code, when the lapse of the exemption occurs, the rate and the value to be considered in the assessment shall be those in force on the date of assessment.

In the present case, IMT should have been assessed, for that reason, on the value of the contract appearing in the deed of 09/03/2004, i.e., €1,251,980 and not on €2,069,920.00.

Wherefore the assessment is manifestly unlawful as it violates the provisions of no. 2 of Article 18 of the IMT Code.

In effect, in this case, it is evident that, after the acquisition of the goods by B..., they were altered in their nature – the urban properties acquired and resold by B... were urban properties, and those for which IMT was, unlawfully, assessed were already building land plots.

To claim to assess IMT for lapse of the tax exemption on the acquisition of an urban property, applying the tax to building land plots, is a logical and material impossibility – to which the provision of no. 3 of Article 18 of the IMT Code corresponds.

In this sense, it invokes the Judgment of the High Administrative Court (STA) 0244/15 of 9 September 2015, where it is summarised:

(...) I - Having the IMT exemption lapsed because the property was not resold within three years following its acquisition by an entity that normally and habitually engages in the activity of purchasing property for resale, and meanwhile the property underwent alteration in its nature, given that horizontal property division was established thereon, that tax shall be assessed, taking into account the provisions of Article 18, no. 3 of the IMT Code, based on the rates and values in force on the date of transmission to the acquirer who benefited from that exemption. (...).

  1. By notification for that purpose, the TCA presented its Response, accompanied by the Administrative File, arguing for the total rejection of the Claimant's request, contending in its favour, among other things, the specific understanding set out in the Arbitral Decision handed down in case 475/2014-T of this CAAD. It argues, fundamentally, as follows:

a- Although the Claimant contends that the property sold to C... was not intended for resale insofar as this does not appear in the Public Deed, it follows expressly, however, from the deed executed in 2007, that the purchasing company normally and habitually engaged in the previous year in the activity of purchase and sale and resale of property acquired for that purpose, in accordance with the Tax Service Certificate of ..., which is why it was exempted under the provisions of Article 7 of the IMT Code.

In that regard, the Claimant cannot contend that it was unaware of the IMT exemption that benefited the purchaser of the property, having regard to the property purchase and sale activity that C... engaged in, and consequently, the numerous deeds resulting from that activity, where the benefit of that exemption usually appears.

Moreover, given the economic activity it engaged in, it would be natural, if not indeed required of the Claimant to exercise greater care in carrying out sales to companies with a similar corporate purpose to its own.

The truth is that company C... also enjoyed the exemption set out in Article 7 of the IMT Code, with no oversight having occurred, since, as is mentioned in the deed of purchase and sale, all participants understood and accepted the terms of the deed which was read and explained to everyone present.

The content of the Certificate issued by the Tax Service of ... combined with the express IMT exemption under Article 7 of the IMT Code, appearing in the Public Deed executed on 09.03.2007, demonstrate that the acquisition of the property fell within the scope of normal activity of C..., and was therefore, at that date, destined for resale.

Thus, given the obligations of the Claimant and the tax obligations of company C..., in light of the facts brought before the Tribunal, the company now Claimant, by reselling property that was acquired again for resale, effectively meets the prerequisites for lapse of the IMT exemption in accordance with the terms of no. 5 of Article 11 of the IMT Code, and the TCA cannot fail to assess the tax owing.

For its part, company C..., being likewise a real estate company, which also has in its commercial purpose the purchase and sale of property for resale, met the prerequisites itself to benefit from the exemption of Article 7 of the IMT Code.

That is, by acquiring the property in question for resale, company C... was also obliged to comply with the resale requirements within three years as a condition of exemption, pursuant to no. 5 of Article 11 of the aforementioned IMT Code.

In these terms and in all other respects of Law that Your Excellency shall learnedly supply, the present request for arbitral pronouncement should be judged totally without merit, with the legal consequences thereof.

b- Regarding the alleged error of interpretation and application of Article 18 of the IMT Code, the Respondent argues:

The taxable fact underlying the IMT assessment in dispute is the fact that determined the lapse of the exemption, under the terms of Article 11, no. 5 of the IMT Code, that is, the act of resale of the property to C... again for resale. That is, it was the sale carried out on 09.03.2007.

Furthermore, the urban properties acquired by B... were exactly the same ones that it subsequently resold to C..., with the same description and nature, as can be seen from comparing the two Deeds. Therefore, between the two Deeds of Purchase and Sale, that executed on 09.03.2004 and 09.03.2007, no fact occurred that altered the nature of the aforementioned urban properties.

Such alteration only occurred with the submission of the respective Model 1 declarations on 12.11.2007, which precludes the application of no. 3 of Article 18 of the IMT Code.

Thus, as mentioned in the Information supporting the challenged order, "the lapse of the IMT exemption occurred on the date the public deed of purchase and sale was executed, with intent for resale, on 09.03.2007. Now, on that date, the taxable property value to be taken into account (and indeed taken into account by the tax administration) in the calculation of IMT is €2,069,920.00."

The Respondent concludes for the total rejection of the present request for arbitral pronouncement, with the legal consequences thereof.

  1. On 30 April 2018 an order was issued dispensing with the holding of the Meeting referred to in Article 18 of the LRAT, since there was no evidence to be produced or other convenience, ordering that the case proceed to the phase of final submissions (written), which the Claimant and Respondent effectively presented.

II - CASE MANAGEMENT

a) The Tribunal has jurisdiction.

b) The parties have legal personality and capacity and benefit from procedural standing, under the terms of Articles 4 and 10, no. 2, of the LRAT and Article 1 of Regulatory Decree no. 112-A/2011 of 22 March, as well as no. 5 of Articles 22 of the General Tax Law, 70, no. 1 and 99 of the Code of Tax Procedure.

c) The TCA proceeded to designate its Representatives in the proceedings and the Claimant attached a power of attorney, thus with the Parties being properly represented.

d) The case does not suffer from nullities.

e) No preliminary or subsequent questions prejudicial or of exception were raised that obstruct the consideration of the merits of the case, with the conditions being met for a final decision to be handed down.

III. MERITS

III.1. FACTUAL MATTERS

1st SECTION. FACTS ESTABLISHED

With regard to the factual matters relevant to the decision of the case, the following facts are established:

a- The Claimant was managing partner until 20.07.2009 of company B..., Ltd., registered in economic activity with CAE no. 68100 – Purchase and Sale of Real Estate, classified under the VAT exemption regime in accordance with Article 9 of the VAT Code and under the general IRC regime, as of 01.01.2009.

b- On 09.03.2004, B... acquired the urban property, located at R. ..., parish of ..., municipality of Odivelas, and registered under articles ..., ..., ..., ..., ..., ..., ..., ... and ... of the property register of that parish, by public deed of purchase and sale, which includes, in particular:

"That, for its represented party, it accepts the present sale on the terms set out above, intending the said property for resale."

"The purchaser is registered ..., for the activity of purchase and sale of real estate and resale of property acquired for that purpose, having engaged in that activity normally and habitually in the previous year, wherefore this acquisition is exempt from IMT, in accordance with Article seven of the respective Code."

c- B... sold to C..., Ltd., the said urban property, by Public Deed of Purchase and Sale of 09.03.2007, which shows:

  • Overall taxable property value: €295,630.86

  • Price: €2,000,000.00

  • That from the said price the sum of seven hundred and sixty-three thousand euros shall be paid in this act, with the remaining price, that is, one million two hundred and thirty-seven thousand euros to be paid upon issuance of the respective construction licence.

  • Content: "Certificate issued by the Tax Service of ..., certifying that the purchasing company is registered with the activity of 'PURCHASE AND SALE OF PROPERTY AND RESALE OF PROPERTY ACQUIRED FOR THAT PURPOSE', an activity it engaged in normally and habitually in the previous year, wherefore this acquisition is exempt from the Municipal Tax on Onerous Property Transfers, in accordance with Article 7 of the respective Code."

d- The said purchase deed of 09/03/2007 does not include an express mention that it is made for resale.

e- On 12.11.2007, by means of the Model 1 declaration submitted by "C...", the articles acquired with nos. ..., ..., ..., ..., ... and ..., gave rise to article ... of the property register of the parish of ..., described as building land;

f- On 12.11.2007, by means of the Model 1 declaration submitted by C..., the articles acquired with nos. ..., ... and ... gave rise to article ... of the property register of the parish of ..., described as building land.

g- On 27.07.2009 tax enforcement proceedings no. ...2009... were instituted, in which the original debtor is company B..., in the amount of €134,544.80, plus compensatory interest in the amount of €8,773.06, resulting from the assessment for lapse of the IMT exemption, under the terms of no. 5 of Article 11 of the IMT Code.

h- By order of His Excellency the Head of the Tax Service of ..., dated 29 April 2014, an act of reversal was issued against the Claimant, in the capacity of subsidiary obligor, for the aforementioned debt. In accordance with the Information from the Tax Service of ..., of 08/04/2014, attached to the draft reversal and notified to the present Claimant:

"These proceedings were instituted for a debt of Municipal Tax on Property Transfers (IMT), arising from the assessment of IMT in the amount of €134,544.80, plus €8,773.06 of compensatory interest, totalling €143,317.86, to which further default interest (as of 06-01-2009) and procedural costs are added, because the exemption provided for in Article 7 of the IMT Code lapsed, owing to the acquisition of urban articles registered in the property register under nos. ..., ..., ..., ..., ..., ..., ..., ... and ... all of the parish of ..., municipality of Odivelas, acquired on 09/03/2004 for resale. On 09-03-2007 it was transferred to company C..., Ltd. again for resale."

i- On 16/01/2007 a preliminary contract for purchase and sale was executed between B... and C... relating to the property in question, where it is mentioned that the property to be sold shall be the subject of a request for a construction licence and that payment of the price is conditional on obtaining a construction licence.

j- The deed includes a clause conditioning payment of the full price on obtaining the construction licence/permit.

l- Payment of the price never came to be made in full with B... ending up initiating enforcement proceedings against C... to manage to settle the debt.

m- The properties in question, after transformation into building land plots, were acquired on 30-05-2013 by D....

2nd SECTION. FACTS NOT ESTABLISHED

There are no other facts with relevance to consideration of the merits of the case that have not been established.

3rd SECTION. SUBSTANTIATION OF THE FACTUAL MATTERS ESTABLISHED AND NOT ESTABLISHED

Regarding the factual matters, the Tribunal does not have to pronounce on everything that was alleged by the parties, it being its duty, rather, to select the facts that matter for the decision and distinguish the matter established from the not established (see Article 123, no. 2, of the Code of Tax Procedure and Article 607, no. 3 of the Code of Civil Procedure, applicable by virtue of Article 29, no. 1, paragraphs a) and e) of the LRAT).

In this way, the facts relevant to judgment of the case are chosen and defined according to their legal relevance, which is established in light of the various plausible solutions to the question(s) of Law (see previous Article 511, no. 1, of the Code of Civil Procedure, corresponding to the current Article 596, applicable by virtue of Article 29, no. 1, paragraph e), of the LRAT).

Thus, taking into account the positions assumed by the parties (in light of Article 110, paragraph 7 of the Code of Tax Procedure), the administrative file and further documentary evidence attached to the case, all the facts listed above were established as relevant for the decision, with no factual matter being given as not established.

III.2 – MATTERS OF LAW

QUESTION TO BE DECIDED

In the case under analysis, the question that the Tribunal must resolve and which underlies the divergence between the Claimant and the TCA is manifested in the latter's position that it understood that, due to the fact that properties acquired with IMT exemption intended for resale were again acquired for resale, the exemption lapses by force of no. 5 of Article 11 of the IMT Code.

That is, it being certain that the purchase for new resale formally took place, with execution of the deed and respective IMT exemption, it is necessary to weigh and decide whether this suffices, without more, to automatically cause the exemption that benefited the first purchase to lapse, or whether the Claimant's aforementioned arguments should be taken into account, considering that such formal direct and automatic lapse of the exemption provided for in no. 5 of Article 11 of the IMT Code should not proceed.

Moreover, it is important to decide (having regard to the sense of the decision) what value should be considered the taxable value of the property and the respective rate to apply, under the terms of Article 18 of the IMT Code. When the lapse of the exemption occurs due to new acquisition for resale, shall the rate and value to be considered in the assessment be those in force on the date of the first acquisition, as the Claimant argues, or of the second which is the consequence of such lapse, as the Respondent argues?

Let us examine, then, and before all else, the applicable legal framework.

Article 7, no. 1 of the IMT Code provides that "[a]cquisitions of property for resale are exempt from IMT, under the terms of the following number, provided that it is verified that a declaration provided for in Article 112 of the Code of Personal Income Tax (IRT) or in paragraph a) of no. 1 of Article 109 of the Code of Corporate Income Tax (IRC), as the case may be, has been submitted prior to the acquisition, relating to the exercise of the activity of property purchaser for resale."

For its part, no. 2 of the said provision establishes that "[t]he exemption provided for in the preceding number does not prejudice the assessment and payment of the tax in accordance with general terms, unless it is recognised that the acquirer normally and habitually engages in the activity of property purchaser for resale."

And no. 3 provides that "for the purposes of what is provided in the latter part of the preceding number, a taxpayer is deemed to normally and habitually engage in the activity when it proves its exercise in the previous year by means of a certificate issued by the competent tax service, and such certificate must always state whether in the previous year any property was acquired for resale or any property previously acquired for that purpose was resold."

As regards lapse of the exemption, Article 11, no. 5 of the IMT Code provides that "the acquisition referred to in Article 7 shall cease to benefit from exemption as soon as it is verified that the properties acquired for resale were given a different purpose or that they were not resold within a three-year period or were resold again for resale."

Under the terms of no. 1 of Article 7 acquisitions of property for resale are exempt from IMT, when the taxpayer (legal entity or natural person) normally and habitually engages in the activity of property purchaser for resale.

From the combination of no. 1 of Article 7 and no. 5 of Article 11 of the IMT Code the IMT exemption lapses on acquisition of property for resale by a taxpayer (legal entity or natural person) previously qualified for such, when it is sold again for resale.

Following closely the provisions of the Judgment of the Administrative Court of the North in case no. 00005/07 of 12/12/2014 the present arbitral tribunal understands the following regarding the interpretation of Article 7 no. 1 of the IMT Code:

Commonly, the concept of resale is understood as the operation initiated with the acquisition of real property and the subsequent sale of that same property.

Real property, for purposes of IMT, is understood as a commodity that is transacted as if it were a commercial item.

Within the scope of this exemption provided for in no. 1 of Article 7 the purchase of property with the intent to resell it immediately thereafter is not regarded by the legislator as a true acquisition, in so far as the current purchaser will not be the future owner of the property in question.

The objective of resale is the obtaining of profit margin in a given time period between the purchase price and the sale price.

The legislator exempts the reseller from payment of IMT because the property is not intended for him, however it taxes him in the field of income (IRC/IRT).

The law establishes a set of prerequisites for the IMT exemption regime for property acquired for resale that constitute preventive mechanisms against its abusive use and the practice of tax fraud operations.

To benefit from this exemption contemplated by Article 7 of the IMT Code, it is necessary to meet the following requirements:

  • Present the declaration provided for in the IRT and IRC codes that proves that the corporate purpose of the taxpayer includes "purchase and sale of real property/resale of real property";

  • Result from the public deed of purchase and sale the indication that the goods to be transacted are intended for resale;

  • Record in the accounting services the respective acquisition in an inventory account;

  • Present a declaration issued by the tax service indicating that the taxpayer develops this activity in a regular manner (it being considered that a taxpayer normally and habitually engages in the activity of property purchaser for resale when it acquires or resells a property for this purpose in the year prior to the date of the deed).

On the other hand, this exemption lapses as soon as any of the following situations or circumstances is verified:

  • That the properties acquired for resale were given a different purpose, or

  • That they were not resold within a three-year period, or

  • Were resold again for resale.

Now Article 7 no. 1 configures an exemption in the sense that it excludes the application of IMT subjection to the taxpayer that engages in a property transfer. In fact, this non-application of the rule of subjection might not even be technically considered as an exemption or as a tax benefit, because underlying it is not the protection of an extra-fiscal public interest, that is, it could be approximated to an exclusion of subjection or negative delimitation of incidence since the legislator assumes that a purchase and sale under these conditions should not be taxed in IMT but rather in income tax for the resale margin.

Notwithstanding Article 7 no. 1 is formally inserted in the "exemptions" provided for in the IMT Code. And doctrine and case law interpret it in light of the principles that shape and delimit the scope and objective of a true tax benefit (see among others the Judgment of the High Administrative Court in case 0456/17 of 21/06/2017 and the Judgment of the High Administrative Court in case 01245/16 of 22/02/2017).

It is therefore in light of these principles that the tribunal will interpret and apply to the case under examination the IMT exemption in question.

A tax exemption has an exceptional character, as it consists in the revocation of the general principles that guide taxation, namely the principles of contributive capacity and equality of taxation.

Maintaining the same wording of the Sisa Code, the IMT Code preserved the tax exemption for acquisition of real property for resale.

Resale is understood as the operation initiated with the acquisition of real property and the subsequent sale of that same property, without such property having undergone any fundamental alteration.

Within this scope, it is understood that the economic agent regards the real property as a commodity and transacts it as if it were a commercial item. This notion implies that the taxpayer does not make any modification or alteration to the state of the property, the only value added being the value of the commercial margin of the economic agent.

However, this vision is subject to conditions that restrict the spirit of the law and which, unless met, point to the limits of lapse, so, given its characteristics, it is necessary to assess each case individually.

In the case of resale the law expressly stipulates that, to benefit from the IMT exemption, it is necessary that the property to be acquired for future resale was not similarly purchased previously with the same intent, that of resale, or will not come to be, in the future, similarly acquired for resale.

This delimitation arises to eliminate tax evasion and avoid faulty transactions in which properties are transferred from asset to asset of companies in the same group (or between companies with special relationships with one another), so as to adjust balance sheets and remove themselves from tax payment.

In these cases, the legislator, unable to control acquisitions of resale upon resale, eliminates the possibility of exemption in an economic activity that depends and is based on the logic of "fiscal transparency" documented in a previous section. This is one of the cases where the effort in limiting the granting of exemptions can, in some cases, harm the activity of various taxpayers in the real estate market.

The legislator provided for, with a view to avoiding abusive practices and tax fraud, the lapse of the IMT exemption in cases where the resale goods were given a different purpose, were not resold within a three-year period or were resold again for resale.

Now the question that concerns us is whether the contract executed between company B... and company C... on 09/03/2007 constitutes a sale for resale, leading to the lapse of the IMT exemption provided for in no. 11 of Article 7 of the IMT Code.

It results from the established matter that the Claimant was managing partner until 20.07.2009 of company B..., Ltd., registered in economic activity with CAE no. 68100 – Purchase and Sale of Real Estate, classified under the VAT exemption regime in accordance with Article 9 of the VAT Code and under the general IRC regime as of 01.01.2009.

That on 09.03.2004 B... acquired the urban property, located at R..., parish of ..., municipality of Odivelas, and registered under articles ..., ..., ..., ..., ..., ..., ..., ... and ... of the property register of that parish, by public deed of purchase and sale, which includes, in particular:

"That, for its represented party, it accepts the present sale on the terms set out above, intending the said property for resale."

"The purchaser is registered ..., for the activity of purchase and sale of real estate and resale of property acquired for that purpose, having engaged in that activity normally and habitually in the previous year, wherefore this acquisition is exempt from IMT in accordance with Article seven of the respective Code."

That B... sold to C..., Ltd. the said urban property, by Public Deed of Purchase and Sale of 09.03.2007, which shows:

  • Overall taxable property value: €295,630.86

  • Price: €2,000,000.00

  • Content: "Certificate issued by the Tax Service of ..., certifying that the purchasing company is registered with the activity of 'PURCHASE AND SALE OF PROPERTY AND RESALE OF PROPERTY ACQUIRED FOR THAT PURPOSE', an activity it engaged in normally and habitually in the previous year, wherefore this acquisition is exempt from the Municipal Tax on Onerous Property Transfers, in accordance with Article 7 of the respective Code."

That the said purchase deed of 09/03/2007 does not include an express mention that it is made for resale.

That on 12.11.2007, by means of the Model 1 declaration submitted by "C...", the articles acquired with nos. ..., ..., ..., ..., ... and ..., gave rise to article ... of the property register of the parish of ..., described as building land.

On 12.11.2007, by means of the Model 1 declaration submitted by C..., the articles acquired with nos. ..., ... and ... gave rise to article ... of the property register of the parish of ..., described as building land.

By force of no. 5 of Article 11 of the IMT Code the acquisition referred to in Article 7 shall cease to benefit from exemption as soon as it is verified that the properties acquired for resale were resold again for resale.

The Claimant executed, by public deed, a contract of purchase and sale by which it transferred the property, by means of a price with a Certificate issued by the Tax Service of ... attached to that public document, certifying that the purchasing company is registered with the activity of 'PURCHASE AND SALE OF PROPERTY AND RESALE OF PROPERTY ACQUIRED FOR THAT PURPOSE', an activity it engaged in normally and habitually in the previous year, wherefore this acquisition is exempt from the Municipal Tax on Onerous Property Transfers, in accordance with Article 7 of the respective Code.

The Claimant intends to make one believe that there was an oversight and that the entity acquiring the property intended its acquisition for construction rather than for resale.

However, the Claimant benefited from the exemption under the terms of Article 7 no. 1 of the IMT Code in 2004.

Being a fiscal exemption conditioned on the compliance with a set of requirements the entity that benefits from the exemption in the purchase for resale is subject to a special duty of diligence in so far as it is that entity, Claimant in the present proceedings, that participated in the two contracts of purchase and sale, the first of purchase and the second of sale, whereby it is incumbent upon it to ensure the maintenance of the material and procedural conditions set down in the law to benefit from the exemption in the purchase of the property and prevent the prerequisites from being met that lead to the lapse of that exemption.

It is true that, as the Claimant argues, there were requests for construction licences for the property (or properties in question) and that the public deed of sale itself in 2007 refers to the intention to request those construction licences.

However, that mention does not relieve the Claimant of the duty of "vigilance" with regard to verification of the prerequisites provided for in fiscal law for the exemption in question and prerequisites that operate its lapse.

The Claimant, having knowledge through the deed of purchase and sale in which it participated in the capacity of seller in 2007, that the purchaser benefited from the exemption provided for in Article 7 no. 1 of the IMT Code, based on "purchase for resale" and having knowledge that a Certificate issued by the Tax Service of ... was attached to the deed certifying that the purchasing company is registered with the activity of 'PURCHASE AND SALE OF PROPERTY AND RESALE OF PROPERTY ACQUIRED FOR THAT PURPOSE', an activity it engaged in normally and habitually in the previous year, should have known that the non-lapse of the fiscal exemption of which it had benefited in 2004 was subject to the property that benefited from the exemption not being able to be sold again for resale.

To undo this result, the Claimant could have had recourse to legal mechanisms – deed rectification – thus safeguarding all effects of the transaction that put in question the fiscal exemption of which it had benefited in 2004.

Effectively, the execution of the public deed has formal and substantive requirements that obliged its participants to understand that they were committing an error.

The Claimant did not demonstrate that it undertook any diligence in this direction.

Nor did it demonstrate, if it could, that the properties alienated in 2007 were not recorded as "inventory" or what the recording of the same was.

As stated above the provision of no. 5 of Article 11 of the IMT Code intends to avoid tax evasion and avoid transactions in which properties pass from the assets of one company to the assets of another company in the same group and of companies with special relationships with one another so as to allow adjustment of balance sheets and avoidance of income tax liability.

In tax law the rules of burden of proof are found in Article 74 of the General Tax Law, with the rules of burden of proof provided for in the Civil Code not applying.

As the burden of proof in tax law is objective or material, dealing with determining which facts must be taken as established and not who will have to allege and prove them, that legal provision should be understood as a decision criterion, the question is decided against the party burdened with the burden of proof.

Under the terms of no. 1 of Article 74 of the General Tax Law, applicable both to the procedure and to tax proceedings, the burden of proof of the facts constituting the rights of the tax administration or of taxpayers rests with whoever invokes them. This is the general rule on burden of proof to be considered in the tax legal order.

As regards satisfaction of the burden of proof in the situations provided for in no. 2, this legal provision states that if evidence elements are in the power of the Administration "Existing these specific rules of tax litigation on the distribution of burden of proof regarding quantification of taxable matter, the possibility of basing such distribution, in this scope, on either the rules of Articles 342 to 344 of the Civil Code and 516 no. 4 of the Code of Civil Procedure or the general criterion of distribution of such burden that has been used in administrative litigation, is set aside, despite, as a rule, the results being similar." - Jorge Lopes de Sousa, Code of Tax Procedure annotated and commented, Vol. II, 6th Ed., Áreas Editora, 2011, pp. 133-34.

In light of the evidence produced by the Claimant the tribunal was not convinced that the purchase of the property by C... in 2007 did not have as its objective its resale.

From the evidence produced it does not result that there was an oversight, since various acts were executed, in particular the collection of documents necessary for execution of the public deed, payment of the price, the act of signing in which the notary explained the transaction and inserted in the deed the mention of the activity of C... and the IMT exemption of which it benefited precisely because it was considered that the prerequisites of no. 1 of Article 7 of the IMT Code were met.

Given that the Claimant did not use the legal mechanisms, it was incumbent upon it to prove clearly and unequivocally that there was an oversight and demonstrate that the operation carried out with the sale of the property to C... did not have as its objective the resale of the same.

From the combination of no. 1 of Article 7 and no. 5 of Article 11 of the IMT Code acquisitions of property for resale are not exempt from IMT by legal entities previously qualified for such when they are sold again for resale.

In this conformity and in light of the foregoing, the conclusions of the Claimant cannot prevail since the alienation is fiscally relevant as it places it outside the said exemption.

See also, regarding this matter, Judgment TCAS_01137/06 of 04-07-2006:

(...) given that the rule is that of taxation in sisa of transfers, faced with the circumstance that the purchasing and selling company, knowing that payment had not been made (prior to this deed of purchase and sale executed on 24/10/2000) said nothing (despite having made clear in the deed that such transfer was exempt from sisa under no. 3 of Article 11 and Article 13-A of the Sisa Code) it appears to us reasonable to conclude, as the judgment does, that the former revealed, at least implicitly, intention of reselling the property by such act transmitted and the latter accepted such circumstance. That is, we do not agree with the thesis of the appellant (in Articles 14 et seq. of the appeal arguments), to the effect that, considering the concept of implied contractual declaration, it is difficult to, as the judgment intends, reconstruct a contractual declaration of purchase for resale from the combination of the notary's access to a certificate, the notarial declaration of sisa exemption and the declaration of acceptance of the executing parties, directed at the purchase and sale transaction as a whole.

Although the acquiring party (E... Constructions SA) did not make any express declaration at the time of that deed (of 24/10/2000) of its intention of reselling the properties, it had not requested the prior assessment of sisa (as the law required), had presented the said certificate proving normal and habitual exercise of the activity of purchase and sale of property for resale in the previous year, and said nothing regarding that mention that the transfer was exempt from sisa under no. 3 of Article 11 and Article 13-A of the Sisa Code. It is not, therefore, contrary to what was alleged by the appellant (Conclusions 2nd to 4th of the appeal), a matter of having attended only to the certificate proving normal and habitual exercise of the activity of purchase and sale of property for resale in the previous year to grant or deny the right to exemption.

And it being certain that the public deed, as an authentic document, provides full proof of the facts it refers to as practiced by the respective official, as well as of the facts that are attested therein based on the perceptions of the documenting entity, the personal judgments of the documenter being worth as elements subject to free assessment of the judge (Article 371 of the Civil Code), there is also no reason to question that, at the time of the aforementioned deed of 24/10/2000, the purchasing company E... SA delivered to Public Form the certificate mentioned therein nor that it was made clear that the transfer was exempt from sisa under no. 3 of Article 11 and Article 13-A of the Sisa Code.

In any event, notwithstanding the jurisprudential references made by the appellant, it is also not to be forgotten that in later case law it came to be stated (ac. of the Plenum of the High Administrative Court of 17/6/92, rec. 12088, Apend. DR of 30/9/94, page 102/105) that "From the normative provisions transcribed it is evident that the intention of purchase for resale must arise from reading the deed and the documents accompanying it, but it is not indispensable to state that the purchase is made for resale..." And that, referring to the ac. of 12/7/89 also of the Plenum of the High Administrative Court, rec. 5321, that judgment of 17/6/92 states that in this one (ac. of 12/7/89) it is also "openly accepted the lack of need for such express reference by admitting the possibility that in the acquisition of property for resale the purpose can be revealed implicitly."

Thus, no illegality of the challenged assessment act is apparent, it being concluded that the prerequisites provided for in Article 11 of the IMT Code for lapse of the fiscal exemption of which B... had benefited have been met.

Regarding the value of the property to be considered in the IMT assessment.

Subsidiarily the Claimant argues that, under the terms of no. 2 of Article 18 of the IMT Code, when lapse of the exemption occurs, the rate and the value to be considered in the assessment shall be those in force at the date of assessment.

In the present case, IMT should have been assessed, for that reason, on the value of the contract appearing in the deed of 09/03/2004, i.e., €1,251,980 and not on €2,069,920.00.

Wherefore the assessment is manifestly unlawful as it violates the provisions of no. 2 of Article 18 of the IMT Code.

In effect, in this case, the Claimant argues that, after the acquisition of the goods by B..., they were altered in their nature – the urban properties acquired and resold by B... were urban properties, and those for which IMT was, unlawfully, assessed were already building land plots.

The Respondent takes the view that the taxable fact underlying the IMT assessment in dispute is the fact that determined the lapse of the exemption under the terms of Article 11, no. 5 of the IMT Code, that is, the act of resale of the property to C... again for resale. That is, it was the sale carried out on 09.03.2007.

Furthermore, the urban properties acquired by B... were exactly the same ones that it subsequently resold to C..., with no fact having occurred that altered the nature of the said urban properties.

Now, on 09.03.2007 the taxable property value to be taken into account (and indeed taken into account by the tax administration) in the calculation of IMT is €2,069,920.00.

Article 18, no. 2 of the IMT Code provides that "if lapse of the exemption occurs, the rate and the value to be considered in the assessment shall be those in force at the date of assessment."

This shall not be the case only when after acquisition of the goods facts have occurred that alter the nature of the property, in which case the tax shall be assessed based on the rates and values in force on the date of transmission, as results from no. 3 of the same Article 18.

The "date of assessment" is, for this purpose, the "date on which, by force of lapse, the assessment must be requested," which is the date on which the taxable fact is constituted, the date of verification of the prerequisites that determine that it must occur and not the date on which the Tax and Customs Authority implements it or the date on which the taxpayer must request that it be carried out.

In truth, the tax legal relationship is constituted with the taxable fact and its essential elements cannot be altered by the will of the parties (Article 36, nos. 1 and 2 of the General Tax Law).

In cases of lapse of the exemption the taxable fact occurs on the date on which the exemption becomes ineffective, as can be inferred from no. 1 of Article 35 of the IMT Code.

The lapse of the exemption occurs "as soon as it is verified that the properties acquired for resale were given a different purpose," with which results from what is provided for in Article 11, no. 5 of the IMT Code.

In the case at hand, the lapse of the exemption occurred on 09-03-2007, the date on which the property was sold by the Claimant also intended for resale, within the framework of the commercial activity of the purchaser and the documentation attached to the deed.

Between the date of acquisition, 09-03-2004 and the date of transmission, 09-03-2007, no significant alterations occurred that give rise to alterations in the nature of the property.

The urban property acquired by B... in 2004, located at Street ..., nos..., ..., ..., ..., ..., ..., ..., ... and ... was the property transmitted by it in 2007.

Thus, the value to be considered is the value the property had on 09-03-2007, taking into account the greater of the following values:

  • value of acquisition appearing in the deed, or

  • taxable property value on the date of transmission.

The total taxable property value in 2007 is €295,630.86 and not the value of €2,069,920.00 as alleged by the Respondent but not demonstrated nor proven by it.

On 09-03-2007 B... sold the property to C... for the value of €2,000,000.00.

Wherefore the IMT assessment resulting from lapse of the exemption must be carried out on the value of the deed which is €2,000,000.00.

IV - DECISION

In these terms it is decided in this Arbitral Tribunal:

  1. To judge the arbitral request without merit and, in consequence, to maintain the assessment in dispute considering that the prerequisites for lapse of the IMT exemption of which B... had benefited have been met;

  2. To judge partially with merit the Claimant's request regarding the alleged error of interpretation and application of Article 18 of the IMT Code, correcting the base value of the IMT assessment which should be €2,000,000.00.

  3. To condemn, under the terms below, both parties to payment of the costs of the proceedings.

VALUE OF THE CASE

The value of the case is fixed at €143,317.86 under the terms of Article 97-A, no. 1, a), of the Code of Tax Procedure, applicable by force of paragraphs a) and b) of no. 1 of Article 29 of the LRAT and no. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

COSTS

The value of the arbitration fee is fixed at €3,060.00 in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, under the terms of Articles 12, no. 2 and 22, no. 4, both of the LRAT, and Article 4 of the said Regulation, to be paid in the proportion of 95/5%, by the Claimant and Respondent respectively.

Notify.

Lisbon, 5 September 2018

The Collective Arbitral Tribunal,

(José Poças Falcão - President)

(Fernando Miranda Ferreira)

(Ana Teixeira de Sousa)

Frequently Asked Questions

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What happens when a property acquired with IMT resale exemption is resold again for resale under Article 7(1) of the IMT Code?
When property acquired with IMT resale exemption under Article 7(1) of the IMT Code is resold again for resale purposes, the exemption granted to the initial seller lapses (caducidade). This prohibition prevents successive applications of the resale exemption in chain transactions. The original seller becomes liable for the IMT that was initially exempted, with the tax calculated based on rates and values in force at the time of the original transmission that benefited from the exemption. If the property's nature changed between transactions (e.g., from urban property to building plots through horizontal property division), Article 18(3) of the IMT Code requires assessment based on the original property characteristics and values, as established in STA Judgment 0244/15.
Can the IMT resale exemption be denied if the resale was conditioned on obtaining a construction license for new lots?
The IMT resale exemption can be challenged when the resale transaction is conditioned on obtaining construction licenses that fundamentally alter the property's nature. Article 11(5) of the IMT Code prohibits giving acquired property a different purpose than resale, under penalty of exemption lapse. If the acquiring company conditions payment on construction license issuance, seeks licenses in its own name, and transforms the property into building plots rather than maintaining it for simple resale, this constitutes giving the property a different purpose. Even if the acquiring company declares engagement in resale activity and provides Tax Service certification, conditioning the transaction on development approvals and actually transforming the property suggests the exemption was improperly applied and should lapse for the original seller.
How does CAAD handle arbitration cases involving reversed tax liability against a managing partner in IMT proceedings?
CAAD handles arbitration cases involving reversed tax liability (reversão) against managing partners in IMT proceedings by allowing the partner to challenge both the substantive legality of the underlying tax assessment and procedural aspects of liability reversal. The managing partner, despite not being the original taxpayer, has standing to contest the material defects in the IMT assessment that led to enforcement against them. The tribunal examines whether the original IMT assessment against the company was lawful, including issues of exemption application and taxable base determination. If the underlying assessment is found unlawful, the reversed liability against the managing partner falls. This reflects the principle that subsidiarily liable parties can invoke all defenses available to the principal debtor regarding the validity of the tax debt itself.
What are the legal consequences of the expiry (caducidade) of the IMT fiscal benefit for properties purchased for resale in Portugal?
The legal consequences of expiry (caducidade) of the IMT fiscal benefit for properties purchased for resale in Portugal include: (1) the original seller who benefited from the Article 7 exemption becomes liable to pay the IMT that was initially exempted; (2) per Article 18(2) of the IMT Code, the tax is assessed using rates and values in force at the date of the original transmission; (3) if the property's nature changed after the exempt acquisition (through horizontal property division, construction, or other transformation), Article 18(3) requires assessment based on the original property characteristics at the exempt transmission date, not the altered property; (4) interest and penalties may apply from the original transmission date; (5) enforcement proceedings can be instituted or reversed against managing partners if the original debtor company fails to pay. The exemption lapses when prohibited conditions occur, such as resale again for resale purposes or giving the property a purpose other than simple resale within the required timeframe.
Can a taxpayer challenge an additional IMT assessment based on errors in the determination of the taxable base?
Yes, a taxpayer can challenge an additional IMT assessment based on errors in determining the taxable base through CAAD arbitration under the Legal Regime for Arbitration in Tax Matters (RJAT). Common grounds for challenging taxable base errors include: (1) incorrect valuation - arguing the Tax Authority used the wrong property value or applied incorrect valuation methodologies; (2) application of Article 18(2) and (3) of the IMT Code in exemption lapse cases, where the taxable base should reflect values at the original exempt transmission date, not subsequent altered property values; (3) failure to account for property transformation - when horizontal property division or construction fundamentally changed the property's nature, requiring assessment on original characteristics; (4) misapplication of valuation tables or coefficients. The burden typically falls on the taxpayer to demonstrate the assessment error through documentary evidence, property valuations, and legal interpretation. Even taxpayers subject to reversed liability (reversão) as managing partners can raise these substantive challenges to the underlying assessment's legality.