Process: 580/2017-T

Date: March 9, 2018

Tax Type: IMT

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 580/2017-T) addresses whether real estate investment funds are exempt from IMT (Municipal Property Transfer Tax) when acquiring properties in Portugal. The applicant, an open-ended real estate investment fund represented by its management company, challenged two IMT assessments totaling €487,500 (€71,418.75 and €416,081.25) levied on property acquisitions completed in September 2017. The Tax Authority applied the standard 6.5% rate for other urban property acquisitions. The fund argued that Article 1 of Decree-Law 1/87, which originally exempted real estate investment fund acquisitions from 'sisa' (the predecessor tax to IMT), remains applicable. The legal framework transitioned with Decree-Law 287/2003, which reformed asset taxation and replaced sisa with IMT. Critically, Article 28(2) of this decree states that references to sisa should be read as references to IMT, while Article 31(6) explicitly maintains tax benefits relating to sisa, now reported to IMT. The arbitral tribunal analyzed whether this exemption survived the tax reform, applying the cessation of validity rules under Article 7 of the Civil Code. The Tax Authority failed to respond or submit the administrative file within the statutory deadline, leaving the applicant's arguments and evidence unchallenged. The case demonstrates the continued applicability of pre-reform tax exemptions for real estate investment funds and the procedural advantages when tax authorities default in arbitration proceedings.

Full Decision

ARBITRATION DECISION

The arbitrators Cons. Jorge Lopes de Sousa (arbitrator-president), Dr. Arlindo José Francisco and Dr. Jesuíno Alcântara Martins (arbitrator-members) designated by the Deontological Board of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 17-01-2018, agree as follows:

1. Report

OPEN REAL ESTATE INVESTMENT FUND A..., tax identification number..., hereinafter referred to as "Fund", represented by its managing company B... - Movable Investment Funds Management Company, S.A., with registered office at..., no.... -..., ...-... Lisbon, with sole registration number and legal entity number... (hereinafter simply "Applicant"), pursuant to the provisions of articles 2, no. 1, of Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT"), requested the constitution of an Arbitral Tribunal.

The Applicant seeks to challenge the legality of the assessments for Municipal Tax on Onerous Transfers of Real Estate (IMT) no.... and no...., in the amounts of € 71,418.75 and € 416,081.25, respectively, both dated 7 September 2017.

The Applicant further requests the refund of the amount paid plus compensatory interest.

The respondent is the TAX AND CUSTOMS AUTHORITY.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 03-11-2017.

Pursuant to the provisions of item a) of no. 2 of article 6 and item b) of no. 1 of article 11 of RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Board designated as arbitrators of the collective arbitral tribunal the undersigned, who communicated acceptance of the assignment within the applicable deadline.

On 27-12-2017 the parties were duly notified of this designation, and did not manifest willingness to refuse the designation of the arbitrators, in accordance with articles 11, no. 1, items a) and b) of RJAT and articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provisions of item c) of no. 1 of article 11 of RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 17-01-2018.

On 17-01-2018, the Tax and Customs Authority was notified to respond, but did not submit a Response, nor submitted the administrative file, within the deadline provided in article 17 of RJAT.

By order of 27-02-2018, the meeting provided for in article 18 of RJAT was dispensed with and a date for the decision was set.

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

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

The case does not suffer from any vices.

2. Factual Matters

2.1. Proven Facts

The following facts are considered proven:

- The Open Real Estate Investment Fund A... operates in accordance with the terms provided in articles 204 and following of the General Regime of Collective Investment Undertakings approved by Law no. 16/2015, of 24 February;

- On 08-09-2017, the Applicant, managing company of the Fund, acquired for the Fund the full ownership of the urban property with registration number U-..., registered in the property register of the parish of..., located at..., no.... -..., intended for warehouses and industrial activity (Document no. 1 attached with the request for arbitral pronouncement, the content of which is hereby reproduced);

- On 08-09-2017, the Applicant, managing company of the Fund, acquired for the Fund the full ownership of the urban property with registration number U-..., registered in the property register of the parish of..., located at... no...., ..., ...-... Amadora, intended for warehouses and industrial activity (document no. 1 attached with the request for arbitral pronouncement, the content of which is hereby reproduced);

- With respect to the acquisition of the property with registration number U-..., IMT assessment no...., dated 07-09-2017, was carried out in the amount of € 71,418.75 (document no. 1);

- With respect to the acquisition of the property with registration number U-..., IMT assessment no...., dated 07-09-2017, was carried out in the amount of € 416,081.25 (document no. 1);

- On 07-09-2017, the Fund made payment of the assessed amounts (document no. 1);

- On 02-11-2017, the Applicant submitted the request for arbitral pronouncement that gave rise to the present case;

2.2. Unproven Facts

There are no facts relevant to the decision of the case that have not been proven.

2.3. Grounds for the Determination of Factual Matters

The proven facts are based on documents submitted by the Applicant.

There is no controversy regarding the factual matters.

3. Legal Matters

The issue that is the subject of the present case is whether the acquisitions of the properties carried out by the Fund are exempt from IMT.

The contested assessments applied the rate of 6.5% provided in item d) of no. 1 of article 17 of the IMT Code for "acquisition of other urban properties and other onerous acquisitions".

The Applicant contends that the exemption provided in article 1 of Decree-Law no. 1/87, of 3 January, is applicable to the acquisitions, which establishes that "acquisitions of real property made for a real estate investment fund by its managing company are exempt from sisa".

The Applicant contends that in Decree-Law no. 287/2003, of 12 November, which carried out the reform of the taxation of assets, and whose article 31, no. 3 repealed the Code of Municipal Tax on Sisa and the Code of Tax on Successions or Donations, it was established in article 28, no. 2, that "all legal texts that mention Code of Municipal Tax on Sisa and the Code of Tax on Successions and Donations, municipal tax on sisa or tax on successions and donations are deemed to be referred to the Code of Municipal Tax on Onerous Transfers of Real Estate (CIMT), to the Code of Stamp Duty, to the municipal tax on onerous transfers of real estate (IMT) and to stamp duty, respectively".

The Applicant further states that no. 6 of article 31 of Decree-Law no. 287/2003, establishes that "the tax benefits relating to local authority contribution, now reported to IMI, as well as those relating to municipal tax on sisa established in legislation outside the Code approved by Decree-Law no. 41969, of 24 November 1958, and in the Tax Benefits Statute, which now are to be reported to IMT, remain in force".

The acquisitions mentioned fall within the scope of the aforementioned article 1 of Decree-Law no. 1/87, so that, if this rule remains in force, the exemption will be applicable, reported to IMT, by virtue of these provisions of Decree-Law no. 287/2003.

The regime for the cessation of the validity of the law is provided in article 7 of the Civil Code, which establishes the following:

Article 7
Cessation of the Validity of Law

1. Where a law is not intended to have temporary validity, it ceases to have effect only if repealed by another law.

2. Repeal may result from express declaration, from incompatibility between the new provisions and the preceding rules or from the circumstance that the new law regulates all of the subject matter of the preceding law.

3. A general law does not repeal a special law, unless the legislator's unequivocal intention is otherwise.

4. The repeal of a repealing law does not bring about the revival of the law which it had repealed.

No temporary validity was provided for article 1 of Decree-Law no. 1/87, so that any cessation of its validity can only result from repeal by another law, as follows from no. 1 of this article 7 of the Civil Code.

3.1. Express Repeal

No express repeal occurred, in particular before or with the Tax Benefits Statute, approved by Decree-Law no. 215/89, of 1 July.

In fact, the adoption of the Tax Benefits Statute was preceded by a comprehensive re-examination of tax benefits, which was initiated by Law no. 2/88, of 26 January (State Budget for 1989), which in its article 49 repealed various tax benefits, including that provided in article 7 of Decree-Law no. 1/87, but not that provided in article 1, which is at issue here.

The list of tax benefits expressly repealed came to be completed by Decree-Law no. 485/88, of 30 December, in which the tax benefit provided in article 1 of Decree-Law no. 1/87 is also not included.

After the adoption of the Tax Benefits Statute, there is also no law that expressly repeals that article 1 of Decree-Law no. 1/87.

In particular, express repeal was proposed by the Government in article 81, no. 3, of the Draft State Budget for 2007 (Draft Law no. 99/X), in a list of tax benefits to be repealed, but was not included in the approved Budget Law (Law no. 53-A/2006, of 29 December), although express repeal of other tax benefits was maintained, in article 87.

It is thus unequivocal that it was not intended to expressly repeal article 1 of Decree-Law no. 1/87.

3.2. Tacit Repeal

Given that there is no express repeal, the repeal of that article 1 of Decree-Law no. 1/87 could only result from tacit repeal, resulting from "incompatibility between the new provisions and the preceding rules or from the circumstance that the new law regulates all of the subject matter of the preceding law".

The Tax Benefits Statute, in its initial wording, does not include any provision on taxes on assets relating to real estate investment funds, so it cannot be understood that it regulated all of the subject matter of the preceding law.

Moreover, the fact that the Tax Benefits Statute was preceded by express repeal of tax benefits, which included one provided in Decree-Law no. 1/87, but not that provided in its article 1, requires the conclusion that it was not intended to repeal this tax benefit.

Decree-Law no. 189/90, of 8 June, added to the Tax Benefits Statute article 56 relating to "Real Estate Investment Funds", establishing that "properties included in real estate investment funds are exempt from local authority contribution". Law no. 39-B/94, of 27 December, amended the wording of this article to "properties included in real estate investment funds and equivalent funds, in pension funds constituted in accordance with national legislation and in pension savings funds are exempt from local authority contribution".

With the renumbering carried out by Decree-Law no. 198/2001, of 3 July, this article 56 became article 46.

Law no. 32-B/2002, of 30 December, gave article 46 the following wording: "Properties included in real estate investment funds and equivalent funds, in pension funds and in pension savings funds, which are established and operate in accordance with national legislation, are exempt from local authority contribution".

With Law no. 53-A/2006, of 29 December, article 46 of the Tax Benefits Statute came to encompass tax benefits in respect of IMT, relating to properties included in real estate investment funds.

This article 46 came to have the following wording:

1- Properties included in real estate investment funds, in pension funds and in pension savings funds which are established and operate in accordance with national legislation are exempt from municipal property tax (IMI) and from municipal tax on onerous transfers of real estate (IMT).

2 - Properties included in mixed or closed real estate investment funds with private subscription by non-qualified investors or by financial institutions on behalf of those investors do not benefit from the exemptions mentioned in the preceding number, with the rates of IMI and IMT reduced by half.

With Decree-Law no. 108/2008, of 26 June, this article 46 became article 49 of the Tax Benefits Statute.

This article 49 was successively amended by Law no. 3-B/2010, of 28 April, by Law no. 55-A/2010, of 31 December, by Law no. 83-C/2013, of 31 December, and came to be repealed by Law no. 7-A/2016, of 30 March.

In any of the wordings referred to, article 49 refers only to properties included in real estate investment funds, not referring to IMT relating to their acquisition.

In this context, it cannot be understood that tacit repeal of article 1 of Decree-Law no. 1/87 occurred, since all of the subject matter provided for therein was not regulated by any subsequent law, in particular that relating to benefits relating to acquisition of real property by real estate investment funds.

On the other hand, no provision is found that is incompatible with that tax benefit.

Furthermore, the fact already mentioned that express repeal of Decree-Law no. 1/87 was proposed, and the proposal was not approved, corroborates the conclusion that it was not intended to repeal its article 1.

Therefore, it must be concluded that article 1 of Decree-Law no. 1/87, of 3 January, was not repealed in 2017, when the acquisitions in question were made, so that the contested assessments suffer from the vice of violation of law which justifies their annulment, pursuant to article 163, no. 1, of the Administrative Procedure Code subsidiarily applicable pursuant to article 2, item c), of the General Tax Law.

4. Refund of Amounts Paid and Compensatory Interest

The Applicant requests the refund of the tax paid in error, plus compensatory interest.

The Applicant paid the assessed tax on 07-09-2017.

In accordance with the provisions of item b) of article 24 of RJAT, the arbitral decision on the merits of the claim to which no appeal or challenge applies binds the Tax Administration as from the end of the deadline provided for appeal or challenge, and this must, in the exact terms of the merits of the arbitral decision in favor of the taxpayer and until the end of the deadline provided for the spontaneous execution of the sentences of tax courts, "restore the situation that would exist if the tax act subject to the arbitral decision had not been executed, adopting the necessary acts and operations for this purpose", which is in line with the provision of article 100 of the General Tax Law [applicable by virtue of the provision of item a) of no. 1 of article 29 of RJAT] which establishes that "the tax administration is obliged, in case of full or partial success of claim, judicial challenge or appeal in favor of the taxpayer, to the immediate and full restoration of the legality of the act or situation subject to the dispute, comprising the payment of compensatory interest, where applicable, from the end of the deadline for execution of the decision".

Although article 2, no. 1, items a) and b), of RJAT uses the expression "declaration of illegality" to define the jurisdiction of the arbitral tribunals functioning in CAAD, making no reference to condemnatory decisions, it should be understood that the powers that, in judicial challenge proceedings, are attributed to tax tribunals are included in their jurisdiction, being this the interpretation that is in line with the sense of the legislative authorization on which the Government based itself to approve RJAT, in which it is proclaimed, as the first directive, that "the tax arbitration process must constitute an alternative procedural means to the judicial challenge process and to the action for recognition of a right or legitimate interest in tax matters".

The judicial challenge process, although it is essentially an annulment process for tax acts, admits the condemnation of the Tax Administration in the payment of compensatory interest, as can be inferred from article 43, no. 1, of the General Tax Law, in which it is established that "compensatory interest is due when it is determined, in gracious claim or judicial challenge, that there was error attributable to the services resulting in the payment of the tax debt in an amount greater than that legally due" and from article 61, no. 4 of the Code of Tax Procedure and Process (in the wording given by Law no. 55-A/2010, of 31 December, to which corresponds no. 2 in the initial wording), which "if the decision that recognized the right to compensatory interest is judicial, the payment deadline is counted from the beginning of the deadline for its spontaneous execution".

Thus, no. 5 of article 24 of RJAT, when stating that "payment of interest is due, regardless of its nature, in accordance with the provisions of the general tax law and the Code of Tax Procedure and Process", should be understood as permitting the recognition of the right to compensatory interest in the arbitration process.

On the other hand, since the right to compensatory interest depends on the existence of a right to a sum to be refunded, from this competence to decide on the right to compensatory interest it follows that it extends to the examination of the right to refund.

No. 1 of article 43 of the General Tax Law only recognizes the right to compensatory interest when it is determined in gracious claim or judicial challenge proceedings that there was error attributable to the services.

In the case at hand, the contested assessments suffer from the vice of violation of law that is attributable to the Tax and Customs Authority, which carried out the assessments.

Thus, the Applicant has the right to refund of the amount paid, in the total amount of € 487,500, plus compensatory interest from 07-09-2017, until refund of that amount.

Compensatory interest is due at the legal suppletory rate, pursuant to articles 43, no. 4, and 35, no. 10, of the General Tax Law, article 559 of the Civil Code and Order no. 291/2003, of 8 April.

5. Decision

In accordance with the foregoing, this Arbitral Tribunal agrees as follows:

- To allow the request for arbitral pronouncement;

- To annul IMT assessments nos.... and...., in the amounts of € 71,418.75 and € 416,081.25, respectively, both dated 7 September 2017;

- To allow the requests for refund of the sum of € 487,500 and compensatory interest calculated thereon, from 07-09-2017 until refund, and to condemn the Tax and Customs Authority to make the respective payments.

6. Value of the Case

In accordance with the provisions of article 296, no. 1, of the Code of Civil Procedure and article 97-A, no. 1, item a), of the Code of Tax Procedure and Process and article 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at € 487,500.

7. Costs

Pursuant to article 22, no. 4, of RJAT, the amount of costs is fixed at € 7,650.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.

Lisbon, 09-03-2018

The Arbitrators

(Jorge Lopes de Sousa)

(Arlindo José Francisco)

(Jesuíno Alcântara Martins)

Frequently Asked Questions

Automatically Created

Are real estate investment funds exempt from IMT (Municipal Property Transfer Tax) in Portugal?
Yes, real estate investment funds are exempt from IMT in Portugal. Article 1 of Decree-Law 1/87 originally exempted acquisitions of real property made for real estate investment funds by their managing companies from 'sisa' (the predecessor to IMT). This exemption was transitioned to IMT through Decree-Law 287/2003, which replaced sisa with IMT. Specifically, Article 28(2) provides that references to sisa should be read as IMT, and Article 31(6) explicitly maintains that tax benefits relating to sisa remain in force, now reported to IMT. Therefore, real estate investment funds operating under Law 16/2015 continue to benefit from IMT exemption on property acquisitions.
What happens when the Tax Authority fails to respond in CAAD arbitration proceedings?
When the Tax Authority fails to respond in CAAD arbitration proceedings, the case proceeds without their defense or administrative file. The arbitral tribunal decides the case based on the applicant's submissions, evidence, and legal arguments. In this case, the Tax Authority was notified on 17-01-2018 to respond but failed to submit a Response or the administrative file within the deadline provided in Article 17 of RJAT. The tribunal then dispensed with the hearing under Article 18 of RJAT and set a date for the decision. The absence of the Tax Authority's defense typically strengthens the applicant's position, as the challenged assessments remain undefended.
How can a fund management company challenge IMT liquidation through tax arbitration?
A fund management company can challenge IMT liquidation through tax arbitration by filing a request for constitution of an arbitral tribunal under Article 2(1) of RJAT (Decree-Law 10/2011). The request must identify the contested IMT assessments, state the legal grounds for the challenge, and specify the relief sought (such as annulment of assessments and refund of amounts paid with compensatory interest). The Deontological Board of CAAD designates arbitrators to form the tribunal. The process is relatively swift, with the tribunal constituted within weeks and the Tax Authority given a deadline to respond under Article 17 of RJAT.
What is the legal basis for IMT exemption applicable to open-ended real estate investment funds?
The legal basis for IMT exemption applicable to open-ended real estate investment funds consists of two interconnected provisions. First, Article 1 of Decree-Law 1/87 of 3 January established that 'acquisitions of real property made for a real estate investment fund by its managing company are exempt from sisa.' Second, when Decree-Law 287/2003 of 12 November reformed asset taxation and replaced sisa with IMT, Article 28(2) provided that references to sisa in legal texts should be read as references to IMT. Additionally, Article 31(6) explicitly states that tax benefits relating to sisa 'remain in force' when reported to IMT. These provisions together ensure the exemption's continued application to real estate investment funds operating under the current legal framework (Law 16/2015).
Can taxpayers claim compensatory interest on refunded IMT payments after a favorable arbitral decision?
Yes, taxpayers can claim compensatory interest on refunded IMT payments after a favorable arbitral decision. When challenging tax assessments through CAAD arbitration, applicants typically request not only annulment of the contested assessments and refund of amounts paid, but also compensatory interest on the refunded amounts. This compensatory interest compensates the taxpayer for being deprived of the use of their funds during the period from payment until refund. The right to compensatory interest in tax matters is well-established in Portuguese tax law and forms part of standard relief requested in tax arbitration proceedings challenging unlawful tax assessments.