CAAD 651/2017-T: IRC on Real Estate Investment Fund Under Article 22(6)(a) EBF - Tax Assessment Annulment

ARBITRAL DECISION (consult full version in PDF)

Parties

Claimant: A... - REAL ESTATE INVESTMENT FUND MANAGEMENT COMPANY, S.A. "A..." Tax ID No. ..., in its capacity as manager of the SPECIAL CLOSED REAL ESTATE INVESTMENT FUND B... (IN LIQUIDATION) Tax ID No. ..., with registered office at ..., ..., ... floor, ..., ...-... Lisbon

Defendant: TAX AND CUSTOMS AUTHORITY (AT)

I. REPORT

On 14 December 2017, the Claimant filed with the CAAD a request for arbitral opinion (PPA), requesting, pursuant to the Legal Framework for Arbitration in Tax Matters (RJAT), the constitution of a singular arbitral tribunal (TAS).

THE REQUEST

The Claimant, with respect to Corporate Income Tax (IRC) for the fiscal year 2012, seeks the "declaration of illegality of the act of additional IRC tax assessment and respective accrual of compensatory interest", namely, of the "act of additional assessment of Corporate Income Tax ("IRC") No. 2016..., dated 29 August 2016 (€4,289.30), and of the Interest Accrual Statement No. 2016..., dated 31 August 2016" (€563.60), resulting in a total amount payable of €4,852.90 (document No. 9 attached to the request for arbitral opinion).

It concludes its request as follows: "In these terms and in accordance with applicable law, the present request for arbitral opinion should be admitted and judged to be well-founded and, consequently:

• the IRC correction concerning the period 2012 promoted in the tax inspection report mentioned above should be annulled;

• the acts of additional IRC assessment No. 2016..., dated 31 August 2016, and of interest No. 2016..., dated 31 August 2016, should be annulled; and

• the Fund should be reimbursed the amount of IRC and other increases borne in excess by the Fund of €5,124.95.

Should the learned Tribunal conclude in favor of the thesis presented by AT regarding the method of determining taxable income, and in accordance with its interpretation of subsection (a) of section 6 of article 22 of the EBF, which should be based on cash flows rather than period income and expenses, the Claimant requests of Your Excellency, on a subsidiary basis, the correction of said additional IRC assessment and the refund of tax borne in excess, corresponding to: (i) €32,594.91, should the Tribunal conclude that charges re-invoiced to retailers should not be included in income subject to IRC; or

(ii) €62,175.85, should the Tribunal conclude that charges re-invoiced to retailers should be deducted for purposes of determining income subject to tax".

THE CAUSE OF ACTION

The Claimant states that "on 29 July 2008, the Fund acquired C... (hereinafter referred to, briefly, as C...), a property located in ..., parish of ..., municipality of ... and which was held by the Fund until December 2015, when that same asset was disposed of. With respect to the composition of the enterprise in 2012, C... consisted of two distinct areas:

• the store occupied by D..., Lda., separated from the rest of the enterprise;

• and the main body of the enterprise, corresponding to a single property divided by various floors or units with independent use (stores that make up C...), identified by the letters A to J"

It further states that "C..., as a commercial real estate complex, in addition to comprising spaces intended exclusively for retail commerce and ancillary food and beverage services, for use by end consumers, was served by common infrastructure, such as accesses, roadways, green areas and car parking, as well as by common administration and services". And that "the Fund records as 'real estate asset income' only the fixed amounts of income corresponding to the use of store space, and not amounts charged as contributions to common expenses", "common expenses, to the extent of their re-invoicing, did not affect results".

Accordingly, given the wording of subsection (a) of section 6 of article 22 of the EBF, the "...Fund adopted as its procedure for determining real estate income subject to tax, that which was recorded in the accounts, adding thereto the balance between reversals and adjustments for doubtful collection. To that total amount of income, the Fund deducted charges recorded as municipal property tax, insurance, repairs and renovations and other common expenses, obtaining a taxable base to which it applied the said IRC rate (of 20%, in force at the date of the facts)".

It objects to the corrections made by AT through a Tax Inspection, insofar as "no expenses were considered relating to conservation and maintenance charges incurred by the Fund with the common parts of C..., because, through mere oversight and in the absence of a request, it did not make them available to AT during the inspection, without prejudice to having been subsequently made available. Such expenses total a global amount of €294,780.07, relating to water, communications, energy and electricity, management, marketing and advertising, repairs, cleaning, security and surveillance, among others, as demonstrated to AT and supported with documentation of payment vouchers". "Moreover, AT disregarded as deductible the charges relating to stores that produced no income in the 2012 period, particularly those incurred with Store F and Store J, totaling €11,924.11, which were excluded from the amount of deductible charges considered by AT, resulting in an amount of expenses relevant for tax purposes of €114,596.95".

It advocates for a reading of subsection (a) of section 6 of article 22 of the EBF, in force at the date of the facts, to the effect that it does not require the determination of income subject to taxation, with respect to REITs, on the basis of "cash flows", but rather in accordance with the applicable Chart of Accounts (specialization in the recognition of income and expenses).

Whereby "in summary, the Claimant considers that the taxable base determined by AT, with respect to fiscal year 2012, would be manifestly excessive (i) by €146,975.36, should the perspective be adopted that receipts arising from re-invoicing should not be included in income subject to IRC, to which corresponds an IRC of €29,375.57, or (ii) by €294,780.07, should the opposite perspective be adopted, but the corresponding payments be deducted, to which corresponds an IRC of €58,956.01", whereby "... the Claimant considers that the IRC borne by the Fund, with respect to fiscal year 2012, would be manifestly in excess of that due (i) by €29,375.07, should the perspective be adopted that receipts arising from re-invoicing should not be included in income subject to IRC, or (ii) €58,956.01, should the opposite perspective be adopted but the corresponding payments be deducted".

As to the portion of expenses and charges that AT did not accept, relating to Stores F and J which at the time were not leased, it argues that, since it is not a property in horizontal division, this "cannot proceed, because it results from an incorrect interpretation contrary to the spirit and letter of subsection (a) in section 6 of article 22 of the EBF, in the wording at the date of the facts, whereby the respective correction should be annulled".

OF THE SINGULAR ARBITRAL TRIBUNAL (TAS)

The request for constitution of the TAS was accepted by the President of CAAD and automatically notified to AT on 15-12-2017.

By the Ethical Committee of CAAD, the undersigned arbitrator was appointed, with the parties being notified thereof on 01.02.2018. The parties did not manifest a desire to reject the appointment, pursuant to article 11, section 1, subsections (a) and (b) of the RJAT and articles 6 and 7 of the Ethical Code.

The Singular Arbitral Tribunal (TAS) has been duly constituted since 21.02.2018 to hear and decide the subject matter of this dispute (articles 2, section 1, subsection (a), and 30, section 1, of the RJAT).

All these acts are documented in the records contained in the Procedural Management System, which are hereby considered reproduced.

On 21-02-2018, AT was notified pursuant to and for the purposes of article 17-1 of the RJAT. It responded on 06.04.2018, attaching the Administrative Process (PA) composed of two computerized files, designated "PA1" and "PA2", each with 21 pages.

By order of 09.04.2018, the Claimant was invited to indicate whether it maintained an interest in its party statements and, if affirmatively, what specific facts it proposed to prove. The parties were invited, in the same order, to take a position on the need to hold or not the meeting of parties referred to in article 18 of the RJAT, and should they agree to its non-performance, the TAS would opportunely set a deadline of 10 days for written and successive pleadings.

The Claimant, by motion of 16.04.2018, stated that it no longer maintained an interest in producing proof by party statements and also attached Document No. 3, which it had protested attaching to the request for opinion.

By order of 19.04.2018, accepting the implicit position of the parties regarding the non-performance of the meeting of parties of article 18 of the RJAT, a deadline of 10 days was set for the submission of written and successive pleadings.

On 30.04.2018, the Claimant submitted written pleadings and on 15.05.2018 the Defendant filed counter-pleadings.

By order of 19.06.2018, the date for delivery of the final decision was scheduled.

PROCEDURAL REQUIREMENTS

Legitimacy, capacity and representation – The parties are legitimate, enjoy juridical personality and judicial capacity and are represented (articles 4 and 10, section 2, of the RJAT and article 1 of Ordinance No. 112-A/2011, of 22 March).

Principle of contradictoriness - AT was notified pursuant to subsection n) of this Report. All procedural documents and all documents attached to the proceedings were made available to the respective counterparty in the Procedural Management System of the CAAD. Notice of their attachment was always given to both parties.

Dilatory exceptions - The arbitral procedure is not subject to nullities and the request for arbitral opinion is timely since it was submitted within the period prescribed in subsection (a) of section 1 of article 10 of the RJAT, as results from the fact that the Claimant submitted the request for opinion on 14.12.2017 and was notified on 28 September 2017 of the decision to reject the gracious administrative review which it had filed against the additional assessment here challenged.

SUMMARY OF THE CLAIMANT'S POSITION

The Claimant considers that the "... provision contained in subsection (a) of section 6 of article 22 of the EBF, in the wording in force at the date of the facts, ... establishes that taxation of real estate income of REITs applies "to net income after deduction of conservation and maintenance expenses actually borne, duly documented, as well as municipal property tax".

And that "... at no time does that provision make reference to actual payment or receipt, but rather to income and expenses, concepts which are undeniably distinct at the accounting and tax level".

Having noted that the Claimant "... that the financial statements of REITs must be prepared in accordance with the Chart of Accounts for Real Estate Investment Funds, approved by CMVM Regulation No. 2/2005, of 14 April, with particular relevance to the accounting principles applicable and the timing of accounting recognition of the respective patrimonial elements". "In such manner, it is established in Chapter 2, under the heading "Accounting principles and valuation criteria", that "the patrimonial elements of the fund must be valued and recognized in accordance with the periodicity of calculation of the value of participation units, independently of their receipt or payment, and must be included in the financial statements of the period to which they pertain, as well as any adjustments in value resulting therefrom".

Whereby "... taking into account the express reference to the principle of accounting specialization in the recognition of income and expenses, ... the Claimant considers abusive the interpretation of AT according to which taxation of REITs, as IRC taxpayers, should be carried out on a cash flow basis, since no effective adherence of this idea is seen in the letter of the law nor in the general principles of taxation of these taxpayers", "... the Claimant considers that the correction proposed by AT reflects an interpretation at odds with the general principles of taxation applicable to IRC taxpayers, whereby it requested the annulment of the relevant IRC assessment notices and respective demonstrations of compensatory interest accruals, as well as other legal consequences".

The claimant disagrees with the fact that the "... AT ... contends, in response to the arguments raised by the Claimant, that "the adoption of the cash basis is fully justified, since the basis of this system rests on taxation income by income, without aggregation, as if dealing with natural persons, through the payment of tax by the Claimant by way of autonomous taxation, implying the methodology used in the IRS Code (CIRS), for determination of income", considering that "... such assertion appears devoid of any foundation or support", since, as to the "disregard of conservation and maintenance expenses relating to stores F and J in the determination of taxable base, it is important to ... note that there is no direct correspondence in the tax regime for investment funds provided in article 22 of the EBF, at the date of the facts, in the IRS Code", which results from the "... fact that some of the rules provided in the said tax regime expressly refer to the IRS Code (as occurs regarding capital gains), but this does not occur in another set of rules, as is the case with real estate income".

Whereby it concludes "... that the correction proposed by AT reflects an interpretation at odds with the general principles of taxation applicable to IRC taxpayers, which alone should imply the annulment of the assessment notes No. 2016..., dated 29 August 2016, and of the Interest Accrual Statement No. 2016..., dated 31 August 2016, as well as other legal consequences".

It considers that there was an oversight by AT in the tax inspection, stating that "... even if it were considered that the taxable base of REITs should be determined on the basis of effective cash flows, the correction promoted by AT would still be tainted with illegality, because it contains several oversights" since "... the real estate income that the Fund subjected to IRC, based on accounting, did not include the re-invoicing of common expenses with C... or the underlying expenses, which concerned, namely, maintenance, conservation and repair of common areas".

Noting that "... the contracts with the Retailers providing for such re-invoicing, it would not be the Fund that would bear those expenses, to the extent of the re-invoicing, whereby the accounting movement associated with the same only impacted the balance sheet and not the income statement (which, as we have seen, was the basis used by the Claimant)", it will result that "... when AT, in the inspection, recalculated the Fund's income subject to tax on the basis of cash flows (which naturally include the payments and receipts relating to said common expenses), it did not correct them so as to disregard the re-invoicing or, alternatively, to take into account the deduction of the underlying expenses", from which it is extracted that "... AT ultimately determined a base of incidence of IRC relating to real estate income manifestly superior to the income actually received by the Fund (by €146,875.35 euros)".

And "as a logical corollary of the foregoing, the maintenance of the correction promoted by AT, to the effect that the Fund proceed to determine its base of incidence of IRC relating to real estate income on the basis of cash flows, should, necessarily, imply the deduction of receipts corresponding to the re-invoicing of said common expenses", since "... if this were not so, the Fund would be taxed on income not attributable to it, which would correspond to a clear violation of the aforementioned section 2 of article 104 of the CRP, according to which 'taxation of enterprises shall apply fundamentally to their real income'" and "... the principle of tax capacity provided in article 4 of the General Tax Law ("LGT") would equally be violated, generating a situation manifestly unjust from a tax perspective".

"Alternatively, even if it were to be considered that the amounts received from the Retailers by the Fund as contributions to common expenses should be relevant to the concept of real estate income, it would be unequivocal that deduction of the corresponding charges would be necessary, in line with what is provided in subsection (a) of section 6 of article 22 of the EBF".

"... the Claimant considers that the IRC borne by the Fund, with respect to fiscal year 2012, would be manifestly in excess of that due (i) by €29,375.07, should the perspective be adopted that receipts arising from re-invoicing should not be included in income subject to IRC, or (ii) €58,956.01, should the opposite perspective be adopted but the corresponding payments be deducted".

It objects to the fact that the "... AT ... states that 'the complainant did not submit sufficient and valid supporting documentation in order to verify what it alleges (...)," a statement with which the Claimant cannot agree, since it always showed itself available to provide all the information and documents deemed necessary by AT and even made available a vast set of elements, which it again attached as Documents No. 15 and No. 6".

The Claimant argues that article 22 of the EBF should be considered as containing a tax benefit, as thus interpreted, and that AT cannot resort to the regime of article 40 of the CIRS (current article 41 of the CIRS).

It states by way of conclusion that the "... Fund should be taxed on the real estate income obtained from the operation of the urban property corresponding to C... – note, a single property divided into several parts with independent use – and from this should be deducted all conservation and maintenance expenses borne with the property generating income, including the amount of €11,924.11, which AT rejects, which results in an amount of excess net tax, with respect to the same, of €2,384.82", whereby "... the adjustment made by AT to the base of incidence of IRC relating to real estate income, in the amount of €11,924.11, should be annulled", and

reaffirms the Claimant "that no doubt will remain that the determination of taxable base, according to article 22 of the EBF and other applicable rules for IRC taxpayers, should be based on relevant accounting results, whereby the resort to cash flows proposed by AT, set forth in the assessment note, is illegal and determines its annulment", whereby "... having the Fund paid the self-assessment, as well as the amount due and legal increases in the context of the tax execution process No. ...2016..., in the global amount of €210,538.75, the Claimant considers that the Fund should be reimbursed the amount corresponding to said amount due and legal increases, corresponding to €5,124.95".

In the pleadings, the Claimant reiterated what it had already stated in the request for opinion, adding that AT merely limited itself to addressing a part of the issues raised, particularly when it states the following "it therefore makes no sense that the income generated by a leased property could, for tax purposes, be deducted from expenses with a property that may not even be leased". And that "... it again did not pronounce on the fact that, in the inspection, it proceeded to recalculate the Fund's income subject to tax on the basis of cash flows, without deducting the receipts corresponding to the re-invoicing of common expenses with C..., which concerned, namely, maintenance, conservation and repair of common areas".

SUMMARY OF THE DEFENDANT'S POSITION

AT has a different reading of subsection (a) of section 6 of article 22 of the EBF and starts from the following premise regarding the taxation regime in IRS and REIT taxation "... it is entirely impossible to consider the latter (taxation of REITs) without considering the former (taxation in the context of IRS)".

To this it adds: "being the intention of the tax legislator based on what is established in subsection (a) of section 6 of article 22 of the EBF, what is relevant here is brought, Circular 20 of 13/07/1994, from the Service of Administration of Income Tax, in which the tax legislator itself sanctioned the understanding relating to doubts raised by that article (at the time, article 19 of the EBF), with respect to the taxation of real estate income [at the time, subsection (a) of section 5 of article 19 of the EBF]" and concluded: "thus, as to real estate income, in point 4 of that Circular it reads: 'For purposes of the provision in subsection (a) of section 5 of article 19 of the EBF, taxation shall apply only to rents actually received, given fiscal neutrality with respect to direct investors, natural persons, enshrined in the current regime of Investment Funds'".

For the reason that "... the regime of Investment Funds to which the tax legislator refers in that Circular is, in essence, the same as that in force at the date of the tax facts, which is, moreover, the reason why, for example, only rents actually received (and not simply invoiced) are considered as real estate income and deductible expenses those actually paid (and not simply recorded in accounts)", whereby "... it does not appear that doubts remain that the tax legislator always understood fiscal neutrality with respect to natural persons as the cornerstone of the regime of taxation of real estate income of REITs, which is opposed to the Claimant's argument in seeking that the tax legislator intended to introduce such heavy fiscal discrimination by permitting REITs to deduct expenses not directly related to the properties actually generating real estate income, while not permitting this to natural persons benefiting from income of the same nature".

And that "a literal interpretation of subsection (a) of section 6 of article 22 of the EBF also seems to lead in the direction opposite to that sought by the Claimant", "... because one cannot fail to consider the fact that the provision in question includes the expression 'real estate income' (and not 'real estate income'), in the same way that, in reverse sense, one must value the fact that the IRC code provides in its article 17 the determination of a 'taxable profit' (and not 'taxable profits') and in its articles 15 and 16 of a 'taxable base' (and not 'taxable bases')" since "... if the objective of subsection (a) of section 6 of article 22 of the EBF was the taxation of a single real estate income obtained by a REIT – constituted by the sum of rents received and expenses borne with properties independently of whether they generated real estate income or not, as sought by the Claimant – the legislator would have used the expression 'real estate income', which it did not".

"And it did not because a REIT, like a natural person who leases a property, obtains real estate income for each rent received in the course of the leasing of a property and that rent, having to be considered net for tax purposes, is deducted from certain expenses incurred with the property that generated it". That is, "in other words, because one is in the presence of 'real estate income' and not of a single income, it makes no sense that the income generated by a leased property could, for tax purposes, be deducted from expenses with a property that may not even be leased".

As to the Claimant's allegation that "the various stores making up C... (excluding the store pertaining to D...) correspond to units with independent use of the same property", being "the Fund's activity (...) the commercial operation of commercial spaces (...) in an integrated manner" and that "sometimes it is not possible for all stores to be occupied", and that "such does not mean that, however, the Fund (attributes) them a different purpose, since the same continue to be assigned to the only activity it develops – the granting of use of that space for commercial purposes", it states that "... the fact that each of the stores of C... exists to generate real estate income for the Fund (susceptible to taxation in the context of IRC), does not oppose another fact that each of those stores individually considered only generates real estate income, subject to two cumulative premises: the existence of a lease agreement and the actual receipt by the Fund of the respective rents".

It concludes: "thus, if on the one hand, the verification of both premises for each store individually considered comprises the existence of gross real estate income that could be deducted from certain expenses borne with the store in question; on the other hand, in the particular case of any store in which there is no lease agreement or the actual receipt of rents is not verified, there is no real estate income, whereby no deduction of expenses borne by the Fund with the store in question can operate".

As to "... the alternative request presented, the Claimant alleges that the 'expenses' which it claims were not considered through mere oversight and in the absence of a request, these were not made available to AT during the inspection", it states that "... these 'expenses' were presented in the context of gracious administrative review, which is why there are no other means of proof, beyond those presented either in the Report prepared by the Tax Inspection Services (SIT), or in the process of the gracious review prepared by the Administrative Justice Services". And concluded: "in light of this, no illegality is perceived in the challenged act, whereby the entire allegations in the learned arbitral petition that contradict the above are impugned, and the Claimant's claim should be considered unfounded".

In counter-pleadings, the Defendant presents in summary its position, stating, as to the manner in which the Claimant presented its income statement "... there were two inaccuracies that contradict the tax assessed under article 22 of the EBF: on one hand it considered, for determination of real estate income, expenses at the time of accounting for supplier invoices and not their actual payment; on the other hand it did not disregard expenses relating to units that produced no income in the years in question".

As to proof of existence of lease agreements in which the non-acceptance of expenses of common parts is discussed (document No. 3 attached with the PPA), it states "the Claimant attaches to the record as document 3 ... a template of 'agreement for use of space' integrated in "C...", and a 'listing' with the reference "C...", which, with all due respect and notwithstanding the principle of contractual freedom, cannot constitute means of proof of the existence of a contract concluded with each of the retailers", whereby "... it did not demonstrate the existence of contracts between the Fund and the Retailers, since it merely attaches a template, without any compliance with the requirements set forth therein, namely identification of the retailer, the unit, the store, the activity of the establishment, the retailer's trade name, duration of the contract, date of opening of the fraction and identification of the date of conclusion".

Concluding that having the Claimant attached "... for proof of the conclusion of contracts between the Fund and the Retailers, the existence thereof, it does not succeed with the elements presented and attached as document 3, in making this proof, because it does not present any contract", "... being unable to attribute to each store individually considered the expenses borne with the same, no deduction thereof can operate in favor of the Claimant".

It contends for the non-existence of any illegality in the challenged act, and that the Claimant's claim should be considered unfounded.

II - QUESTIONS THE TRIBUNAL MUST RESOLVE

What is at issue in this case appears to concern only different readings of subsection (a) of section 6 of article 22 of the EBF, (version in force in 2012), namely:

"6 - The income of real estate investment funds, which are constituted and operate in accordance with national legislation, have the following tax regime:

In the case of real estate income, which is not related to social housing subject to legal regimes of controlled costs, there is autonomous taxation, at the rate of 20%, which applies to net income after deduction of conservation and maintenance expenses actually borne, duly documented, the payment of tax to be made by the respective management entity by the end of April of the year following the year to which it relates, and considering any tax withheld as payment on account of this tax".

The Defendant expressed in the Inspection Report (to which it adhered in the context of the substantiation of the decision to reject the gracious administrative review) its point of view, namely:

"At the date of the facts, the tax regime of investment funds which were constituted and operated in accordance with national legislation was enshrined in article 22 of the Statute of Tax Benefits (EBF). Investment funds had a specific tax regime based on the fact that their income was taxed autonomously, as if they were natural persons.

Article 22 of the EBF provided that taxation of income obtained by Real Estate Investment Funds, which were constituted and operated in accordance with national legislation, depended on the nature thereof, that is, whether they were classified as real estate, capital gains or as other income.

Set forth in subsection (a) of section 6 of the said provision was the tax regime applicable to real estate income. This income, except that relating to social housing subject to legal regimes of controlled costs, was taxed autonomously at a rate of 20% (until 2012) and 25% (from 2013 and 2014).

The definition of real estate income has as its model what is established for purposes of category F of the IRS. Section 1 of the article of the CIRS defines real estate income as rents of rural, urban and mixed properties paid or placed at the disposal of their respective holders.

And for the correct determination of the contours of the tax incidence of this income, it seems necessary to us to analyze beforehand the notion of rent as a key element in the legal-tax qualification of real estate income.

Thus, rent, as an element constitutive of the lease agreement, is a retributive, periodic payment, by which the lessee fulfills the obligation in which it is constituted by force of said agreement and which consists of payment to the landlord of a price for the temporary right to use and enjoy the leased immovable property, although the tax legislator has adopted for purposes of IRS a generically broader concept of rent, which goes beyond the legal or conventional qualification, reflected in section 2 of article 8 of the CIRS, presumedly for obvious reasons of preventing forms of tax avoidance, that is, the conclusion of other business with economically equivalent effect not classified in law.

It thus results, and is commonly understood, that rent is all that is due to the owner (or usufructuary) for the cession of use of a property or part thereof, and that the total of rents or any payments derived from the use or granting of use received constitutes the real estate income of the owner.

It is thus relevant, for tax purposes, the requirement of the existence of a lease, as a necessary condition for the qualification of the sum of rents actually received. This position is reinforced by the understanding set forth in Circular 20/94- NIR, of 1994-07-13, that according to what is established in subsection (a) of section 6 of article 22 of the EBF, taxation shall apply only to rents actually received.

As to its delimitation, the law determines the necessity of its consideration as net, that is, with the deduction of conservation and maintenance expenses, which are duly documented.

Despite not finding in article 22 of the EBF or any other article a concrete definition of what should be considered as conservation and maintenance expenses, it is accepted that in a broad sense they constitute:

• Maintenance expenses the charges borne with energy for lighting, maintenance of elevators, doormen, cleaning, administration of horizontal property, property insurance and municipal fees for sanitation and sewers; and

• Conservation expenses those borne with works intended to maintain a building in the conditions existing at the date of its construction, reconstruction, enlargement or alteration, namely restoration, repair and cleaning works and which cannot be grouped in the concept of maintenance expenses.

In this way the real estate income of the real estate investment fund is taxed, autonomously, at a rate of 20% (until 2012) and 25% (2013 and 2014), which shall apply to net income after deduction of conservation and maintenance expenses actually borne by the fund and duly documented.

And no other reading results from subsection (a) of section 6 of article 22 of the EBF, that is, what is taxed is the net real estate income determined by deduction from rents of conservation and maintenance expenses of the properties, as well as municipal property tax, which generate the income subject to taxation, being only these the expenses that may be deducted".

...

"From the analysis made to the documents presented by the taxpayer, the following inaccuracies were found:

• For purposes of determining income subject to tax the taxpayer did not take into account the amounts actually received (income)/paid (expenses) during the years 2012, 2013 and 2014, thus not finding an arrangement within subsection (a) of section 6 of article 22 of the EBF;

• With respect to expenses, provisions also do not fit the concept of conservation and maintenance expenses, as stated in point 1 of this chapter;

• Also with respect to expenses, expenses with properties that, in the year in question, did not generate any income are not accepted.

In order to correctly determine the real estate income subject to IRC in 2012, 2013 and 2014, requests were made for elements from the taxpayer (Annex 3) to submit the income actually received, as well as the expenses actually paid attributable to each store/fraction of its sole asset — C....

By sampling, the amounts presented by the taxpayer were subsequently validated against the amounts in its accounts, and no discrepancies were found".

...

"For purposes of determining Real Estate Income, the Taxpayer considered certain expenses with municipal property tax, Insurance, Repairs and Renovations and other Common Expenses which, according to the information provided, it allocated to the different fractions of C..., in accordance with the gross private areas contained in the property records (Annex 5).

However, the two inaccuracies already previously mentioned and which contradict the tax assessed under article 22 of the EBF were found: on one hand it considered, for determination of real estate income, expenses at the time of accounting for supplier invoices and not at the time of actual payment; on the other hand it did not disregard expenses relating to units that did not produce any income in the years in question.

In response to our request, the Fund reported having paid ... expenses, allocated to the different stores of C... (Annex 5)".

...

"By accounting sampling carried out, it was verified that the amounts correspond to the actual payment of supplier invoices (net of VAT borne) in those years.

As noted previously, there were units that generated no income in some of the years analyzed — Store F (2012 and 2014), Store G (2014), Store H (2013 and 2014) and Store J (2012) — whereby the expenses attributable to those units are likewise not deductible for purposes of determining real estate income".

The Claimant, on the other hand, summarizes its position as follows (articles 166 and 168 of the request for opinion):

"... the Fund should be taxed on the real estate income obtained from the operation of the urban property corresponding to C... – note, a single property divided into several parts with independent use –, and from this should be deducted all conservation and maintenance expenses borne with the property generating income"... and the "determination of taxable base, in accordance with article 22 of the EBF and other applicable rules for IRC taxpayers, should be based on relevant accounting results" and not on the resort to cash flows, as proposed by AT.

In light of the foregoing, being at issue the interpretation of the provision contained in subsection (a) of section 6 of article 22 of the EBF, in force at the date of the facts, the questions in disagreement will concern, only, the deduction from income (whose determination does not appear to merit objection) of supplier invoices relating to "repairs and renovations and other common expenses" of the property called "C...", which the Claimant allocated to each leased space in proportion to its private area, according to property records, namely:

• Is it in accordance with the provision in question to consider expenses at the time of accounting for supplier invoices and not at the time of actual payment?

• Should expenses (common expenses) relating to certain stores be disregarded only because they produced no income in the years in question (Store F and Store J) (2012), applying the IRS regime for determining real estate income taxable for natural persons?

Other questions raised shall be appreciated, namely whether the tax regime of article 22 of the EBF (version of 2012) should be considered as a "tax benefit" and whether the accounting rules applicable to REITs, invoked by the Claimant, are relevant here, which moreover were not specifically challenged by the Defendant.

Regarding the factual matter alleged by the Claimant, the only point that AT considers not proven is that of the existence of lease agreements (document No. 3 attached with the PPA and which was attached in the gracious administrative review procedure). However, this position was not assumed in the Inspection Report (as substantiation of the assessments here in question), which, in principle, makes this allegation irrelevant.

III. PROVEN AND UNPROVEN FACTS AND SUBSTANTIATION

Regarding the factual matter, the Tribunal is not required to pronounce on all that was alleged by the parties, but rather has the duty to select the facts that matter to the decision and to distinguish proven from unproven matter (as per article 123, section 2, of the CPPT and article 607, section 3, of the CPC, applicable ex vi article 29, section 1, subsections (a) and (e), of the RJAT).

In this way, the facts relevant to the trial of the case are selected and determined according to their legal relevance, which is established in consideration of the various plausible solutions of the question(s) of law (as per former article 511, section 1, of the CPC, corresponding to current article 596, applicable ex vi article 29, section 1, subsection (e), of the RJAT).

Thus, taking into consideration the positions assumed by the parties and the documentary evidence attached, the following facts were considered proven, with relevance to the decision, being indicated, for each point brought to the established facts, the means of proof considered relevant, as substantiation.

Proven Facts

1. The SPECIAL CLOSED REAL ESTATE INVESTMENT FUND B... (in liquidation) is a closed real estate investment fund for complete distribution, constituted by private subscription pursuant to section 1 of article 48 of the Legal Framework for Real Estate Investment Funds (Decree-Law No. 60/2002, of 20 March, updated by various instruments and republished by Decree-Law No. 71/2010, of 18 July, subsequently repealed by Law No. 16/2015, of 24 February, amended by Decree-Law No. 124/2015, of 7 July) – as per first and second paragraphs of point 3.1 of the tax inspection report contained on page 8 of document No. 8 attached with the PPA, article 1 of the PPA and section 5 of AT's Response;

2. On 29 July 2008, the Fund acquired C... (C...) which corresponds to a property located in ..., Union of parishes ..., ..., ... and ..., municipality of ..., article ...° and described in the Property Registry under No. ..., an enterprise which in the 2012 period consisted of two distinct areas: (1) the store occupied by D..., Lda., separated from the rest of the enterprise; and (2) the main body of the enterprise, corresponding to a single property divided by various floors or units with independent use (stores making up C...), identified by the letters A to J – as per articles 10 and 11 of the PPA and document No. 2 attached with the PPA (property record);

3. C..., in addition to comprising spaces intended exclusively for retail commerce and accessory food and beverage services, for use by end consumers, is served by common infrastructure, such as accesses, roadways, green areas and car parking, as well as by common administration and services, constituting, in 2012, the sole asset of the Claimant Fund – as per point 3.1 of the tax inspection report: third paragraph of page 9, which constitutes document No. 8 attached with the PPA and article 12 of the PPA;

4. The Claimant adopted as its procedure for determining real estate income subject to tax, that which was recorded in the accounts, adding thereto the balance between reversals and adjustments for doubtful collection, and deducted the charges recorded as municipal property tax, insurance, repairs and renovations and other common expenses, and thus obtained a taxable base in the amount of €1,027,065.84, which resulted in the determination of an amount of IRC of €205,413.80, which was paid in full – as per articles 27 to 29 of the PPA and non-challenge by AT, appreciated pursuant to section 7 of article 110 of the CPPT.

5. In compliance with service order No. 012016..., with an order of 30 March 2016, the Tax Inspection Services of AT determined an external inspection of the Fund, covering the period 2012, which began on 13 May 2016 and ended on 8 July 2016, having resulted in the following corrections, as per the inspection report whose substantiation is reproduced in the previous part of this decision, in the most relevant part and as to fiscal year 2012:

• as per tax inspection report, page 29, which constitutes document No. 8 attached with the PPA; subsection B) of AT's response and articles 30 and 31 of the PPA;

1. On 04 August 2016, the Claimant exercised the right to prior hearing regarding the draft inspection report, having on 23 August 2016 been notified of the final report, with the corrections referred to in the preceding point, and having subsequently been notified of the additional Corporate Income Tax ("IRC") assessment No. 2016..., of 29 August 2016 (€4,289.30), and of the Interest Accrual Statement No. 2016..., of 31 August 2016 (€563.60), resulting in a total amount payable of €4,852.90, due by 28 August 2016 – as per articles 44 to 47 of the PPA and documents Nos. 7, 8 and 9 attached to the PPA;

2. On 21 February 2017, the Claimant filed against the assessments referred to in the preceding number, a gracious administrative review with No. ...2017..., having been notified of the draft dismissal on 02 August 2017 to exercise prior hearing, a right which it did not exercise, having on 28 September 2017 received the finalization of the draft decision – as per articles 50 to 52 of the PPA and documents Nos. 12 to 14 attached with the PPA;

3. Not having paid the amount indicated above, the Claimant was summoned in the context of a tax execution process, having proceeded to pay the tax debt of €4,852.90 (including €563.60 as compensatory interest), plus €0.69 in default interest and €76.48 in court costs, that is, it proceeded to payment of the amount due and legal increases on 13 January 2017, in the global amount of €5,124.95, determining the extinguishment of the execution – as per articles 48 and 49 of the PPA and first page of PA1 attached by AT with the response;

4. The Claimant presented in the context of gracious administrative review (and attached to the PPA) a template of an agreement for use of spaces in C..., common use for all retailers and for the year 2012, and a list of lessees, identifying them by names or designations, type of agreement, duration of the agreement and considerations about the duration of the agreements and their renewals – as per document No. 3 attached by the Claimant with the PPA.

5. On 14 December 2017, the Claimant filed with CAAD the present request for arbitral opinion (ppa) – entry record in the CAAD SGP of the request for arbitral opinion.

Unproven Facts

There is no other factuality alleged that was not considered proven and that is relevant to the composition of the procedural dispute.

The facts brought to the established matter are configured as being accepted, expressly or tacitly, by both parties, except as to point 9 of the established facts. However, the TAS only considers proven the fact that the Claimant presented the documents, deferring to the subsequent appreciation the evaluation on their probative value.

IV. APPRECIATION OF THE QUESTIONS THE SINGULAR ARBITRAL TRIBUNAL (TAS) MUST RESOLVE

Does the provision of article 22 of the EBF constitute a "tax benefit"?

It is manifest that the provision contained in article 22 of the EBF should be considered as a tax benefit and thus considered for purposes of its interpretation and application, since

• It is a provision inserted in the Statute of Tax Benefits (EBF);

• In Chapter III of the EBF under the heading of "tax benefits to the financial system and capital markets";

• Translating itself into situations of application of rates and deductions that in certain respects shall be, in practice, more beneficial than the tax regime applicable to natural persons, if considered individually (e.g. absence of any reference to the regime of current article 41 of the IRS)

We are thus in the presence of a provision that is self-contained and should be considered as constituting a tax benefit, a tax regime more favorable than that which would be applicable to holders of participation units, as individual investors, only thus making sense its insertion in the EBF and in a chapter of incentives to the financial system and capital markets.

Income and expenses, relevant in taxation, according to the accounting applicable to REITs.

The Claimant is a REIT. It alleged in articles 74 to 76 of the PPA the following:

"The financial statements of REITs must be prepared in accordance with the Chart of Accounts for Real Estate Investment Funds, approved by CMVM Regulation No. 2/2005, of 14 April, with particular relevance to the accounting principles applicable and the timing of accounting recognition of the respective patrimonial elements."

In Chapter 2, under the heading "Accounting principles and valuation criteria", that "the patrimonial elements of the fund must be valued and recognized in accordance with the periodicity of calculation of the value of participation units, independently of their receipt or payment, and must be included in the financial statements of the period to which they pertain, as well as any adjustments in value resulting therefrom" (emphasis by the Claimant).

"... taking into account the express reference to the principle of accounting specialization in the recognition of income and expenses, ... the Claimant considers abusive the interpretation of AT according to which taxation of REITs, as IRC taxpayers, should be carried out on a cash flow basis, since no effective adherence of this idea is seen in the letter of the law nor in the general principles of taxation of these taxpayers".

AT did not expressly challenge the assertion of this type of accounting action by the Claimant, whereby, as results expressly from section 1 of article 17 of the IRC Code (determination of taxable profit "based on accounting") and section 1 of article 18 of the IRC Code (allocation of income and expenses to the taxation period in which they are obtained and borne, independently of their receipt or payment), the Claimant's action merits no censure, and expenses should, like revenues (income), be relevant for purposes of taxation, in the same manner as they were recorded in the accounts, since it is accepted that they were correctly recorded in the accounts.

Sections 90 and 91 of AT's Response and subsections DD to FF of AT's counter-pleadings – proof of contracts concluded by the Claimant

It is not apparent that this matter was raised in the substantiation of the challenged assessments, either at the level of the Inspection Report or at the level of the substantiation of the decision to reject the gracious administrative review.

Now, it is well-known that subsequent substantiation is irrelevant, and that acts whose legality is questioned must be appreciated as they were practiced, and the tribunal cannot, upon finding the invocation of an unlawful foundation as support for the administrative decision, appreciate whether its action could be based on other foundations. (See judgments of the STA of 10-11-98, Full Court, rendered in appeal No. 32702, published in Appendix to the Diário da República of 12-4-2001, page 1207, of 19/06/2002, case No. 47787, published in Appendix to the Diário da República of 10-2-2004, page 4289, of 09/10/2002, case No. 600/02, of 12/03/2003, case No. 1661/02).

Even if this were not the case, the documentation presented in the context of gracious administrative review, which is that which appears in point 9 of the established facts, appears to be unequivocal in demonstrating clearly the existence of lease relationships. All elements were provided to AT that permitted assessment of the existence of all lease relationships in force in 2012, not in the formal sense of binding lease agreements, exempt from VAT (which is not practice in this type of commercial real estate operations, which is notorious fact) but rather in the form of "use agreements" templates, subject to VAT.

Moreover, from the reading which this TAS makes of AT's position, that question will be immaterial, since at the level of income (income declared by the taxpayer in IRC Form 22 versus income accepted by AT at the level of the Inspection Report) it is stated "... the amounts presented by the taxpayer contained in the accounts were subsequently validated, and no discrepancies were found".

It is nonetheless incomprehensible that, thereafter, at the level of "deductible expenses" (conservation and maintenance - article 22-6-a) of the EBF) it was not considered that, (not putting in question either their realization or their eligibility to integrate the concept of "conservation" or "maintenance") being correctly recorded in the accounts according to the accounting rules applicable to REITs (like revenues), no discrepancies were also found.

Now, if it was accepted, for tax purposes, that the declared income (the payments received by the REIT for the occupation of the leased spaces), in light of the principle of specialization of fiscal periods, as they were recorded in the accounts, (not at the time of receipt, but allocating to the fiscal period to which the "rents" pertained), by analogy, it would be proper that equal reasoning be followed, as to expenses that were subject to re-invoicing to retailers.

Accepting that a certain expense:

• Was incurred;

• Was recorded in the accounts according to the accounting rules applicable to REITs;

• Integrates the concept of conservation or maintenance expense;

we do not see how, then, it can be disregarded for the purposes of deduction from income, pursuant to subsection (a) of section 6 of article 22 of the EBF.

The lease relationships that existed in 2012 in "C..." were not formalized in binding lease agreements, but rather in space use agreements, and it makes no sense to discuss the existence of binding lease agreements (binding), because what should be relevant is the existence of income classified as being of category F (which the parties do not put in question), in addition to the formal type of contract.

We do not subscribe, either, to the approach, aiming at the interpretation and application of subsection (a) of section 6 of article 22 of the EBF, to the effect of diminishing the amplitude of its normative provision, resorting to the concept of "rent" which here is configured as questionable, since all contracts concluded are lease agreements, but are not binding lease agreements.

As noted, in the reading which this TAS makes of the facts, it does not appear to be coherent, on the one hand, to accept that this type of lease relationship generates income of category F, (based on a space use agreement) and then not accept that the expense subject to re-invoicing to the lessee, pursuant to the agreement, is not eligible as conservation or maintenance, since the law does not expressly prohibit it, as is the case with subsection (a) of section 6 of article 22 of the EBF.

Disregard of expenses relating to stores for the period in which they generated no income.

One of the major arguments in the substantiation of the Inspection Report and in the order dismissing the gracious administrative review relates to the fact of resorting (albeit implicitly) to the regime of current article 41 of the IRS Code, to conclude that as to spaces (stores) that are not leased, the expenses they generate cannot be subject to deduction from income generated by other leased spaces.

Now, as stated, the provision we are applying here is subsection (a) of section 6 of article 22 of the EBF. It is a provision that constitutes a tax benefit, an incentive to attract investors to this type of collective investment instrument. In it there is no reference or remission to the IRS Code regime to the effect of applying the tax regime of the IRS for natural persons, much less (even if implicitly) to the regime of current article 41 of the IRS Code, with a view to achieving fiscal neutrality with respect to individual investors, at the level of real estate income.

It is understood that the legislator, by the own full reading of the provision here in discussion, had in view a tax regime for REITs identical to that applicable to natural and legal persons, aiming at fiscal neutrality (being indifferent whether the investment is made by a natural or legal person, or collectively by various natural or legal persons, through a REIT), but one thing is the "voluntas legislatoris" (what is supposed to have been intended) another is the "voluntas legis" (what the law says, starting from its irremovable literal element, the will which the text of the law seeks to achieve).

Moreover, the conclusion reached by the Defendant, by the fact that subsection (a) of section 6 of article 22 of the EBF expresses "real estate income" and not "real estate income", does not appear to configure having the virtue of wanting to signify an expansion of the normative provision, by extensive interpretation, which, in practical terms, would lead to the application of the tax regime of current article 41 of the IRS Code. And for the reason that the plural was used in all subsections (a), (b) and (c) of section 6 of article 22 of the EBF, version of 2012, wanting only to signify the aggregation of all income of a certain category, independently of the generating source being one property, various properties, whether or not constituted in horizontal division.

We conclude, in light of the foregoing, that it is not possible to extract from subsection (a) of section 6 of article 22 of the EBF, version of 2012, while a provision that enacts a tax benefit, the necessity of resort (implicit) to the current regime of article 41 of the IRS Code, in the search for a fiscal neutrality that does not result from the letter of the provision here in discussion. Such reading has in the letter of the law a minimum of correspondence.

In light of the foregoing, the request for opinion is partially granted. Partially, because the value of the request which the Claimant formulated is €5,124.85, but the total value of the assessments is only €4,852.90, having the Claimant added to the value of the assessments (IRC and interest) the values of costs with the tax execution, as noted in point 8 of the proven facts, values which here cannot be challenged, but rather at the level of the consequences of this judgment.

V - DECISION

On the basis and with the grounds set forth above:

1. The request for arbitral opinion is judged partially well-founded in the part seeking annulment of the act of additional Corporate Income Tax ("IRC") assessment No. 2016..., of 29 August 2016 (€4,289.30), and of the Interest Accrual Statement No. 2016..., of 31 August 2016" (€563.60), resulting in a total amount payable of €4,852.90.

2. Consequently, the assessments referred to in the preceding point are annulled, since these assessments and the decision adopted in the gracious administrative review procedure are not in conformity with subsection (a) of section 6 of article 22 of the EBF, in the reading hereinabove advocated.

3. The remaining part of the request for arbitral opinion is judged unfounded (in the difference between the value petitioned of €5,124.95 and the sum of the challenged assessments of €4,852.90).

Value of the case: in accordance with the provision in article 3, section 2, of the Regulation of Court Costs in Tax Arbitration Proceedings (and subsection (a) of section 1 of article 97A of the CPPT), the value of the case is set at €5,124.95.

Court costs: pursuant to the provision in article 22, section 4, of the RJAT, the amount of court costs is set at €612.00 according to Table I attached to the Regulation of Court Costs in Tax Arbitration Proceedings, with 94.69% charged to the Defendant (€571.00) and 5.31% charged to the Claimant (€32.00), in light of the outcomes.

Notify.

Lisbon, 21 June 2018

Singular Arbitral Tribunal (TAS),

Augusto Vieira

Text prepared by computer pursuant to the provision in article 131, section 5, of the CPC, applicable by reference of article 29 of the RJAT.

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