Summary
Full Decision
ARBITRAL DECISION (consult full version in PDF)
I – REPORT
On 14 December 2017, A... – REAL ESTATE INVESTMENT FUND MANAGEMENT COMPANY, S.A., Tax Identification Number..., with registered office in ..., ..., ..., ..., ...-... Lisbon, filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as LFATM), seeking the declaration of illegality of the additional corporate income tax (IRC) assessment notice No. 2016... and of the compensatory interest calculation statement No. 2016..., in the total amount of €119,456.38.
To substantiate its request, the Claimant alleges, in summary, that:
the taxable amount, as per article 22 of the Tax Benefits Statute (EBF), should be based on relevant accounting results, whereby recourse to cash flows proposed by the Tax Authority is illegal;
even if cash basis taxation were to be adopted, this would necessarily imply the disregard, from the IRC tax base, of receipts from recharges made by the "Fund" to the tenants or the deduction of the respective payments;
the "Fund" should be taxed in accordance with the real estate income obtained from the exploitation of the urban property corresponding to the B... retail park, being deducted therefrom the maintenance and upkeep charges incurred with the income-generating property in its entirety, even if part thereof did not generate income.
On 15-12-2017, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority (AT).
The Claimant did not proceed to appoint an arbitrator, whereby, pursuant to subparagraph a) of paragraph 2 of article 6 and subparagraph a) of paragraph 1 of article 11 of the LFATM, the President of the Ethics Council of CAAD designated the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable time period.
On 02-02-2018, the parties were notified of such designations and did not manifest any intention to refuse any of them.
In accordance with the provisions of subparagraph c) of paragraph 1 of article 11 of the LFATM, the collective Arbitral Tribunal was constituted on 22-02-2018.
On 06-04-2018, the Respondent, duly notified to that effect, submitted its defence contesting solely by way of impugnation.
Pursuant to subparagraphs c) and e) of article 16, and paragraph 2 of article 29, both of the LFATM, the holding of the meeting alluded to in article 18 of the LFATM was dispensed with.
Having been granted a time period for the submission of written submissions, the parties presented the same, ruling on the evidence produced and reiterating and developing their respective legal positions.
A period of 60 days was fixed for the rendering of the final decision, following the submission of submissions by the Respondent.
The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to articles 2, paragraph 1, subparagraph a), 5 and 6, paragraph 1, of the LFATM.
The parties have legal personality and capacity, are legitimately interested and are legally represented, pursuant to articles 4 and 10 of the LFATM and article 1 of Order No. 112-A/2011, of 22 March.
The proceedings are not subject to any nullities.
Thus, there is no obstacle to the examination of the case.
All things considered, it is necessary to render
II. DECISION
A. FACTUAL MATTERS
A.1. Facts Established as Proved
The Claimant is, and was in 2013, the manager of the C... Closed Special Real Estate Investment Fund (in liquidation, hereinafter referred to as the "Fund").
The "Fund" is, and was in 2013, a closed real estate investment fund of full distribution, constituted by private subscription.
The constitution of the "Fund" was authorised by the Securities Market Commission on 18-05-2006 and occurred on 10 August of the same year.
The "Fund" was constituted with an initial capital of €5,000,000.00, represented by 1,000,000 participation units with the unit value of €5.00 in exclusively registered form, fully subscribed by a single participant.
On 01-02-2012, a capital increase was resolved up to the limit of 470,864 participation units, with the subscription of the capital increase occurring on 08-02-2012 and financial settlement on 09-02-2012, with 470,864 participation units having been subscribed.
With the capital increase, the "Fund" had 9,730,986 participation units issued and capital of €37,999,997.90.
On 21-03-2013, a new capital increase was resolved up to the limit of 474,345 participation units, with the subscription of the capital increase occurring on 27-03-2018 and financial settlement occurring on 28-03-2018, with 474,345 participation units having been subscribed.
With this capital increase, the "Fund" had 10,205,331 participation units and capital of €38,660,997.66.
On 28-04-2015 a new capital increase was resolved up to the limit of 10,573,858 units, with the subscription of the capital increase occurring on 11-05-2015 and financial settlement on 12-05-2015.
With this capital increase, the "Fund" had 10,573,858 participation units and capital of €38,860,997.26.
The "Fund" had an initial duration of five years, renewable for periods not exceeding three years, subject to authorisation from CMVM and favourable resolution by the Assembly of Participants.
On 21-07-2014, the Assembly of Participants resolved the extension for a period of one year and seven months, and such period was renewed.
On 16-12-2015 the Assembly of Participants resolved the liquidation of the "Fund".
On 06-12-2017, CMVM resolved the extension of the liquidation period of the "C..." until 16-12-2017.
The "Fund" had as its objective to achieve, from a medium and long-term perspective, increasing capital appreciation through the constitution and management of a portfolio of real estate properties characterisable as "Retail Parks" located outside urban centres.
The Claimant is, and was in 2013, responsible for the administration, management and representation of the "Fund", being responsible for entering into legal transactions and performing all operations necessary for the implementation and execution of the investment policy and exercising the rights, directly and indirectly, related to the "Fund".
On 29-07-2007, the "Fund" acquired the B... Retail Park, a property situated in ..., parish of ..., municipality of ..., which was held by it until December 2015, when it was alienated.
The B... Retail Park consisted of two distinct areas: the shop occupied by D..., Lda. and a property divided into various floors and divisions with independent use (shops that make up the B... Retail Park), identified by the letters A to J.
The B... Retail Park, in addition to integrating spaces intended exclusively for retail commerce and accessory catering and beverage services for use by end consumers, was served by common infrastructure, such as accesses, roads, green areas and car parking, as well as common administration and services.
In the course of the 2013 period, the "Fund" maintained the contracts entered into by the previous owner of the B... Retail Park in order to grant the use of spaces to tenants, so that they could carry out their commercial activities for the public.
The "Fund" and the tenants entered into contracts for the use of space in a commercial area and the provision of various ancillary services.
By means of these contracts, the "Fund" undertook to grant to the tenants the right to temporary use of the commercial space corresponding to the shop, for the commercial purposes associated with each of those entities and to ensure the organisation, management and operation of the enterprise, notably through the provision to tenants of maintenance, upkeep and cleaning services for the common areas, security of persons and property and promotion and publicity of the B... Retail Park.
On the other hand, each tenant was obliged to pay to the "Fund" a fixed monthly fee, as well as a monthly amount as a contribution to the common expenses of the B... Retail Park, which include current administration, operating, maintenance, upkeep and repair expenses for the common areas and expenses with common services.
Between July 2008 and 31 December 2014, the activity of the "Fund" was entirely dedicated to the management of the B... Retail Park.
The amounts with maintenance and upkeep charges of the B... Retail Park borne by the "Fund" correspond, to a large extent, to the monthly amounts charged to the tenants.
In the 2013 financial year, the "Fund" recorded in its accounting a total amount of revenues of €1,666,627.14, which correspond to the amounts invoiced to the tenants.
By sampling the accounting extracts relating to customers, the AT concluded that the amounts presented correspond to the amounts accounted for as customer receipts net of the respective VAT.
The amount received in 2013 from J... corresponded to compensation relating to contract negotiation.
In the 2013 financial year, the "Fund" accounted for a negative balance between reversals and adjustments, relating to doubtful debts, in the amount of €945,839.71.
The "Fund" recorded in 2013 expenses for the maintenance and upkeep of the B... Retail Park in the total amount of €232,696.02, distributed as follows:
€47,232.08 corresponding to IMI (Municipal Real Estate Tax) borne;
€86,775.50 corresponding to technical consultancy;
€48,564.73 corresponding to the difference between the common expenses incurred by the "C..." and the amount charged to the tenants;
€50,123.71 corresponding to civil liability insurance.
In the 2013 financial year, the "Fund" calculated net real estate income as follows:
[details of calculation]
The "Fund" paid the following expenses attributed to the different shops of the B... Retail Park:
[details of allocation]
In 2013, shop H produced no revenues, with the Fund having incurred charges with respect to the same in the amount of €65,399.03.
In the year 2013, the Fund incurred expenses in the total amount of €327,227.28, relating to water, communications, energy and electricity, management, marketing and advertising, repairs, cleaning, security and surveillance, among others.
The "Fund" recorded as "revenues from real estate assets" the fixed amounts of revenues corresponding to the use of the shop space, and not the amounts charged as contributions to common expenses.
The real estate revenues that the "Fund" subjected to IRC, based on the accounting, did not include the recharge of common expenses with the B... Retail Park or the underlying expenses.
The "Fund", as a Real Estate Investment Fund, is, and was in 2013, subject to IRC and is subject to a special taxation regime provided for in article 22 of the Tax Benefits Statute.
The "Fund" adopted as the procedure for calculating real estate revenues subject to tax those accounted for, increasing them by the balance between reversals and adjustments for doubtful debts.
In the 2013 financial year, the "Fund" calculated a taxable base of €488,097.41 from which resulted an IRC amount of €119,111.91.
The values presented by the Claimant contained in its accounting were validated by the Tax Inspection, with no divergencies being found.
The "Fund" was subject to an external inspection procedure, through Service Order No. 2016..., for the 2013 financial year.
Through Official Letter No. ..., the "Fund" was notified of the Draft Tax Inspection Report and to, if so desired, exercise the right to be heard.
On 04-08-2016 the "Fund" presented the right to prior hearing, in which it contested the formula for determining the taxable amount indicated by the AT.
On 23-08-2016, the "Fund" was notified of the Final Tax Inspection Report (RIT) in which the corrections proposed in the Draft Report were maintained:
[details of corrections]
The RIT contains, among other things, that:
[further details]
The "Fund" was notified of the additional IRC assessment notice No. 2016... and of the compensatory interest calculation statement No. 2016....
The "Fund" was cited in the course of the tax enforcement proceedings No. ...2016... for payment of the tax debt of €117,085.00, plus €458.90 in procedural costs, having proceeded to pay the debt subject to enforcement.
The Claimant submitted a petition for reconsideration against the additional IRC assessment notice relating to the 2013 period and the respective compensatory interest calculation.
On 28-09-2017, the Claimant was notified of the final decision dismissing the petition for reconsideration.
A.2. Facts Established as Not Proved
With relevance to the decision, there are no facts that should be considered as not proved.
A.3. Substantiation of Proved and Not Proved Factual Matters
With regard to the factual matters, the Tribunal does not need to rule on everything alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to distinguish the proved from the not proved factual matters (cf. article 123, paragraph 2, of the Tax Code of Procedure and Process (CPPT) and article 607, paragraph 3 of the Civil Procedure Code (CPC), applicable by virtue of article 29, paragraph 1, subparagraphs a) and e), of the LFATM).
Thus, the facts relevant to the judgment of the case are chosen and delineated according to their legal relevance, which is established in light of the various plausible solutions of the legal question(s) (cf. previous article 511, paragraph 1, of the CPC, corresponding to the current article 596, applicable by virtue of article 29, paragraph 1, subparagraph e), of the LFATM).
Thus, taking into account the positions adopted by the parties, in light of article 110/7 of the CPPT, the documentary evidence and the case file attached to the records, it was considered proved, with relevance to the decision, the facts listed above, taking into account that, as was written in the Decision of the Southern Administrative Court of 26-06-2014, delivered in case 07148/13, "the probative value of the tax inspection report (...) may have evidentiary force if the assertions contained therein are not impugned".
No assertions made by the parties and presented as facts consisting of strictly conclusive statements, not susceptible to proof, and whose truthfulness is to be assessed in relation to the specific factual matters consolidated above, were considered as proved or not proved.
B. ON THE LAW
The dispute in the present arbitral action radically turns, by agreement, on the interpretation of article 22/6 of the applicable EBF (wording in force in 2013, given by Law No. 66-B/2012, of 31 December) whose text prescribes:
"6 - The revenues of real estate investment funds, which are constituted and operate in accordance with national legislation, have the following tax regime:
a) In the case of real estate revenues, which are not related to social housing subject to legal regimes of controlled costs, there is individual taxation at the rate of 25%, which applies to the net revenues of maintenance and upkeep charges actually borne, duly documented, as well as of the municipal real estate tax, with the delivery of the tax being made by the respective management entity by the end of April of the year following that to which it relates, and any tax withheld being considered as payment on account of this tax;"
In execution of such a norm, the Claimant calculated its taxable profit, submitted its tax return (IRC) and assessed the same, based on its accounting records, records which, as results from the factual matters, were validated by the AT during inspection.
The AT, for its part, considered that the procedure adopted by the Claimant was not the one legally imposed upon it, understanding that the taxable profit subject to tax, in this case, should be computed based on the net revenues of the maintenance and upkeep charges actually borne by the fund and duly documented, taking into account the provisions of article 8/1 and 2 of the Personal Income Tax Code (CIRS).
The Respondent sustains, in support of its thesis, that "without prejudice to the existence of separate tax regimes for taxation of real estate revenues provided for the purposes of Personal Income Tax (IRS) and for the purposes of taxation of REIFs in the context of IRC, it is entirely impossible to consider the latter (taxation of REIFs) without considering the former (taxation under IRS).", since "the fiscal concept of income is only defined in paragraph 2 of article 8 of CIRS, being, for tax purposes, a broad concept of income, which goes beyond the legal or conventional qualification, encompassing the performance of other transactions of equivalent economic effect not provided for in the law.".
Relying on Circular 20 of 13/07/1994 of the Income Tax Administration Service, the Respondent suggests that "taxation will only apply to rents actually received, in light of the fiscal neutrality towards direct investors, natural persons, enshrined in the current regime of Investment Funds", concluding that "there appears to be no doubt that the legislator has always understood fiscal neutrality towards natural persons as the cornerstone of the regime for taxation of real estate revenues of REIFs, which opposes the argument of the Claimant in seeking to have the legislator intend to introduce such heavy fiscal discrimination by allowing REIFs the deduction of charges not directly related to the real estate properties actually generating real estate revenues, while not allowing it to natural persons benefiting from revenues of the same nature.".
The Respondent finally suggests that "A literal interpretation of subparagraph a) of paragraph 6 of article 22 of the EBF also appears to lead in the opposite direction to that sought by the Claimant", since "one cannot fail to consider the fact that the rule in question includes the expression "real estate revenues" (and not "real estate revenue"), in the same way that, conversely, one must value the fact that the IRC Code provides in its article 17 for the determination of a "taxable profit" (and not "taxable profits") and in its articles 15 and 16 of a "taxable amount" (and not "taxable amounts")", considering that "if the objective of subparagraph a) of paragraph 6 of article 22 of the EBF were the taxation of a single real estate revenue obtained by a REIF – constituted by the sum of the rents received and the expenses borne with properties irrespective of whether they generated real estate revenues or not, as intended by the Claimant – the legislator would have used the expression "real estate revenue", which it did not.", since "a REIF, like a natural person who leases a property, obtains a real estate revenue for each rent received in the course of the lease 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.".
With due respect, it is considered that the interpretation formulated and applied by the AT, as the basis of the corrections sub iudice, is not correct.
Indeed, both the postulate of filling the regime of article 22/6 of the applicable EBF with recourse to the regime of taxation of revenues from category H of IRS, and the postulate of "fiscal neutrality towards natural persons as the cornerstone of the regime for taxation of real estate revenues of REIFs", lack material and teleological foundation, as will be explained below.
Thus, and first of all, the hermeneutic process followed by the AT, and now sustained by the Respondent, obscures a fundamental fact, which is the circumstance that, by definition, Real Estate Investment Funds (REIFs), and consequently the Claimant, as entities and subjects liable to IRC, engage in business activities.
Such a circumstance, in itself, given the predominance of the category B regime over the category H in IRS, enshrined, moreover, in article 3/1 and 2/a) of CIRS, evidences the unsuitability of the filling of the regime of article 22/6 of the applicable EBF with recourse to the regime of taxation of revenues from category H of IRS, as well as the fallacy of the reasoning of the purported fiscal neutrality of the regime of REIFs in relation to natural persons in IRS.
Indeed, natural persons who, like REIFs, engage as a business in activities generating real estate revenues, will be taxed, by virtue of the aforementioned article 3/1 and 2/a) CIRS, in accordance with the category B regime, and not with the category H regime, thus demonstrating that the position applied by the AT and sustained by the Respondent does not realise, in any way whatsoever, any kind of neutrality in relation to subjects liable to IRS who receive real estate revenues in the same circumstances as REIFs, it being noted that article 41/1 of the applicable CIRS, which incorporates the taxation method applied in casu by the AT, is restricted to "gross revenues referred to in article 8", that is to revenues subject to taxation in category H, and not to that kind of revenues to which category B applies.
Furthermore, taxation by category H in IRS has other characteristics of its own, which do not occur with respect to REIFs, such as the absence of an obligation to maintain organised accounting (which in IRS is restricted to certain cases subject to category B – cf. article 28 of the applicable CIRS), which, in itself, justifies that revenues subject to category H of IRS have a specific regime (and perhaps more restrictive) as regards the consideration of expenses.
It is also noted that the putative neutrality would always be emptied by the circumstance that, as pointed out in the RIT, real estate revenues of REIFs are taxed separately at rates of 20% (until 2012) and 25% (from 2013 onwards), whereas real estate revenues subject to category H in IRS are subject to rates of 15% (until 2011), 16.5% (2012) and 28% (from 2013 onwards), which denotes the absence of any legislative purpose to establish any combination between the two regimes.
It is thus considered that there is no foundation for the understanding of the Respondent, according to which "each shop individually considered embodies the existence of a real estate revenue that may be deducted from certain charges incurred with the shop in question; on the other hand, in the particular case of any shop in which there is no lease contract or the actual receipt of rents does not occur, there is no real estate revenue, whereby no deduction of charges borne by the Fund with that shop may operate.".
It is instead considered that REIFs, as subjects liable to IRC, should be taxed in accordance with the rules of the respective Code, with the necessary adaptations for the application of article 22/6 of the EBF, which means, moreover, the application of article 17/1 of the applicable IRC Code, that is, and as regards real estate revenues, their determination based on accounting and possibly corrected in accordance with the IRC Code.
Thus, should be considered as real estate revenues those which, according to accounting standards, are qualified as such, deducted from the expenses which, in the same terms, are of the same nature, increased by those which have the nature of common expenses, in the proportion in which they are attributable to such revenues.
This understanding will not be hindered by the literal text of article 22/6 of the EBF, to the contrary of what appears to the Respondent.
Indeed, and it is believed to be, as regards the matter of literality, sufficiently clarifying, article 3/2/a) of the applicable CIRS, relating to the taxation of real estate revenues within category B of IRS, uses precisely the same expression as article 22/6 of the EBF – "real estate revenues" – without any known understanding advocating that such revenues should be taxed in the terms now sustained by the AT.
Given the foregoing, and it being proved that the Claimant calculated its IRC in accordance with its accounting, and that it was validated by the AT, which detected no incorrectness therein, given the legal error found, the IRC assessment object of the present arbitral action should be annulled, as well as the interest calculation based thereon, and, pursuant to article 24/1/b) of the LFATM, the amounts paid by the Claimant in the respective tax enforcement proceedings should be refunded to it, whereby the claim is granted.
*
C. DECISION
Accordingly, this Arbitral Tribunal decides to find the arbitral claim filed entirely grounded and, in consequence:
To annul the additional IRC assessment No. 2016... and the compensatory interest calculation statement No. 2016...;
To order the Respondent to refund the amounts paid by the Claimant in tax enforcement proceedings No. ...2016...;
To order the Respondent to pay the procedural costs, in the amount fixed below.
D. Value of the Proceedings
The value of the proceedings is fixed at €119,456.38, in accordance with article 97-A, paragraph 1, a), of the Tax Code of Procedure and Process, applicable by virtue of subparagraphs a) and b) of paragraph 1 of article 29 of the LFATM and paragraph 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.
E. Costs
The arbitration fee is fixed at €3,060.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, since the claim was entirely grounded, in accordance with articles 12, paragraph 2, and 22, paragraph 4, both of the LFATM, and article 4, paragraph 4, of the cited Regulation.
Notify accordingly.
Lisbon, 05 September 2018
The President Arbitrator
(José Pedro Carvalho)
The Arbitrator Member
(José Coutinho Pires)
The Arbitrator Member
(Maria Antónia Torres)
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