Summary
Full Decision
ARBITRAL DECISION
The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Sofia Ricardo Borges and José Ramos Alexandre, appointed by the Ethics Council of the Administrative Arbitration Centre to form an Arbitral Tribunal, hereby agree to the following:
I – REPORT
On 14 December 2017, A... – REAL ESTATE INVESTMENT FUND MANAGEMENT COMPANY, S.A., NIPC..., with registered office at ..., ..., ..., ..., ...-... Lisbon, filed, in its capacity as manager of the Special Closed Real Estate Investment Fund B... (in liquidation), 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 a declaration of illegality of the additional corporate income tax assessment No. 2016... and the determination of the interest calculation No. 2016..., in the total amount of €87,163.73, relating to the tax year 2014.
To support its application, the Applicant argues, in summary, that:
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The taxable income, in accordance with Article 22 of the Tax Benefits Statute, should be based on relevant accounting results, so the recourse to cash flows proposed by the Tax Authority is illegal;
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Even if taxation based on cash flow were adopted, this would necessarily imply the disregard, from the IRC tax base, of receipts from rebilling carried out by the "Fund" to shopkeepers or the deduction of respective payments;
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The "Fund" should be taxed according to the real property income obtained from the operation of the urban property corresponding to C... Retail Park, and deductions should be made for maintenance and conservation expenses incurred with the income-generating property in its entirety, even though part of it 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.
The Applicant did not proceed to appoint an arbitrator, so, pursuant to Article 6, No. 2, paragraph a) and Article 11, No. 1, paragraph a) of the LFATM, the President of the Ethics Council of CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of their appointment within the applicable deadline.
On 01-02-2018, the parties were notified of these appointments, and neither manifested an intention to challenge any of them.
In accordance with the provisions of Article 11, No. 1, paragraph c) of the LFATM, the collective Arbitral Tribunal was constituted on 21-02-2018.
On 06-04-2018, the Respondent, duly notified to that effect, submitted its response, defending itself solely by means of objection.
Pursuant to Articles 16, paragraphs c) and e), and Article 29, No. 2, both of the LFATM, the meeting referred to in Article 18 of the LFATM was dispensed with.
Having been granted a deadline for submission of written pleadings, these were presented by the parties, commenting on the evidence produced and reiterating and developing their respective legal positions.
A deadline of 60 days was set for pronouncement of the final decision, following the submission of pleadings by the Respondent.
The Arbitral Tribunal is materially competent and is properly constituted, in accordance with Articles 2, No. 1, paragraph a), 5 and 6, No. 1, of the LFATM.
The parties have legal capacity and standing, are legitimate and are properly represented, in accordance with Articles 4 and 10 of the LFATM and Article 1 of Order No. 112-A/2011 of 22 March.
The proceedings are free from nullities.
Thus, there is no obstacle to the examination of the case.
Having considered everything, judgment is to be rendered as follows:
II. DECISION
A. FACTUAL MATTERS
A.1. Facts established as proven
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The Applicant is, and was in 2014, the manager of the Special Closed Real Estate Investment Fund B... (in liquidation, hereinafter referred to as the "Fund").
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The "Fund" is, and was in 2014, a closed real estate investment fund with full distribution of profits, established by private subscription.
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The establishment of the "Fund" was authorised by the Securities Market Commission on 18-05-2006 and took place on 10 August of the same year.
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The "Fund" was established with an initial capital of €5,000,000.00, represented by 1,000,000 units of participation with a unit value of €5.00, in bearer form exclusively, fully subscribed by a single participant.
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On 01-02-2012, a capital increase was resolved up to the limit of 470,864 units of participation, with subscription of the capital increase occurring on 08-02-2012 and financial settlement on 09-02-2012, with 470,864 units of participation being subscribed.
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With the capital increase, the "Fund" had 9,730,986 units of participation issued and capital of €37,999,997.90.
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On 21-03-2013, a new capital increase was resolved up to the limit of 474,345 units of participation, with subscription of the capital increase occurring on 27-03-2013, with financial settlement occurring on 28-03-2013, with 474,345 units of participation being subscribed.
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With this capital increase, the "Fund" had 10,205,331 units of participation and capital of €38,660,997.66.
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On 28-04-2015 a new capital increase was resolved up to the limit of 10,573,858 units, with subscription of the capital increase occurring on 11-05-2015 and financial settlement on 12-05-2015.
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With this capital increase, the "Fund" had 10,573,858 units of participation and capital of €38,860,997.26.
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The "Fund" had an initial duration of five years, extendable for periods not exceeding three years, subject to authorization by the Securities Market Commission and favorable resolution by the Assembly of Participants.
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On 21-07-2014, the Assembly of Participants resolved to extend for a period of one year and seven months, with that period being renewed.
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On 16-12-2015 the Assembly of Participants resolved on the liquidation of the "Fund".
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On 06-12-2017, the Securities Market Commission resolved to extend the liquidation period of the "B..." until 16-12-2017.
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The "Fund" had the objective of achieving, from a medium and long-term perspective, increasing capital appreciation, through the establishment and management of a portfolio of real estate characterizable as "Retail Parks" located outside urban centers.
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The Applicant is, and was in 2014, 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 rights, directly and indirectly, related to the "Fund".
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On 29-07-2007, the "Fund" acquired C... Retail Park, a property located at ..., parish of ..., municipality of ..., which was held by it until December 2015, when it was sold.
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C... Retail Park consisted of two distinct areas: the shop occupied by D..., Lda. and a property divided by several stories and divisions with independent use (shops that form part of C... Retail Park), identified by the letters A to J.
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C... Retail Park, in addition to including spaces intended exclusively for retail commerce and ancillary catering and beverage services for use by end consumers, was served by common infrastructure, such as access roads, streets, green areas and car parking, as well as common administration and services.
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During the 2014 tax year, the "Fund" maintained the contracts concluded by the previous owner of C... Retail Park in order to grant the use of spaces to shopkeepers so that they could exercise their commercial activities to the public.
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The "Fund" and the shopkeepers concluded contracts for the use of commercial space and provision of various ancillary services.
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By means of these contracts, the "Fund" committed itself to grant shopkeepers the right to temporary use of the commercial space corresponding to the shop, for commercial purposes associated with each of those entities and to ensure the organization, management and operation of the enterprise, namely through the provision to shopkeepers of maintenance, conservation and cleaning services for common areas, security of persons and property and promotion and advertising of C... Retail Park.
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On the other hand, each shopkeeper was obliged to pay the "Fund" a fixed monthly fee, as well as a monthly amount as a contribution to common expenses of C... Retail Park, which includes the current expenses of administration, operation, maintenance, conservation and repair of common areas and expenses for common services.
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Between July 2008 and 31 December 2014, the "Fund's" activity was entirely dedicated to the management of C... Retail Park.
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The amounts with maintenance and conservation expenses of C... Retail Park incurred by the "Fund" correspond, to a large extent, to the monthly amounts charged to shopkeepers.
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In the tax year 2014, the "Fund" recorded in its accounts a total amount of income of €595,894.45, corresponding to the amounts invoiced to shopkeepers.
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By sampling from the accounting records relating to customers, the Tax Authority concluded that the amounts presented correspond to the amounts recorded in the accounts as customer receipts deducted from the respective VAT.
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In the tax year 2014, the "Fund" accounted for a positive balance between reversals and adjustments relating to doubtful debt provisions, in the amount of €4,867.81.
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The "Fund" recorded expenses with the maintenance and conservation of C... Retail Park in the total amount of €346,910.75, distributed as follows:
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€34,157.50 corresponding to Municipal Real Estate Tax incurred;
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€91,124.54 corresponding to technical consulting;
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€138,316.35 corresponding to civil construction works, renovations and repairs;
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€38,453.32 corresponding to the difference between common expenses incurred by "B..." and the amount charged to shopkeepers for that purpose;
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€44,857.04 corresponding to civil liability insurance.
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In the tax year 2014, the "Fund" calculated net real property income as follows:
[Details of calculation provided in original document] -
The "Fund" paid the following expenses allocated to the different shops of C... Retail Park:
[Details provided in original document] -
In the tax year 2014, shops F, G and H generated no income, and the Fund incurred expenses relating to them in the amount of €183,200.70.
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In the year 2014, the Fund incurred expenses in the total amount of €180,673.59, relating to water, communications, energy and electricity, management, marketing and publicity, repairs, cleaning, security and surveillance, among others.
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The "Fund" recorded as "real estate asset income" only the fixed amounts of income corresponding to the use of shop space, and not the amounts collected as contributions to common expenses.
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The real property income which the "Fund" subjected to IRC, based on the accounts, did not include rebilling of common expenses with C... Retail Park or the underlying expenses.
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The "Fund", as a Real Estate Investment Fund, is, and was in 2014, a taxable person subject to IRC and is subject to a special taxation regime provided for in Article 22 of the Tax Benefits Statute.
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The "Fund" adopted as a procedure for determining real property income subject to tax, the amounts recorded in the accounts, increasing them by the balance between reversals and adjustments of doubtful debt provisions.
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In the tax year 2014, the "Fund" calculated a taxable base of €253,851.51 from which resulted the determination of an IRC amount of €63,462.88.
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The amounts presented by the Applicant in its accounts were validated by the Tax Inspection, with no divergences being found.
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The "Fund" was subject to an external inspection procedure, through Service Order No. 2016..., for the tax year 2014.
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By means of Letter No. ..., the "Fund" was notified of the Draft Tax Inspection Report and to, if desired, exercise the right to a hearing.
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On 04-08-2016 the "Fund" exercised the right to a prior hearing, in which it challenged the formula for determining the taxable income proposed by the Tax Authority.
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On 23-08-2016, the "Fund" was notified of the Final Tax Inspection Report in which the corrections proposed in the Draft Report were maintained:
[Details provided in original document] -
The Final Tax Inspection Report states, among other things, that:
[Details provided in original document] -
The "Fund" was notified of the additional corporate income tax assessment No. 2016... and the calculation of compensatory interest No. 2016....
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The "Fund" was cited in the tax enforcement proceedings No. ...2016... for payment of the tax debt of €85,361.14, plus €359.14 in court costs, and proceeded to pay the debt exigible and legal accruals.
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The Applicant filed a taxpayer's request for reconsideration against the act of additional corporate income tax assessment relating to the 2014 tax year and the respective compensatory interest calculation.
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On 28-09-2017, the Applicant was notified of the final decision rejecting the taxpayer's request for reconsideration.
A.2. Facts established as not proven
With relevance to the decision, there are no facts that should be considered as not proven.
A.3. Substantiation of proven and unproven factual matters
Regarding factual matters, the Tribunal does not have to pronounce upon everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to distinguish proven from unproven matters (see Article 123, No. 2 of the Code of Tax Procedure and Process and Article 607, No. 3 of the Code of Civil Procedure, applicable by virtue of Article 29, No. 1, paragraphs a) and e), of the LFATM).
In this manner, the facts pertinent to the judgment of the case are chosen and delimited according to their legal relevance, which is established in light of the various plausible solutions of the legal question(s) (see former Article 511, No. 1 of the Code of Civil Procedure, corresponding to the current Article 596, applicable by virtue of Article 29, No. 1, paragraph e), of the LFATM).
Thus, having regard to the positions assumed by the parties, in light of Article 110/7 of the Code of Tax Procedure and Process, the documentary evidence and the Tax Authority file attached to the case, the facts listed above were considered proven with relevance to the decision, taking into account that, as stated in the Decision of the Court of Appeals of the South Region of 26-06-2014, rendered in case 07148/13, "the probative value of the tax inspection report (...) may have probative force if the assertions contained therein are not challenged".
Allegations made by the parties and presented as facts, consisting of assertions that are strictly conclusive, incapable of proof and whose truthfulness must be assessed in relation to the concrete factual matters consolidated above, were not established as proven or unproven.
B. LEGAL MATTERS
The dispute in the present arbitration action concerns the corrections effected by the Tax Authority with reference to the 2014 tax year, relating to real property income, and is based, by consensus, on the interpretation of Article 22/6, paragraph a) of the applicable Tax Benefits Statute (in the version in force in 2014, as amended by Law No. 66-B/2012 of 31 December), whose text provides:
"6 - The income of real estate investment funds, which are established and operated in accordance with national legislation, are subject to the following tax regime:
a) In the case of real property income, which is not related to social housing subject to legal controlled cost regimes, there is autonomous taxation at the rate of 25%, which applies to net income after deduction of maintenance and conservation expenses actually incurred, properly documented, as well as municipal real estate tax, with the tax being paid by the respective managing entity by the end of April of the year following the year to which it relates, and the tax possibly withheld being considered as payment on account of this tax;"
In implementation of such norm, the Applicant calculated its taxable profit, presented its tax return (IRC) and calculated the tax based on its accounting records, records which, as results from the factual matters, were validated by the Tax Authority during the inspection.
The Tax Authority, for its part, considered that the procedure thus adopted by the Applicant was not that which was legally imposed upon it, understanding that the taxable profit subject to tax, in this case, should be computed based on net income after deduction of maintenance and conservation expenses actually incurred by the fund and properly documented (and Municipal Real Estate Tax), having regard to the provisions of Articles 8/1 and 2 of the Personal Income Tax Code.
The Respondent submits, in support of its thesis, that "without prejudice to the existence of separate tax regimes for taxation of real property income provided for purposes of personal income tax and for taxation of Real Estate Investment Funds for purposes of corporate income tax, it is entirely impossible to consider the latter (taxation of Real Estate Investment Funds) without considering the first (taxation for personal income tax purposes)", since "the tax concept of rent is only defined in No. 2 of Article 8 of the Personal Income Tax Code, and is, for tax purposes, a broad concept of rent that goes beyond legal or conventional qualification, encompassing the celebration of other transactions with equivalent economic effect not typified in law."
Relying on Circular 20 of 13/07/1994, from the Income Tax Administration Service, the Respondent argues that "taxation will only apply to rents actually received, taking into account the tax neutrality vis-à-vis direct investors, natural persons, established in the current Real Estate Investment Fund regime", concluding that "it seems clear that the tax legislator always understood tax neutrality vis-à-vis natural persons as the cornerstone of the regime for taxation of real property income of Real Estate Investment Funds, which is contrary to the argument of the Applicant in seeking to claim that the tax legislator intended to introduce such heavy tax discrimination by allowing Real Estate Investment Funds to deduct expenses not directly related to properties actually generating real property income, while not allowing this to natural persons benefiting from income of the same nature."
The Respondent finally suggests that "A literal interpretation of paragraph a) of No. 6 of Article 22 of the Tax Benefits Statute also seems to lead in a direction opposite to that sought by the Applicant", because "one cannot fail to consider the fact that the norm in question includes the expression "real property income" (and not "real property income"), in the same way that, in the reverse sense, one must value the fact that the corporate income tax 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")", considering that "if the objective of paragraph a) of No. 6 of Article 22 of the Tax Benefits Statute were the taxation of a single real property income obtained by a Real Estate Investment Fund – constituted by the sum of rents received and expenses incurred with properties regardless of whether they generated real property income or not, as claimed by the Applicant – the legislator would have used the expression "real property income", which it did not do", since "a Real Estate Investment Fund, like a natural person who leases a property, obtains real property income 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 Tax Authority, as the basis for the corrections in question, is not correct.
Indeed, both the postulate of filling the regime of Article 22/6 paragraph a) of the applicable Tax Benefits Statute by recourse to the regime of taxation of income of category F of the Personal Income Tax Code, and the postulate of "tax neutrality vis-à-vis natural persons as the cornerstone of the regime for taxation of real property income of Real Estate Investment Funds", lack material and teleological foundation, as will now be explained.
Thus, first and foremost, the hermeneutical process followed by the Tax Authority, and now sustained by the Respondent, obscures a fundamental fact, which is the circumstance that, by definition, Real Estate Investment Funds (Real Estate Investment Funds), as corporations and taxable persons subject to corporate income tax, are engaged in business activities, with corresponding reflexes for the Applicant in its capacity as legal representative of the Fund B...
This circumstance, in itself, in light of the predominance of the category B regime over category F in Personal Income Tax, established, moreover, in Article 3/1 and 2/a) of the Personal Income Tax Code, demonstrates the unsuitability of the filling of the regime of Article 22/6 paragraph a) of the applicable Tax Benefits Statute by recourse to the regime of taxation of category F income of the Personal Income Tax Code, as well as the fallacy of the reasoning of the supposed tax neutrality of the Real Estate Investment Fund regime in relation to natural persons in Personal Income Tax.
In fact, income of natural persons who, like Real Estate Investment Funds, are engaged in business activities generating real property income, will be taxed, by virtue of the aforementioned Article 3/1 and 2/a) of the Personal Income Tax Code, in accordance with the category B regime, not being considered category F income, thereby demonstrating that the position applied by the Tax Authority and sustained by the Respondent does not, in any way whatsoever, realize any kind of neutrality in relation to taxable persons subject to Personal Income Tax who derive real property income under the same circumstances as Real Estate Investment Funds – that is, in a business and professional capacity – it being noted that Article 41/1 of the applicable Personal Income Tax Code, which incorporates the method of taxation applied in this case by the Tax Authority, is restricted to "gross income referred to in Article 8", that is to real property income subject to taxation in category F, and not to such income when classifiable as category B income in Personal Income Tax.
Furthermore, taxation by category F in Personal Income Tax has other characteristics peculiar to itself, which do not apply to Real Estate Investment Funds, such as the absence of an obligation to maintain organized accounting records (an obligation that in Personal Income Tax is restricted to certain cases of category B income – see Article 28 of the applicable Personal Income Tax Code), which, for that reason alone, justifies that income subject to category F of the Personal Income Tax Code should have a specific (and possibly more restrictive) regime regarding the consideration of expenses.
It is also noted that the putative neutrality would in any case be emptied by the circumstance that, as pointed out in the Final Tax Inspection Report, Real Estate Investment Fund real property income is taxed autonomously at rates of 20% (until 2012) and 25% (from 2013 onwards), whereas category F real property income in Personal Income Tax is subject to rates of 15% (until 2011), 16.5% (2012) and 28% (from 2013 onwards), which demonstrates the absence of any intention by the legislator to establish any coordination between the two regimes.
It is thus considered that the Respondent's understanding has no foundation, according to which "each shop individually considered constitutes the existence of gross real property income which could be deducted from certain expenses 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 effective receipt of rents does not exist real property income, so no deduction of expenses incurred by the Fund with the shop in question can operate."
Rather, it is considered that Real Estate Investment Funds, as taxable persons subject to corporate income tax (see Article 2 of the Corporate Income Tax Code), should be taxed in accordance with the rules of that Code, with the necessary adaptations for the application of Article 22/6 of the Tax Benefits Statute, which means, moreover, the application of Article 17/1 of the applicable Corporate Income Tax Code, that is, and as regards real property income, their determination based on accounting records and possibly corrected in accordance with the Corporate Income Tax Code.
In this manner, those should be considered as real property income which in accordance with accounting norms are classifiable as such, deducted from expenses which, under the same terms, have the same nature, plus those which have the nature of common expenses, in the proportion in which they are attributable to such income.
The letter of Article 22/6, paragraph a) of the Tax Benefits Statute will not stand in the way of this understanding, contrary to what seems to the Respondent.
Indeed, and it is believed to be, with respect to the matter of literalness, sufficiently clarifying, Article 3/2/a) of the applicable Personal Income Tax Code, relating to the taxation of real property income within category B of Personal Income Tax, uses precisely the same expression as Article 22/6, paragraph a) of the Tax Benefits Statute – "real property income" – without it being known of any understanding that defends that such income should be taxed in accordance with that now sustained by the Tax Authority.
In light of the foregoing, and it being established that the Applicant calculated the corporate income tax of Fund B... in accordance with its accounting, and that it was validated by the Tax Authority, which found no errors in it, in view of the error of law verified, the corporate income tax assessment object of the present arbitration action, as well as the interest calculation based upon it, should be annulled, and, in accordance with Article 24/1/b) of the LFATM, the amounts paid by the Applicant in the respective tax enforcement proceedings should be returned to it, the petition being thus granted.
C. DECISION
For these reasons, this Arbitral Tribunal decides to declare the arbitration petition filed entirely well-founded and, in consequence:
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To annul the additional corporate income tax assessment No. 2016... and the interest calculation demonstration No. 2016...;
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To condemn the Respondent to reimburse the amounts paid by the Applicant in the tax enforcement proceedings No. ...2016...;
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To condemn the Respondent to pay the costs of the proceedings, in the amount set below.
D. Value of the case
The value of the case is fixed at €87,163.73, in accordance with Article 97-A, No. 1, a), of the Code of Tax Procedure and Process, applicable by virtue of paragraphs a) and b) of No. 1 of Article 29 of the LFATM and No. 2 of Article 3 of the Regulation on Costs in Tax Arbitration Proceedings.
E. Costs
The value of the arbitration fee is fixed at €2,754.00, in accordance with Table I of the Regulation on Costs in Tax Arbitration Proceedings, to be paid by the Tax Authority, since the petition was entirely well-founded, in accordance with Articles 12, No. 2, and 22, No. 4, both of the LFATM, and Article 4, No. 4, of the cited Regulation.
Notification to be made.
Lisbon, 21 August 2018
The Presiding Arbitrator
(José Pedro Carvalho)
The Arbitrator Vogal
(Sofia Ricardo Borges)
The Arbitrator Vogal
(José Ramos Alexandre)
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