Process: 71/2016-T

Date: October 14, 2016

Tax Type: Selo

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 71/2016-T) addresses whether transferring property as a capital contribution to a subsidiary revokes an IMT (Municipal Tax on Onerous Real Estate Transfers) exemption initially granted for property acquired for resale. The claimant, A… S.A., acquired property in 2012 through exchange with the intention to resell it as part of its real estate business, claiming IMT exemption under Article 7 of the IMT Code. In 2014, during a Special Restructuring Procedure (PER), the company transferred the property to subsidiary B… S.A. as an in-kind capital contribution to satisfy creditor obligations. The Tax Authority assessed IMT of €27,547.07, arguing the exemption lapsed under Article 11(5) of the IMT Code due to assignment of a different purpose. The claimant contends this transaction constitutes an 'indirect dação em cumprimento' (indirect payment by delivery), which should qualify as 'resale' since it represents an onerous transmission of ownership to extinguish debts. The claimant argues that economic substance and accounting treatment align with a sale, and the PER context made this transaction necessary for company viability. The Tax Authority maintains a strict interpretation, citing Supreme Administrative Court precedent that 'resale' must be understood in its technical-legal sense as a purchase and sale contract specifically. The Authority argues that payment by delivery has a distinct civil law regime and cannot be equated with resale, and that the PER context cannot alter legal interpretation of tax norms. The tribunal must determine whether the literal interpretation of 'resale' prevails or whether the economic substance of the transaction as an onerous transfer should maintain the exemption.

Full Decision

ARBITRATION DECISION

Claimant / Applicant: A…, S.A.

Respondent: Tax and Customs Authority (hereinafter T.C.A.)

1. Report

On 08-02-2016, the limited company A…, S.A., legal person no. ..., with registered office at Street..., no. ..., ...-... Porto, hereinafter referred to as the Claimant, submitted to the Administrative Arbitration Center (CAAD) a request for the constitution of an arbitral tribunal with a view to declaring the illegality of the acts of assessment of Municipal Tax on Onerous Real Estate Transfers (IMT) in the amount of 27,547.07 €. Said assessment is related to the acquisition by the Claimant, through exchange, in the year 2012, of the property registered in the urban property register of the parish of ..., municipality of Porto, under article..., corresponding to a plot of land for construction.

The Claimant states that at the time of the exchange, there was an exemption from IMT by virtue of the property having been acquired with the intention of being resold, that is, within the scope of its activity consisting of the civil construction industry, purchase, sale, resale and lease of real estate.

The Claimant also states that the property in question was transferred, in 2014, to the company B…, S.A., as performance in kind of its respective share capital, a transaction entered into within the scope of the Claimant's compliance with the Special Restructuring Procedure (PER), which it filed and which was heard in the Commercial Court of ..., under no. …/12. ….

Thus, in the understanding of the Claimant, there was transmission of ownership of the property in question, in strict compliance with what was agreed in the aforementioned PER.

The Claimant argues that the realization of in-kind contributions to the aforementioned company B…, with a view to the subsequent transfer of interests in this company, was the measure that proved to be most appropriate for satisfying the interests of all other creditors. And it also states that without this transaction its viability would have been a failure.

The Claimant contends that the transaction carried out within the scope of the PER was part of a set of measures that it was forced to carry out with a view to its restructuring, which was based on the restructuring of its liabilities, mainly with the Banking sector.

Indeed, acting in compliance with what was provided for in the aforementioned PER, the Claimant established on 16-12-2013 the aforementioned company, B…, S.A. On 31-01-2014, the Claimant resolved and subscribed an increase in the capital of this company, to be realized in kind through the transfer of a set of properties, namely that transfer which gave rise to the assessment that is the subject of these proceedings.

In conclusion, the Claimant considers that there was an onerous transmission of the property in question, as a means of extinction of the Claimant's debts, and as such, the exemption from IMT did not lapse, since it considers that no different purpose was assigned to the aforementioned property.

The Claimant does not agree with the understanding of the Tax Authority in not having classified the transmission as payment by delivery, in this case, an indirect payment by delivery, within the concept of resale, without having proceeded to this equivalence that is due.

The Claimant argues that payment by delivery, as a transaction transferring ownership, has all the specific elements of a purchase and sale, and cannot be excluded from the norm in question, because from the point of view of economic substance and accounting treatment, the one and the other contract do not differ.

The Claimant finally refers to the decision of the CAAD in case no. 349/2014-T, in which the Claimant was equally the applicant, and which concluded to the effect that, within the concept of resale of article 7 of the IMT Code, there must necessarily be included all situations in which there is a transmission of the right of ownership.

At the end, the Claimant identified three witnesses in order to be examined within the scope of these proceedings.

A sole arbitrator, Suzana Fernandes da Costa, was appointed on 12-04-2016.

In accordance with what is provided for in article 11 no. 1 letter c) of the Legal Framework for Arbitration in Tax Matters (RJAT), the sole arbitral tribunal was constituted on 29-04-2016.

Notified in accordance with article 17 of the Legal Framework for Arbitration in Tax Matters (RJAT), the Tax and Customs Authority filed its response on 02-06-2016, defending the maintenance of the tax act under review, requesting dismissal of the claim, and alleging that the Claimant assigned a different purpose to the property in question, and therefore, the exemption lapsed, in accordance with no. 5 of article 11 of the IMT Code.

The Tax and Customs Authority begins by alleging that the interpretation made by the Claimant is an isolated interpretation and that it does not have the support of the Supreme Administrative Court (STA).

The Respondent invokes in its reasoning the judgment delivered in case no. 01061/11 of 23-01-2013 of the Full Court of the Tax Litigation Section of the STA, in which the Respondent emphasizes that the judgment focuses its approach on the question of what constitutes resale, for purposes of preventing the lapse of the SISA exemption of a property acquired for resale in accordance with articles 11, no. 13-A and 16 of the SISA Code (CMISISSD).

The Respondent states that the aforementioned judgment concluded to the effect that the celebration of the conditional purchase and sale contract accompanied by delivery of the property to the conditional buyer fulfills the concept of resale contained in article 16 of the SISA Code by virtue of the occurrence of the tax transmission. And the position of the judgment reasoned that the concept of resale contained in that provision should be understood in a technical-legal sense, specifically the celebration of a purchase and sale contract, not being sufficient with the celebration of a conditional purchase contract even if accompanied by delivery.

The Respondent argues that tax interpretation requires, first and foremost, regard to its literal element, from which it results that we must confine ourselves to the expression "resale" and not "transmission".

The Respondent reiterates that the rules of interpretation of the legal norm establishing the lapse of the exemption due to the failure of resale to occur within the established period should be understood to mean that resale occurs only with a new purchase and sale contract. It further states that it must be considered that the contract of payment by delivery established in articles 837 et seq. of the Civil Code should not be considered resale, or equated to a purchase and sale contract which also has its own regime. Thus, these contracts have a different civil law regime and tax law respects them.

The Respondent invokes that the legislator, in article 7 of the IMT Code, intended to distinguish the taxable event of the lapse of the exemption, specifically choosing one among all the taxable events of tax transmission of a property.

The Respondent argues that, although the contract of payment by delivery was forced by the PER, such a reason cannot interfere with the interpretation of tax legal norms, and cannot serve as an interpretative criterion.

The Respondent concludes to the effect that the act in question does not suffer from any illegality and therefore it is challenged as unfounded, the present arbitral request being dismissed for lack of proof, and, consequently, the Respondent absolved of all claims, maintaining in the legal order the impugned assessment, by virtue of constituting a correct application of law to the facts.

On 08-06-2016, an order was issued ordering notification of the parties that the date of 07-09-2016 at 14:30 hours had been scheduled for the holding of the arbitral hearing provided for in article 18 of the Legal Framework for Arbitration in Tax Matters (RJAT).

On 07-09-2016, the Claimant filed a substitution of counsel with reservation.

On the scheduled date for the hearing, 07-09-2016, the representatives of the Claimant and the Respondent appeared.

The representative of the Claimant declared intention to waive the witness examination requested by it, as well as the production of final arguments. And the representative of the Respondent declared nothing to oppose to the requested.

Faced with the position manifested by the parties, the tribunal decided to waive the production of witness examination and final arguments.

The tribunal further scheduled the date of 07-10-2016 for the purpose of delivering the arbitral decision, and warned the Claimant that up to the date of delivery of the decision it should proceed with payment of the subsequent arbitral fee.

The Claimant filed the proof of payment of the subsequent arbitral fee on 08-09-2016.

On 07-10-2016, an order extending the deadline for delivering the decision was issued for the date of 14-10-2016, taking into account the complexity of the matter.

The parties have legal personality and capacity and are legitimate (articles 4 and 10 no. 1 and 2 of the Legal Framework for Arbitration in Tax Matters and article 1 of Order no. 112-A/2011 of 22 March).

The arbitral request is timely, in accordance with article 10 no. 1 letter a) of Decree-Law no. 10/2011 of 20 January and article 102 no. 1 letter a) of the Code of Procedure and Tax Process.

The proceeding does not suffer from nullities and no preliminary questions were raised.

2. Statement of Facts

2.1. Established Facts:

Having analyzed the documentary evidence produced and the position of the parties contained in the procedural documents, the following facts are considered established and relevant to the decision of the case:

  • The Claimant is a commercial company whose corporate purpose is the civil construction industry, purchase, sale, resale and lease of real estate.

  • The Claimant underwent a Special Restructuring Procedure (PER), case no. …/12. …..., which was heard in the Commercial Court of ....

  • The Claimant acquired, through exchange, in 2012, the property registered in the urban property register of the parish of …, municipality of Porto, under article …, corresponding to a plot of land for construction, with exemption from IMT by virtue of having been indicated in the deed that the property would be for resale.

  • In 2014, within the scope of the Special Restructuring Procedure, the Claimant resolved and subscribed an increase in the capital of the company, B…, S.A., to be realized in kind through the transfer of a set of properties, namely that whose transfer gave rise to the assessment that is the subject of these proceedings, as per document 2 attached to the arbitral request.

  • The Claimant was notified, through letter no. …/…-… of 09-11-2015, of the assessment of IMT in the amount of 27,547.07 €, referring to the property identified above, as per document 1 attached to the arbitral request.

No other facts with relevance to the decision of the case were established.

2.2. Basis of the Established Statement of Facts:

With respect to the established facts, the conviction of the arbitrator was based on the documents attached to the case by the Claimant.

3. Matter of Law:

3.1. Object and Scope of the Present Proceeding

3.1.1. Concept of "Resale"

The question to be decided in these proceedings is whether the increase of capital through in-kind contributions of real estate is or is not subsumable within the concept of resale provided for in article 7 no. 1 and article 11 no. 5 of the Code of the Municipal Tax on Onerous Real Estate Transfers (IMT Code).

According to article 7 no. 1 of the IMT Code:

"Acquisitions of properties for resale are exempted from IMT, in accordance with the following number, provided that it is verified that a declaration was presented before the acquisition as provided for in article 112 of the Code of Personal Income Tax (IRS) or in letter a) of no. 1 of article 109 of the Code of Corporate Income Tax (IRC), as the case may be, relating to the exercise of the activity of buyer of properties for resale.

On the other hand, article 11 no. 5 of the IMT Code provides that:

"The acquisition referred to in article 7 shall cease to benefit from exemption as soon as it is verified that the properties acquired for resale were assigned a different purpose or that they were not resold within the period of three years or were resold again for resale".

The essential issue is, therefore, whether one can consider as resale any act that is subsumed under the broad concept of transmission, including the forms provided for in article 1136 of the Civil Code, or whether the expression "resale" should be limited to the transmission of the right of ownership through a purchase and sale contract as defined in article 874 of the Civil Code.

The concept of resale is not expressly defined either in the IMT Code or in the Civil Code.

Given the literal element, it must be taken into account that the legislator intended to encompass properties acquired for a new sale. If the legislator intended to use a concept that would encompass any type of onerous transmission of properties, it would have done so, being sufficient for it to make a reference to article 2 of the same code, a reference that does not exist in article 7. Thus, in using the expression "resale", and in not referring to the concept of article 2, the legislator intended to limit the situations in which a new transmission would permit the existence of an exemption – not all forms of onerous transmission of properties provided for in article 2 but only resales. Therefore, also by the systematic element it is concluded that the limitation existing in article 7 encompasses only a part of the onerous transmissions of properties defined in article 2.

The Respondent evokes, in defense of its position, another decision of the CAAD (delivered in case no. 349/2014-T) concerning a different factual situation: payment by delivery. For its part, the Tax Authority refers, to defend its thesis, a judgment also concerning another factual situation: the conditional purchase contract. None of the jurisprudence cited is based on a factual situation similar to that of the present case.

Let us see:

According to CARLOS PAIVA and MÁRIO JANUÁRIO, in "Tax Benefits in Property-Based Taxes", Almedina, 2014, page 144, they state that "in the analysis of the concept of 'resale', both doctrine and jurisprudence converge in the conclusion that it only admits transmission of the right of ownership effected through a purchase and sale contract as defined in article 874 of the Civil Code, in which case, by resale one must understand 'to sell again'".

With respect to purchase and sale, article 874 of the Civil Code defines it as the contract by which ownership of a thing, or another right, is transmitted, by means of a price.

As for the effects of purchase and sale, article 879 of the Civil Code states that purchase and sale has as essential effects: a) the transmission of ownership of the thing or the holding of the right; b) the obligation to deliver the thing; c) the obligation to pay the price.

The contract sub judice does not fulfill the requirements of these articles 874 and 879 of the Civil Code, starting with the fact that, although it is onerous, it does not presuppose payment of a price. It is rather an in-kind contribution for the realization of the share capital of a company in which there is consideration, but it cannot be said that there is a price.

See in this regard the judgment of the Supreme Court of Justice (STJ) of 22-01-2009 of case no. 08B2918, where it is stated that with respect to the purchase and sale contract "the consideration for the transmission of the right is the payment of a price, that is, of a sum of money."

According to the same judgment "thus purchase and sale is distinguished from other onerous transactional contracts, such as, for example, exchange (to which, moreover, the rules defined for purchase and sale apply, with the necessary modifications – article 939 of the Civil Code). And the same applies to payment by delivery, since, there, the consideration is the release of the obligation of performance of the thing originally due (release that occurs in the same way)".

The same judgment further states that "it cannot be considered either purchase and sale, or payment by delivery, the act by which a partner realizes in kind his contribution in a limited company". See also the judgment of the STJ of 16 November 2006, delivered in case 06B3596).

In the same sense, see also the judgment of the Court of Appeal of Lisbon, of 22-04-2008, in case no. 1552/2008-a, concerning an in-kind contribution with a commercial establishment, which states that "it is of the essence of the purchase and sale contract the transmission of the right of ownership or of another right, by means of payment of a price. There is here a correlativity of two performances: the right of ownership or of another right, on one hand; and the price, in money, on the other. Not existing obligation to deliver the price, there is lacking an essential requirement for this legal transaction to be classified as a purchase and sale contract. In addition, the obligation of contribution through the transfer, which is an in-kind contribution, emerges from the partnership contract and not from a purchase and sale contract".

From the above it results that the in-kind contribution for the capital of company B… effected by the Claimant cannot be considered a resale for purposes of exemption from IMT, in accordance with articles 7 no. 1 and 11 no. 5 of the IMT Code.

3.1.2. Tax Benefits and Tax Legality

According to article 2 of the Tax Benefits Act:

"1 - Tax benefits are considered to be measures of an exceptional nature instituted for the protection of relevant extrafiscal public interests that are superior to those of the very taxation that they prevent.

2 - Tax benefits include exemptions, reductions of rates, deductions from the taxable base and tax, accelerated amortizations and reinstatements and other tax measures that comply with the characteristics stated in the preceding number".

In the specific case we are dealing with an exemption from IMT that is subsumed within the concept of tax benefit. To tax benefits applies the principle of tax legality, as stated in article 103 no. 2 of the Constitution of the Portuguese Republic (CRP), according to which:

  1. Taxes are created by law, which determines the incidence, the rate, tax benefits and the guarantees of taxpayers.

Thus, for a certain situation to benefit from exemption it must be expressly provided for in law. (In this sense see ANA PAULA DOURADO, "The Principle of Tax Legality", 2007, Almedina page 125 et seq.).

Furthermore, in this matter, analogy is prohibited as follows from article 11, 4 of the General Tax Law.

In this way, given that the law refers to "resale" and it is not, in our opinion, included therein the realization with real estate of an in-kind contribution, articles 7 and 11, no. 5 cannot be applied by analogy to the situation described in the case and to the established facts.

In conclusion, the IMT assessment in question in these proceedings is not affected by illegality, and therefore the arbitral request must be dismissed.

4. Decision

In light of the foregoing, it is determined that the claim filed by the Claimant in this tax arbitration proceeding is dismissed as to the illegality of the assessment of the Municipal Tax on Onerous Real Estate Transfers, which is the subject of this arbitral request.

5. Value of the Proceeding:

In accordance with the provisions of article 306, no. 2, of the Code of Civil Procedure and article 97-A, no. 1, letter a) of the Code of Procedure and Tax Process and article 3, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the action is set at 27,547.07 €.

6. Costs:

In accordance with article 22, no. 4, of the Legal Framework for Arbitration in Tax Matters and Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is fixed at 1,530.00 €, due by the Claimant.

Notify.

Lisbon, 14 October 2016.

Text prepared by computer, in accordance with article 138, no. 5 of the Code of Civil Procedure (CPC), applicable by reference to article 29, no. 1, letter e) of the Legal Framework for Arbitration in Tax Matters, reviewed by me.

The Sole Arbitrator

Suzana Fernandes da Costa

Frequently Asked Questions

Automatically Created

Does transferring property as a capital contribution to a subsidiary constitute a change of purpose that revokes IMT resale exemption?
Under the Tax Authority's position, transferring property as a capital contribution to a subsidiary does constitute a change of purpose that revokes IMT resale exemption. The Authority argues that Article 7 of the IMT Code requires literal interpretation of 'resale' (revenda) as a purchase and sale contract specifically, not merely any transmission of ownership. Capital contributions have a distinct civil law regime under the Portuguese Civil Code, separate from purchase and sale contracts. The Tax Authority contends that when property acquired for resale is instead transferred as a capital contribution, this assignment of a different purpose triggers the lapse of exemption under Article 11(5) of the IMT Code, regardless of whether the transaction involves onerous transmission or serves legitimate business restructuring purposes.
Can a Special Revitalization Process (PER) justify maintaining IMT exemption when property is transferred instead of resold?
The Tax Authority's position is that a Special Restructuring Procedure (PER) cannot justify maintaining IMT exemption when property is transferred instead of resold. The Authority argues that while the PER may have forced the capital contribution as a business necessity, such external circumstances cannot interfere with the interpretation of tax legal norms or serve as an interpretative criterion. Tax law must respect the distinct civil law regimes of different contracts. However, the claimant argues that the PER context is relevant because the transaction was necessary for company viability and creditor satisfaction, representing an onerous transmission that extinguished debts. The claimant contends that denying the exemption would punish compliance with court-approved restructuring measures, but the Authority maintains that tax interpretation requires adherence to literal legal elements regardless of business context.
What is an indirect dação em cumprimento (dation in payment) and how does it apply to IMT exemption under Portuguese tax law?
An indirect dação em cumprimento (indirect dation in payment or payment by delivery) refers to transferring property to a third party as a means of satisfying debts to creditors, rather than directly to the creditor. In this case, the claimant argues that transferring property to subsidiary B… S.A. as capital contribution, which then allowed transfer of shares to creditors under the PER, constitutes an indirect payment by delivery. The claimant contends this should qualify as 'resale' under Article 7 of the IMT Code because it represents an onerous transmission of ownership that extinguishes obligations, with economic substance equivalent to a sale. The argument relies on the position that payment by delivery contains all essential elements of purchase and sale and should not be excluded from the resale concept. However, the Tax Authority rejects this equivalence, maintaining that dação em cumprimento has its own distinct legal regime under Articles 837 et seq. of the Civil Code and cannot be equated with the purchase and sale contract required for 'resale' under strict tax law interpretation.
How does the CAAD arbitral tribunal assess IMT exemption revocation when property is used to satisfy creditor obligations?
The CAAD arbitral tribunal assesses IMT exemption revocation when property is used to satisfy creditor obligations by examining whether such transactions constitute 'resale' under Article 7 of the IMT Code or whether they represent a different purpose triggering exemption lapse under Article 11(5). The tribunal must balance two interpretative approaches: (1) the literal interpretation requiring 'resale' to mean specifically a purchase and sale contract, as supported by Supreme Administrative Court precedent (case 01061/11); and (2) the economic substance approach that considers whether onerous transmissions satisfying debt obligations should be functionally equivalent to resale. The tribunal considers whether the specific context—such as court-approved restructuring procedures—is relevant to tax interpretation, and whether distinctions between civil law contract types (capital contributions vs. sales vs. payment by delivery) must be strictly maintained in tax law. The claimant cited CAAD case 349/2014-T supporting inclusion of all ownership transmissions within the resale concept, suggesting tribunals may adopt varying interpretative approaches to this issue.
What are the requirements for maintaining IMT exemption on property acquired for resale under Article 7 of the IMT Code?
To maintain IMT exemption on property acquired for resale under Article 7 of the IMT Code, the taxpayer must: (1) acquire the property with the genuine intention of resale as part of their business activity (such as real estate development, purchase and resale operations); (2) actually resell the property within the applicable time period; and (3) not assign a different purpose to the property that would trigger exemption lapse under Article 11(5) of the IMT Code. The critical dispute centers on what constitutes 'resale'—whether it requires specifically a purchase and sale contract or includes other forms of onerous transmission. Under the Tax Authority's strict interpretation, supported by Supreme Administrative Court precedent, 'resale' must be understood in its technical-legal sense as a purchase and sale contract specifically. Capital contributions, payments by delivery, or other forms of property transfer, even if onerous, would not satisfy this requirement. The taxpayer bears the burden of demonstrating both the initial resale intention and the actual occurrence of resale within required timeframes without changing the property's designated purpose.