CAAD 720/2015-T: IMT and Stamp Tax Exemption Revocation for FIIAH Real Estate Funds

Arbitral Decision[1]

The single arbitrator tribunal functioning at CAAD – Administrative Arbitration Centre pursuant to the legal regime established by Decree-Law No. 10/2011 of 20 January, to which was appointed by the respective Ethics Board, arbitrator from the Centre's list Nuno Maldonado Sousa, hereby renders its arbitral decision.

1. Report

Identification of the parties and constitution of the tribunal

A…, S.A., with registered office at …, no. …–…, … – …Lisbon, with share capital of € 1,550,000.00, registered at the Lisbon Commercial Registration Office under single registration and tax identification number …, in its capacity as managing entity of the real estate investment fund "B… – CLOSED REAL ESTATE INVESTMENT FUND…" (also designated in this document as "REIF B…"), registered with the Securities Market Commission, with tax identification number …, filed a request for constitution of the tribunal, pursuant to the combined provisions of articles 2 and 10 of the LRTA and articles 1 and 2 of Ordinance No. 112-A/2011 of 22 March, against which the TAX AND CUSTOMS AUTHORITY is named as Respondent.

The request for constitution of the tribunal was accepted by the President of CAAD on 02-12-2015 and was notified to the TA on 11-12-2015.

Pursuant to the provisions of article 6, no. 1 and article 11, no. 1, paragraph b) of the LRTA, the Ethics Board appointed as arbitrator of the single arbitrator tribunal the undersigned, who communicated acceptance of the charge within the applicable timeframe, and notified the parties of this appointment on 27-01-2015. In accordance with the rule set out in article 11, no. 1, paragraph c) of the LRTA, the tribunal was constituted on 11-02-2016.

On 06-07-2016 and on 12-10-2016 this arbitral tribunal extended the deadline for issuing and notifying the parties of the arbitral decision in 2 periods of 2 months, pursuant to article 21-2 of the LRTA.

Identification of the challenged acts, summary of the Claimant's claim, its grounds and defects attributed to the acts

In its Initial Request the Claimant petitioned:

I. The declaration of nullity and subsidiarily the annulment of the following assessments, which had as their origin the transfer of the urban property inscribed in the property register under article …-… of the parish of … and …:

a. IMT Assessment No. …, in the amount of € 1,052.33;

b. IS Assessment No. …, in the amount of € 790.56.

II. The restitution of those taxes unduly assessed and paid, plus compensatory interest.

The Claimant bases its claim on the exemption granted to the REIF it manages, under the regime in effect in 2012 when it acquired the property, at which time there was no rule conditioning the exemptions from IMT and IS provided for in the RE-REIF. In 2014 the tax regime contained in the RE-REIF was amended, in order to limit the effect of exemptions similar to those from which the REIF managed by the Claimant benefited, but this amendment cannot affect the exemptions granted in the meantime and "crystallized in the legal-tax order of the Claimant". If this were the case, the application of the revised rule would result in its "unconstitutionality due to violation of the principle of non-retroactivity of tax law, enshrined in article 103 (Tax System), no. 3, of the Constitution of the Portuguese Republic" (27 of IR), all the more so that "the tax facts that the new law seeks to regulate have already produced all their effects under the old law" (30). It accordingly considers that "the assessments are illegal since it believes that article 236 of Law 83-C/2013, of 31 December, which approved the State Budget for 2014, is unconstitutional, due to violation of article 103 of the Constitution of the Portuguese Republic.

The Claimant considers that the assessments in question are null because they offend the essential content of a fundamental right (article 133-1 of the Code of Administrative Procedure in force until 06-04-2015), a category in which it frames the principle of non-retroactivity of tax law (article 37), and consequently this defect may be grounds for challenging the acts at any time (article 41).

From the perspective of tax procedure (article 99 CPPT) the Claimant's thesis actually rests on the existence of error regarding the legal grounds, as it considers that the rules regulating the extinction of tax benefits are not applicable to the assessments under criticism.

In summary, the Claimant seeks that the assessments be invalidated and that the amounts paid be returned to it, plus interest.

Summary of the TA's position

The Tax and Customs Authority presented its Response sustaining the legality of the assessment and defended the inadmissibility of the claim and its grounds, understanding that the property was not given the destination provided for in the law, which is allocation to rental (article 10). It sustains that the taxable persons who wished to benefit from the exemptions provided for in the tax regime applicable to REIFs always had to allocate the properties in question exclusively to rental for permanent housing. It was in this situation, embodied in the fact that the property was given a destination different from that which gave rise to the attribution of the tax benefit, that the challenged assessments were made (article 13). The assessments do not have as their basis the application of the regime amended in 2014 "but rather are based on the fact that the property was given a destination different" (article 15).

The TA further understands that the defect that could affect the assessments would not be that of nullity but mere voidability, which is the standard regime of invalidity of administrative acts, and that the question of non-retroactivity of tax law has relevance in confrontation with the principle of legality but does not fall within the sphere of citizens' rights, liberties and guarantees, where nullity could arise. Consequently the regime for challenging the act must be that which is applicable to voidable acts (article 19).

2. Preliminary Issues

Pleadings, procedural developments and arguments

On 08-06-2016 the arbitral tribunal issued a pre-sanatory order inviting the Claimant to clarify aspects of its exposition of the facts and to pronounce itself in writing on the exception raised by the TA; the Claimant presented its respective request on 17-06-2017.

The Claimant and the TA stated that it was unnecessary to hold the 1st meeting of the arbitral tribunal with the parties and expressed interest in presenting arguments in written form, which was accepted by the arbitral tribunal.

On 12-07-2016 and on 09-09-2016 the Claimant and the TA, respectively, presented their written arguments. The Claimant attached to the file the opinion of two distinguished legal experts "on the constitutionality of article 236, No. 2, of Law No. 83-C/2013, of 31 December".

Procedural Exceptions

Lack of jurisdiction of the arbitral tribunal

The TA in its Response sustained that this tribunal lacks jurisdiction to conduct abstract assessment of constitutionality and to declare the constitutionality or unconstitutionality of article 236 of Law 83-C/2013, of 31 December and that this lack of jurisdiction constitutes a dilatory exception that obstructs the continuation of the proceedings, leading to dismissal of the instance regarding the claim in question, in accordance with articles 576/1 and 2 and article 577-a) of the CCP, applicable ex vi of article 29/1-e) of the LRTA. (articles 4 and 7 R-TA).

It does not appear to this tribunal that any problem of jurisdiction is raised.

It is agreed for the tribunal and certainly for the Parties that abstract constitutional review of any rules does not fall within this instance.

Although the Claimant may have presented the issue with a very particular formulation in the preamble of its Initial Request, from its exposition and the formulation of its claim it results with clarity that it seeks that the tribunal declare the nullity or annul the IMT and IS assessments and does not ask that the constitutionality of any rule be assessed. With the exception of the introduction to its document, where the Claimant refers to the need to verify whether the transitional rule of the RE-REIF introduced in 2014 reveals a clear violation of the principle of non-retroactivity of tax law, it is not seen that the Claimant asks this tribunal to conduct any constitutional review of a rule.

The Claimant's thesis is based on the non-conformity of the assessments with article 103-3 of the CRP (articles 18, 37 and 38 of IR). That failure to observe the rule (constitutional) in the conduct of the act generates its invalidity, as occurs when any act conflicts with any rule of the legal system. Moreover, already under the heading "V- Of the claim" the Claimant states that it is the assessments - and not the rule - that suffer from unconstitutionality, i.e., are afflicted with illegality because in its view they do not conform to the statement of the (constitutional) rule.

Pursuant to the provision of article 2-1-a of the LRTA, it falls within the jurisdiction of this arbitral tribunal to assess the conformity with the law, even with constitutional law, of acts of assessment of taxes, which is ultimately what is at issue here.

The alleged exception of lack of jurisdiction raised by the TA does not therefore stand.

Verification of procedural prerequisites

The arbitral tribunal was regularly constituted and has jurisdiction ratione materiae according to the rules of article 2, no. 1, paragraph a) of the LRTA.

The Parties are holders of legal personality and capacity (that of the TA in accordance with the discipline contained in article 4, no. 1 of the LRTA and article 10, no. 2, of the same statute and article 1, paragraph a) of Ordinance No. 112-A/2011, of 22 March), are legitimate and are regularly represented.

There are no nullities that vitiate the proceedings.

Thus, there is no obstacle to the tribunal's assessment of the merits of the case, and a decision must be rendered.

3. Decision

Factual Findings

Facts considered proven

In these proceedings the following facts were established:

On 21-07-2012 the REIF managed by the Claimant acquired by purchase the autonomous fraction designated by the letters "…" of the property inscribed in the property register of the urban property of the parish of …, of the municipality of …, under article …, for the price of 98,820.00 € [2 RA: attached deed, p.54]

The urban property article U-…-… of the parish of … and …, originated from article …-… of the parish of … (extinct) [2 RA: attached property record]

On a date prior to 16-06-2012, the REIF managed by the Claimant made a declaration for assessment of IMT relating to the acquisition of the fraction identified in A for the price of 98,820.00 €, referencing that the tax fact fell under the "code…" for purposes of tax benefits [3 RA: declaration attached].

By declaration of 04-09-2015 the REIF managed by the Claimant requested from the TA the assessment of IMT relating to the acquisition by REIF B…, "of the right of full ownership" of the fraction … of article … of the parish of … and … (previous article … of the parish of …), intended for housing, for the value of 98,820.00 €. [6 IR: doc.1, pp.1-2].

In the request from the REIF managed by the Claimant mentioned in D, this also stated that the acquisition of the fraction had occurred previously and that on that occasion, IMT had been assessed on 18-06-2012 "with the benefit code …-REIF/SREIF (article 87 of SB/09)" with a deed of sale of the property to be executed on 04-09-2015, with the fraction being given a destination different from that which supported the benefit. [6 IR: doc.1, p. 1]

On 04-09-2015 the assessment of IMT relating to the transfer mentioned in D. was made in the amount of 1,052.33 €. [6 IR; doc. 1, p. 3]

On 07-09-2015 the REIF managed by the Claimant made payment of IMT, assessed in the amount of 1,052.33 € [7 IR: doc. 1, p. 3 and doc. 2, p. 1]

By declaration of 04-09-2015 the REIF managed by the Claimant requested from the TA the assessment of IS relating to the acquisition by REIF B…, "of the right of full ownership" of the fraction … of article … of the parish of … and … (previous article 21,787 of the parish of …), intended for housing, for the value of 98,820.00 €. [6 IR: doc.1, p.4].

On 04-09-2015 the assessment of "Stamp Duty – item 1.1." relating to the transfer mentioned in H. was made in the amount of 790.56 €. [6 IR; doc. 1, p. 5]

On 07-09-2015 the REIF managed by the Claimant made payment of IS, assessed in the amount of 750.56 € [7 IR: doc. 1, p. 5 and doc. 2, p. 2]

Facts considered not proven

It is not considered proven that "the exemptions from IMT and IS were recognized at the request of the Fund B…", as stated in paragraph 21 of IR, as no document supporting this assertion was attached, nor was any other evidence produced to support it.

No other facts of interest for the decision of the case were alleged.

Basis for the proven factual findings

The tribunal's conviction was based on the documentary evidence in the file and on the position taken regarding each fact by the Parties in their pleadings, duly identified.

Legal Findings

Principal question – the invalidity of the assessments

The question to be resolved in this proceeding is whether the exemption from IMT and IS of which the Claimant benefited on 21-07-2012, when it purchased the property identified in the file, is maintained on 04-09-2015 when it declared to the TA that it was going to sell the property and it was to be given a destination different from that which supported the benefits.

Let us examine what is the legal discipline applicable to REIFs and the exemption from taxation of transactions by these entities in IMT and IS.

The State Budget for 2009 introduced into the legal order the special regime applicable to real estate investment funds for residential rental (RE-REIF) to remain in effect until 31 December 2020, at which date REIFs would be converted into real estate investment funds subject in their entirety to the Legal Regime of Real Estate Investment Funds (Law 64-A/2008, of 31 December, article 102).

In tax matters and in what concerns especially IMT and IS the RE-REIF provided in its article 8:

(…)

7 - The following are exempt from IMT:

a) Acquisitions of urban properties or of autonomous fractions of urban properties intended exclusively for rental for permanent housing, by the investment funds referred to in no. 1;

b) Acquisitions of urban properties or of autonomous fractions of urban properties intended for personal and permanent housing, as a result of the exercise of the purchase option referred to in no. 3 of article 5 by tenants of properties that form part of the assets of the investment funds referred to in no. 1.

8 - All acts performed are exempt from stamp duty, provided they are connected with the transfer of urban properties intended for permanent housing occurring as a result of the conversion of the right of ownership of these properties into a right of rental on the same, as well as with the exercise of the purchase option provided for in no. 3 of article 5.

(…)

The RE-REIF further established the following transitional regime in its article 9:

1 - In the six months following the date of authorization of the REIF and, at most, until 31 December 2009, the managing entities may carry out transactions between real estate investment funds under their management for the sole purpose of integrating into the REIF's portfolio properties intended for permanent housing, provided all legal safeguards are observed, in particular, with regard to the protection of investors' interests.

2 - Transactions carried out under the preceding paragraph are communicated to the CMVM at the end of that period, with the identification of the essential elements thereof.»

Later, the State Budget for 2014 amended the tax regime of the RE-REIF, by adding 3 new paragraphs to article 8, with the following content (Law No. 83-C/2013, of 31 December, article 235):

(…)

14 - For purposes of the provisions of nos. 6 to 8, urban properties are considered to be intended for rental for permanent housing whenever they are subject to a rental contract for permanent housing within three years from the moment they were integrated into the fund's assets, and the taxable person must communicate and provide proof to the TA of the respective actual rental within 30 days following the end of the said period.

15 - When properties have not been subject to a rental contract within the three-year period provided for in the preceding paragraph, the exemptions provided for in nos. 6 to 8 cease to have effect, and in such case the taxable person must request from the TA, within 30 days following the end of the said period, the assessment of the respective tax.

16 - If properties are alienated, except in the cases provided for in article 5, or if the REIF is subject to liquidation, before the expiry of the period provided for in no. 14, the taxable person must likewise request from the TA, before the alienation of the property or the liquidation of the REIF, the assessment of the tax due pursuant to the preceding paragraph.

With this new regime the realization of the purposes of REIFs – real estate investment for residential rental – came to be supported by the exemption from IMT and IS, reducing the tax burden that naturally falls on property acquisition transactions.

There was thus created the tax benefit in IMT and IS for acquisitions of urban properties or their autonomous fractions, intended exclusively for rental for permanent housing, by REIF funds. Although the creation of the benefit has its basis in a specific statute, this did not initially set any procedural rules relating to the constitution, recognition and extinction of benefits. To find the discipline applicable to these questions, resort must then be made to the general rules.

As is known, tax exemptions are tax benefits, pursuant to the provision of article 2-2 of the TBS, and their discipline is therefore found both in this Statute and in the general provisions of the code of the respective tax – in the case of these proceedings the CIMT and the CIS – and in the specific regulation of the tax benefit in question.

In procedural terms, the regime applicable to recognition of IMT exemptions does not seem to offer any doubts: this must be requested before the property transfer transaction that the REIF intends to perform, as regulated by the CIMT:

Article 10 Recognition of exemptions

1 - Exemptions are recognized at the request of the interested parties, to be presented before the act or contract that gave rise to the transfer at the competent services for decision, but always before the assessment that would be due.

(…)

Let us now examine the most sensitive issue in this sub judicio question which is the determination of the regime for extinction of the exemption. The regime contained in the TBS regulates the extinction of benefits in general in the following terms:

Article 14 Extinction of tax benefits

(…)

3 - When the tax benefit relates to acquisition of goods intended for the direct realization of the purposes of the acquirers, it ceases to have effect if they are alienated or given another destination without authorization from the Minister of Finance, without prejudice to other sanctions or different regimes established by law.

The provision of the rule that prescribes the extinction of benefits (14-3 of TBS) places within its scope (i) benefits granted for acquisition of goods intended for the direct realization of the purposes of the acquirers; (ii) when their alienation occurs. In other words: REIFs are entities that realize their purposes through the rental for housing of properties acquired for that objective and benefit from exemption from IMT and IS in these acquisitions; the alienation of these properties by REIFs will result in the extinction of these benefits.

Moreover, when REIFs place themselves in that situation of extinction of IMT and IS exemptions, they must even notify this situation to the TA. In this regard article 9 of the TBS is quite clear, providing that:

(…)

Article 9 Declaration by interested parties of the cessation of the conditions for tax benefits.

Persons holding the right to tax benefits are obliged to declare, within 30 days, that the factual or legal situation on which the benefit was based has ceased, except when such cessation is known ex officio.

Note that the amendments introduced to the tax regime for acquisitions of properties by REIFs did not bring changes to the situations of alienation of properties. The situations in which the conditions underlying the granting of exemptions may cease to be verified are fundamentally two: (i) the non-celebration of the intended rental; (ii) the alienation of the property, which may no longer be rented by the REIF.

The amendment of the regime introduced in 2014 did not alter the discipline applicable in the general cases of alienation of properties acquired by REIFs in the scope of their activity, which continued to result in the extinction of the benefit. The legislative amendment focused especially on matters related to rental, requiring that this be celebrated within 3 years (article 8-14 of RE-REIF).

It is not apparent that in situations of alienation of properties acquired by REIFs any question arises regarding the retroactive application of rules, as no rules were introduced in this specific matter. Moreover, this particular point has been repeatedly affirmed in the arbitral tribunals constituted at CAAD[2].

Let us now examine how the factual situation already established in this decision fits within this discipline.

On 21-07-2012 the REIF managed by the Claimant acquired by purchase the property identified in these proceedings and then benefited from exemption from IMT and IS as it was intended for rental for permanent housing, within the scope of the REIF's activity, pursuant to the provision of article 8, no. 7-a and no. 8 of the RE-REIF. Pursuant to the rule of article 14-3 of the TBS that benefit is extinguished if the property in question is alienated.

On 04-09-2015 the REIF B… itself declared that it was going to sell the fraction on the same day 04-09-2015, and therefore the property was to be given a destination different from that which supported the exemption. It was in this context that it requested from the TA the assessment of IS and IMT, as is required of it by article 9 of the TBS.

It was in this sequence of facts and legal effects – the declarations of the REIF B… itself affirming the intention to sell the property and the extinction of the benefits provided for in the rule of article 14-3 of the TBS - that the TA made the challenged assessments. It did so in obedience to the law, and therefore those acts merit no censure.

Other claims

The obligation to restitution by the TA of taxes paid is subordinate to the scope of the success of the claim (article 100 LGT), and as the Claimant's claim is unsuccessful the claims for return of amounts paid and interest are foreclosed.

4. Decision

Considering the factual and legal elements gathered and set forth, this arbitral tribunal decides to render judgment that the claim for arbitral pronouncement is unsuccessful. Consequently the TA is absolved of the claim.

By the decision rendered the assessment of the claims for restitution of taxes paid and interest is foreclosed.

The Claimant is condemned to pay the costs, which shall be quantified in the proper venue.

5. Value of the Proceedings

In accordance with the provision of article 306-2 of the CCP, ex-vi article 29-1-e) of the LRTA and article 97-A, no. 1-a) of the CPPT ex-vi article 3-2 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at 1,842.89 €.

6. Costs

The costs are charged to the party that caused them, being understood that costs are caused by the losing party (articles 527-1 and 2 CCP). In these proceedings and considering the cited rule, responsibility for the costs rests with the Claimant, as the losing party.

Pursuant to article 22-4 of the LRTA and Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs charged to the Claimant is fixed at 306.00 €.

Lisbon, 18 October 2016

The Arbitrator,

(Nuno Maldonado Sousa)

[1] In this document the following acronyms, abbreviations and shortened forms are used, with the meaning indicated:

• TA: Tax and Customs Authority

• CIMT: Municipal Tax Code on Onerous Transfers of Real Estate

• CIS: Stamp Duty Code

• CRP: Constitution of the Portuguese Republic

• TBS: Statute of Tax Benefits

• IS: Stamp Duty

• IMT: Municipal Tax on Onerous Transfers of Real Estate

• LGT: General Tax Law

• R-TA: Response of the TA

• LRTA: Legal Regime for Tax Arbitration established by Decree-Law No. 10/2011 of 20 January

• RA: Request for Supplementation of the Claimant

• RE-REIF: Special regime applicable to real estate investment funds for residential rental

• IR: Initial Request of the Claimant

[2] See, among others, the decisions of 14-03-2016 in case no. 398/2015-T (Maria Antónia Torres), of 11-04-2016 in case no. 688/2015-T (Sílvia Oliveira), of 22-04-2016 in case no. 691/2015-T (Hélder Filipe Faustino), of 02-05-2016 in case no. 689/2015-T (Eva Dias Costa), of 19-05-2016 in case no. 709/2015-T (Rui Ferreira Rodrigues), of 07-06-2016 in case no. 684/2015-T (Miguel Patrício), of 15-06-2016 in case no. 706/2015-T (Miguel Patrício), of 17-06-2016 in case no. 717/2015-T (Henrique Nogueira Nunes), of 09-07-2016 in case no. 707/2015-T (Nuno Pombo), of 14-07-2016 in case no. 690/2015-T (Francisco Nicolau Domingos), of 01-08-2016 in case no. 694/2015-T (Maria Manuela Roseiro), of 01-08-2016 in case no. 708/2015-T (Luís Ricardo Farinha Sequeira), of 15-07-2016 in case no. 165/2016-T (Magda Feliciano) and of 08-07-2016 in case no. 128/2016-T (Magda Feliciano).