Process: 721/2016-T

Date: May 9, 2017

Tax Type: IMT

Source: Original CAAD Decision

Summary

CAAD Process 721/2016-T addressed the IMT (Municipal Tax on Onerous Real Property Transfers) exemption under Article 270(2) of the Portuguese Insolvency Code (CIRE) for properties acquired through insolvency estate liquidation. The claimant acquired four autonomous property units from an insolvent company for €126,000 in September 2014. Despite the transaction occurring within insolvency liquidation proceedings, the Tax Authority issued an additional IMT assessment of €8,190 in February 2016, arguing that the exemption did not apply to isolated sales of individual assets from the insolvent estate. The claimant paid the assessment under protest and filed an administrative complaint in July 2016, which was rejected. Subsequently, the claimant initiated arbitration proceedings at CAAD in December 2016, seeking declaration of illegality, annulment of the IMT assessment, and restitution of the amount paid plus legal interest. During the pendency of the arbitral proceedings, a significant administrative development occurred. In February 2017, the Tax Authority issued Circular 4/2017, amending its previous interpretation and clarifying that the IMT exemption under Article 270(2) CIRE applies to isolated sales of property from insolvent estates, not only to transfers of entire businesses or establishments. Following this new guidance, in March 2017, the Head of Finance Services voluntarily annulled the contested IMT assessment. The Tax Authority then requested termination of the arbitration due to supervening uselessness of proceedings (inutilidade superveniente da lide) under Article 277(e) of the Civil Procedure Code, as the administrative act being challenged had ceased to exist. This case illustrates how administrative circulars can modify Tax Authority interpretations during ongoing litigation and demonstrates the procedural mechanism for terminating tax arbitration when the contested act is voluntarily revoked by the administration.

Full Decision

ARBITRAL DECISION

The Arbitrator Andrea Firmino, appointed by the Deontological Council of the Administrative Arbitration Centre to form a Singular Arbitral Tribunal:

I – REPORT

On 2 December 2016, A…, S.A. (hereinafter "Claimant"), with tax identification number…, with registered address at Rua …, no.…, in Lisbon, filed a request for the 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 Regime of Arbitration in Tax Matters, as amended by Article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality and annulment of the act of additional assessment of Municipal Tax on Onerous Real Property Transfers ("IMT") in the amount of EUR 8,190.00 (eight thousand one hundred and ninety euros) issued with reference to the acquisition made by the Claimant by public deed executed on 16 September 2014 relating to four autonomous units designated by the letters "A", "B", "D" and "E" of the urban property in horizontal property regime registered in the urban property matrix under the article…, located at …, in …, parish of … and municipality of Lagoa.

To substantiate its request, the Claimant argues, in summary, that the property referred to in the assessment act in question is the result of a transfer effected through sale, in the context of the liquidation of the insolvent estate, and therefore the exemption provided for in no. 2 of Article 270 of the Code of Insolvency and Corporate Recovery ("CIRE") should apply.

On 2 December 2016, 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, and therefore, pursuant to the provisions of subparagraph a) of no. 2 of Article 6 and subparagraph a) of no. 1 of Article 11 of the RJAT, the President of the Deontological Council of the CAAD appointed the undersigned as arbitrator of the arbitral tribunal, who communicated acceptance of the appointment within the applicable time limit.

On 30 January 2017, the parties were notified of the present appointment and did not manifest the will to refuse the same.

In accordance with the provisions of subparagraph c) of no. 1 of Article 11 of the RJAT, the Arbitral Tribunal was constituted on 14 February 2017.

On 18 April 2017, the Respondent, duly notified for that purpose, filed its reply, requesting that the proceedings be terminated due to the subsequent futility of the dispute, as it had meanwhile annulled the aforementioned IMT assessment during the pendency of the present arbitral proceedings.

The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with Articles 2, no. 1, subparagraph a), 5 and 6, no. 1, of the RJAT.

The parties have legal capacity and standing, are legitimate and are legally represented, in accordance with Articles 4 and 10 of the RJAT and Article 1 of Ministerial Order no. 112-A/2011, of 22 March.

All being considered, it is appropriate to render judgment.

II. DECISION

A. FACTUAL MATTERS – Summary of the facts established as proven

1- The Claimant acquired, by deed of purchase and sale executed on 16 September 2014, four autonomous units designated by the letters "A", "B", "D" and "E" of the urban property in horizontal property regime registered in the urban property matrix under the article…, located at …, in …, parish of … and municipality of Lagoa, for the global price of EUR 126,000.00 (one hundred and twenty-six thousand euros);

2- The aforementioned property was part of the assets of the now insolvent company "B…, S.A." and, as such, was acquired by the Claimant in the context of the insolvency proceedings of a legal entity that were pending against that Company;

3- The aforementioned acquisition was, at that date, exempt from IMT, in accordance with the provisions of no. 2 of Article 270 of the CIRE;

4- Notwithstanding the above, the Claimant was notified in February 2016 in order to exercise the right of prior hearing on the draft additional IMT assessment in the amount of EUR 8,190.00 (eight thousand one hundred and ninety euros), carried out pursuant to subparagraph d) of no. 1 of Article 17 of the IMT Code, with regard to the purchase and sale operation that occurred as stated above;

5- After being notified for that purpose, on 3 March 2016, the Claimant proceeded to pay the aforementioned amount;

6- Notwithstanding the foregoing, the Claimant filed the corresponding administrative complaint of the additional IMT assessment act on 18 July 2016, expressing its disagreement with respect to the Respondent's understanding that the exemption provided for in number 2 of Article 270 of the CIRE should not be granted in the case of isolated sale of assets of the transferor/insolvent party;

7- And, consequently, requesting the annulment of the assessment act, supporting the restitution of the amount unduly paid, plus legal interest from the date of payment until the actual refund;

8- A complaint which was unsuccessful, with the AT maintaining the aforementioned IMT assessment, which prompted the present request for arbitral decision;

9- Meanwhile, already during the pendency of the present jurisdictional instance, the annulment of the IMT assessment in the aforementioned amount of EUR 8,190.00 (eight thousand one hundred and ninety euros) was determined on 10 March 2017 by the Head of Finance Services of Amadora-…;

10- In accordance with the aforementioned Order, the Head of Service revoked his IMT assessment Order regarding the four autonomous units of the urban property sub judice, now considering the transfer to be exempt, sustaining that he did so "taking into account the new instructions disclosed by Circular no. 4/2007, of 10 February, which provides that the application of tax benefits provided for in no. 2 of Article 270 of the CIRE does not depend on the thing sold, exchanged or transferred covering the entirety of the insolvent company or one of its establishments (…)".

B. LAW

The request formulated by the Claimant to the Arbitral Tribunal was for the declaration of illegality and annulment of the IMT assessment in question, having regard to no. 2 of Article 270 of the CIRE and, likewise, the restitution of the amount unduly paid, plus legal interest, calculated on the amount of EUR 8,190.00 (eight thousand one hundred and ninety euros), from the date of payment until its actual refund.

Furthermore, already during the pendency of the present arbitral proceedings, the IMT assessment act in question was revoked by the Respondent, having regard to the more recent administrative instruction emanated from the AT, Circular no. 4/2017.

The cited Circular, following the Order of the State Secretary for Tax Matters no. 14/2017-XXI, of 26 January and the more recent Jurisprudence of the Superior Courts, amended Point III of the annex to Circular no. 10/2015, now clarifying as to the scope of the IMT exemption in the acquisition of real property as follows: "The application of the tax benefits provided for in no. 2 of Article 270 of the CIRE does not depend on the thing sold, exchanged or transferred covering the entirety of the insolvent company or one of its establishments.

Thus, the acts of sale, exchange or transfer, in an isolated manner, of real property of the company or of its establishments are exempt from IMT, provided that they are integrated in insolvency plans, payment plans or recovery plans or carried out in the context of the liquidation of the insolvent estate."

Following the voluntary revocation of the IMT act by the Respondent, pursuant to no. 1 of Article 13 of the RJAT, it requested the termination of the proceedings due to the subsequent futility of the dispute, pursuant to the provisions of subparagraph e) of Article 277 of the Code of Civil Procedure ("CPC").

In fact, the CPC is of subsidiary application in relation to tax arbitral proceedings, in accordance with subparagraph e) of Article 2 of the Code of Tax Procedure and Process ("CPPT") and subparagraph e) of no. 1 of Article 29 of the RJAT.

Consequently, subparagraph e) of Article 277 of the CPC is to be applied to the present case, which provides that grounds for termination of proceedings are the "subsequent impossibility or futility of the dispute".

As for the interest requested by the Claimant and, taking into account that it is an established fact that the Claimant paid, on 3 March 2016, the amount of EUR 8,190.00 (eight thousand one hundred and ninety euros) of the additional IMT assessment in question, it is necessary to also assess this component of the request submitted for the arbitral tribunal's appraisal.

Now, to the extent that the Claimant paid the aforementioned tax, the annulment of the additional IMT assessment now issued by the AT should have as a consequence, in addition to the refund of the tax, the payment of compensatory interest, pursuant to nos. 1 and 3 of Article 46 of the IMT Code.

According to the above-cited legal provision, compensatory interest shall be due pursuant to Article 43 of the General Tax Law, which should be calculated and paid in accordance with Article 61 of the CPPT.

Now, in line with the jurisprudence emanated by the Supreme Administrative Court – by all, see Judgment no. 0574/14, of 7 January 2016 - having occurred an error attributable to the Respondent resulting in "payment of the tax debt in an amount greater than what was legally due", compensatory interest should be counted from the date on which it made the payment of the IMT (i.e., from 3 March 2016) until the effective refund thereof by the AT.

*

C. DECISION

Taking into account that the challenged act of the IMT assessment, in the amount of EUR 8,190.00 (eight thousand one hundred and ninety euros) was entirely revoked by the Respondent during the pendency of the present jurisdictional instance, it is confirmed and decided that the dispute has become futile, thus judging the arbitral request submitted as well-founded.

Additionally, the request for condemnation of the AT to the payment of compensatory interest, counted from the date of payment of the IMT assessment in question until the date of restitution of the tax by the Respondent, is judged as well-founded.

Pursuant to the provisions of no. 2 of Article 12 and no. 2 of Article 22, both of the RJAT, combined with the provisions of no. 4 of Article 4 of the Regulation of Costs in Tax Arbitration Proceedings and Annex I thereto, from the application of the criteria set forth in no. 3 in fine and no. 4 of Article 536 of the CPC, I fix the costs at the amount of EUR 918.00 (nine hundred and eighteen euros) to be borne by the Respondent Authority.

D. VALUE OF THE CASE

The value of the case is fixed at EUR 8,190.00 (eight thousand one hundred and ninety euros) in accordance with Article 97-A, no. 1, a), of the Code of Tax Procedure and Process, applicable by virtue of subparagraphs a) and b) of no. 1 of Article 29 of the RJAT and no. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. COSTS

The arbitration fee is fixed at EUR 918.00 (nine hundred and eighteen euros), in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, since the request was entirely well-founded, due to the subsequent futility of the dispute, pursuant to Articles 12, no. 2, and 22, no. 4, both of the RJAT, and Article 4, no. 4, of the cited Regulation.

Let notice be given.

Lisbon, 9 May 2017

The Arbitrator

(Andrea Firmino)

Frequently Asked Questions

Automatically Created

What is the IMT tax exemption under Article 270(2) of the Portuguese Insolvency Code (CIRE)?
Article 270(2) of the Portuguese Insolvency Code (CIRE) provides an exemption from IMT (Municipal Tax on Onerous Real Property Transfers) for sales, exchanges, or transfers of property carried out within insolvency proceedings. Following Circular 4/2017, this exemption applies to isolated sales of individual properties from the insolvent estate, provided they are integrated in insolvency plans, payment plans, recovery plans, or carried out in the context of liquidation of the insolvent estate. The exemption does not require the transfer to cover the entirety of the insolvent company or one of its establishments.
Can property acquired through insolvency estate liquidation be exempt from IMT transfer tax?
Yes, property acquired through insolvency estate liquidation can be exempt from IMT transfer tax under Article 270(2) of CIRE. The CAAD Process 721/2016-T confirmed this principle after the Tax Authority issued Circular 4/2017, clarifying that the exemption applies even to isolated sales of individual properties from the insolvent estate, not only to transfers of complete businesses or establishments. The key requirement is that the sale must occur within the context of liquidation of the insolvent estate, insolvency plans, payment plans, or recovery plans.
What happens when the Tax Authority annuls an IMT assessment during pending arbitration proceedings?
When the Tax Authority voluntarily annuls an IMT assessment during pending arbitration proceedings at CAAD, the proceedings are typically terminated due to supervening uselessness of the dispute (inutilidade superveniente da lide) under Article 277(e) of the Portuguese Civil Procedure Code, applicable to tax arbitration pursuant to Article 13(1) of RJAT. In Process 721/2016-T, after the Tax Authority annulled the contested assessment in March 2017 following the issuance of Circular 4/2017, it requested termination of the arbitration as the administrative act being challenged had ceased to exist, rendering the dispute moot.
What is supervening uselessness of proceedings (inutilidade superveniente da lide) in Portuguese tax arbitration?
Supervening uselessness of proceedings (inutilidade superveniente da lide) in Portuguese tax arbitration occurs when circumstances arise during the proceedings that eliminate the practical utility of a judicial decision, typically because the contested administrative act has been voluntarily revoked or annulled by the Tax Authority. Under Article 277(e) of the Civil Procedure Code, applied to tax arbitration via Article 13(1) of RJAT, this leads to termination of the proceedings. In Process 721/2016-T, this occurred when the Tax Authority annulled the IMT assessment following issuance of Circular 4/2017, making the arbitration request obsolete.
How does the CAAD tax arbitration process work for challenging additional IMT assessments in Portugal?
The CAAD (Administrative Arbitration Centre) tax arbitration process for challenging additional IMT assessments in Portugal begins with filing a request for constitution of an arbitral tribunal under Articles 2 and 10 of RJAT (Legal Regime of Arbitration in Tax Matters). The claimant must identify the contested act and legal grounds. If no arbitrator is appointed by the claimant, the President of the Deontological Council appoints one. The tribunal is constituted after notification to parties. The Tax Authority files a response. In Process 721/2016-T, this process took approximately 2-3 months from filing to tribunal constitution. The arbitrator then analyzes facts and law to issue a decision, though proceedings may terminate early if the contested act is annulled.