Process: 742/2015-T

Date: May 20, 2016

Tax Type: IMT

Source: Original CAAD Decision

Summary

This arbitral decision concerns Process 742/2015-T involving a banking institution's challenge to an additional IMT assessment of €16,828.96. The bank acquired urban property in Portimão on June 20, 2014, through insolvency proceedings. Initially, the tax office granted an IMT exemption under Article 270(2) of the Insolvency Code (CIRE) based on a judicial certificate that was later discovered to contain an error by the Insolvency Administrator. On March 30, 2015, the Tax Authority revoked this exemption and issued an additional assessment. The bank argues it should have received the exemption under Article 8(1) of the IMT Code (CIMT), which specifically exempts credit institutions acquiring property through insolvency proceedings, execution proceedings, or dation in payment. The bank's main arguments include: (1) procedural violation for failing to provide prior hearing before issuing the additional assessment; (2) the tax office's failure to recognize the correct exemption despite the bank's representative indicating Article 8(1) applied; (3) violation of principles of good faith and cooperation; and (4) the possibility of 'conversion' (convolação) from one exemption regime to another, citing administrative circulars 16/88 and 18/95. The Tax Authority defends its position arguing it was bound by official documents presented, that prior hearing was not mandatory under Article 60(2) of the General Tax Law, and that it had no obligation to investigate alternative exemptions beyond the documents submitted. The fundamental legal issue centers on whether credit institutions can convert between different IMT exemption bases when the factual requirements for both exemptions existed at the time of acquisition, and whether procedural defects in the assessment process warrant its annulment.

Full Decision

ARBITRAL DECISION

1. REPORT

A..., S.A., passive subject with the Tax Identification Number..., with headquarters at Rua..., n.º..., ...-..., in Lisbon (hereinafter referred to as the Applicant), comes, pursuant to the combined provisions of Articles 2, no. 1, paragraph a) and 10, nos. 1, paragraph a), and no. 2, of Decree-Law no. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters (RJAT), to request the constitution of an Arbitral Tribunal, with the intervention of a sole arbitrator, in which the Tax and Customs Authority (AT) is the Respondent, with a view to the declaration of illegality of the act of rejection of the administrative appeal filed with respect to the additional assessment of Municipal Tax on Onerous Transfers of Real Estate (IMT) under Document no....., paid on 24/04/2015, in the amount of € 16,828.96, the annulment of which is requested, as well as the payment of compensatory interest on that amount, pursuant to no. 1 of Article 43 of the General Tax Law (LGT).

To this end, it alleges, in summary:

a. The Applicant is a banking institution which, in the context of its real estate credit activities, exercises, among other real estate operations, the financing of construction, improvement, expansion and acquisition of housing;

b. On 20/06/2014 the Applicant acquired, within the framework of insolvency proceedings no. .../14. ... TBPTM-C, which took place before the ... Civil Court of the Court of Family and Minors and District Court of Portimão, the urban property registered in the land register of the parish of..., municipality of Portimão, under article...;

c. Due to an oversight by the Insolvency Administrator, a judicial certificate was requested and issued by the Court, in the context of the aforementioned proceedings, stating that "(…) The sale is carried out in the context of the operations for liquidation of assets seized in favor of the insolvent mass of B... AND SPOUSE, so that it falls within the provisions of Articles 269, no. 2 and 270, no. 2, of the CIRE, paragraph e)";

d. Based on the aforementioned certificate and within the period provided in no. 3 of Article 36 of the CIMT, an IMT assessment no....., of zero value, was issued on 11/06/2014, by the Tax Office of ..., resulting from the recognition of the exemption referred to in Article 270, no. 2, of the CIRE;

e. Although the Applicant's representative had pointed out that the exemption should be granted under Article 8, no. 1, of the CIMT, the official stated that he could only issue the assessment in accordance with the official documents presented;

f. On 30/03/2015, the Applicant was notified of the additional IMT assessment, by revocation of the tax benefit granted pursuant to Article 270, no. 2, of the CIRE, without having been given the opportunity to exercise the right of prior hearing, provided for in Article 60, no. 1, paragraph c), of the LGT (Article 10 of the p. i.);

g. Having paid the additional IMT assessment on 24/04/2015, the Applicant filed an administrative appeal, notification of the rejection of which was notified to it on 29/09/2015;

h. The aforementioned assessment, at the initiative of the Tax Administration, is tainted by a formal defect and breach of legal formalities, due to failure to observe the right of prior hearing of the passive subject before its issuance;

i. The AT further violated the principles of justice, collaboration and cooperation and good faith – the IMT model 1 form was completed at the counter of the Tax Office of..., without the Applicant having been alerted to the error it would be committing, as the official well knew that it was faced with a situation that could be framed in the provision of no. 1 of Article 8 of the CIMT and not in no. 2 of Article 270 of the CIRE;

j. The Tax Office of Coimbra... failed to comply with point 10 of Circular no. 5/2011, of 11/03, of the DGCI, by not promoting the appropriate procedure for automatic recognition of the tax benefit to which the Applicant was entitled, although it has acted in respect of the obligation imposed by no. 3 of Article 36 of the IMT Code;

k. The Tax Office of ... did not admit the testimonial evidence indicated in the administrative appeal, omitting the performance of a necessary measure for the discovery of material truth, a procedural defect that leads to the voidability of the act deciding the administrative appeal;

l. Nor did it admit the possibility of conversion of one exemption regime to another, although at the date of acquisition the requirements for the exemption for which the Applicant intends to opt were met (cf. Circular no. 16/88, of 9 August, revised by Circular no. 18/95, of 11 October), that is, that provided for in no. 1 of Article 8 of the CIMT;

m. Furthermore, the rationale for the exemption in Article 8 of the CIMT is that, as was decided in the Judgment of the STA, of 21/03/2012, "(…) the IMT is a tax on wealth intended to tax wealth demonstrated by the onerous acquisition, a situation that does not occur (…) [in] acquisition in execution proceedings, insolvency or dation in payment – in which the credit institution acquires the property as consideration and payment of loans granted (…)";

n. The Applicant concludes that "The act of rejection of the Administrative Appeal must be annulled, as illegal, on the basis of the defects that taint the act of additional assessment of Municipal Tax on Onerous Transfers of Real Estate (IMT), in the amount of € 16,828.96, the consequence of which is likewise its annulment which is hereby requested to be declared for the due and legal effects", further requesting the restitution of the amount paid, plus compensatory interest.

Notified in the terms and for the purposes provided in Article 17 of the RJAT, the AT submitted the Motion and Reply in which it defends the maintenance of the contested IMT assessment, with the following grounds:

a. According to the Applicant, all defects, namely the violation of the principles of justice, collaboration and cooperation and good faith, or the non-compliance with Circular no. 5/2011, are imputed to the rejection of the administrative appeal, the immediate object of the request for arbitral pronouncement; to the contested assessment only the defect of failure to observe the duty to hear the passive subject is pointed out;

b. In the initial assessment, of 11/06/2014, the IMT exemption was automatically recognized, based on the official documents presented by the Applicant, to which the AT is bound, pursuant to Article 23 of the CIMT;

c. Subsequently, having the AT verified that the transfer was not exempt from IMT under Article 272, no. 2, of the CIRE, as stated in the Certificate extracted from insolvency proceedings no. .../14. ... TBPTM-C, in the context of which the acquisition of the urban property registered in the land register of the parish of..., municipality of Portimão, under article..., occurred, the additional IMT assessment was issued;

d. It was not mandatory to hear the Applicant before the notification of the assessment (Article 60, no. 2, of the LGT), as this was effected in direct application of the law and the official documents presented; however, even if hearing of the taxpayer was mandatory, its absence would not have the capacity to alter the legal basis of the assessment or to lead to its annulment, in accordance with the principle of beneficial interpretation of the bound act, accepted by case law and doctrine;

e. There was no, on the part of the AT, violation of the principles of justice, collaboration or good faith: (i) it is neither credible nor required that the services not give credence to the content of official documents presented to them; (ii) it was not required, given the documents presented by the Applicant's Representative, that the AT would carry into the procedure other documents that could prove the possibility of recognition of another exemption that would be more advantageous to it; (iii) it is not to be believed that the Applicant's Lawyer was unaware of the content of the document on the basis of which the exemption was granted; (iv) had there been an oversight by the Insolvency Administrator in requesting the exemption under Article 270, no. 2, of the CIRE, the Applicant could, within the period referred to in no. 3 of Article 36 of the CIMT, have requested the exemption in Article 8, no. 1, of the aforementioned Code;

f. There was no non-compliance, by the AT, with Circular no. 5/2011, of the DGCI, of 11/03, which aimed at the uniform interpretation of Article 10 of the CIMT, in whose no. 6 it is clarified that "it is incumbent upon the passive subjects the initiative to, in the terms and periods provided in arts. 19, no. 1 and 3, 21, 22, no. 2, in fine, 23 and 36, no. 3, all of the CIMT (...30 days counted from the signature of the respective report or of the judgment that approved the settlement), deliver the IMT mod. 1 form.";

g. The request for conversion of the exemption provided for in no. 2 of Article 270 of the CIRE, to the exemption in Article 8, no. 1 of the CIMT does not relate to the assessment, but to the recognition of the exemption, a matter that does not fall within the powers of cognition of the Arbitral Tribunal;

h. The conversion of exemptions, sanctioned by Circulars no. 16/88 and 18/95, of the DGCI, must comply with the following conditions: (a) That the exemption regime for which the taxpayer intends to opt is coexistent, at the date of transmission, with the regime that has been chosen; (b) That, on the aforementioned date, all the requirements of the exemption for which the taxpayer intends to opt are met;

i. For conversion to occur it is necessary that at the date of the transmission both the initial exemption right and the one intended coexist; since the exemption in no. 2 of Article 270 of the CIRE is not applicable to the Applicant's situation, the coexistence of the initial exemption with that provided for in no. 1 of Article 8 of the CIMT is not verified;

j. The recognition of tax benefits determines compliance with the obligations provided for in no. 2 of Article 14 of the EBF: with regard to IMT exemptions, even if automatic, which are requested by the interested parties before the act or contract that gave rise to the transfer, with attachment of the necessary documents to prove their requirements, but always before the assessment is made (Article 10, no. 1, of the CIMT);

k. Concerning the procedures for issuing the exemption statement provided for in no. 1 of Article 8 of the CIMT, point 10 of Circular no. 5/2011, of the DGCI, "established a residual procedure to be applied only and when there is an omission in the verification or declaration of IMT exemption by the judicial authorities, being incumbent upon the Tax Office, in those cases, the automatic recognition, provided that the taxpayer complies with the assessment periods provided in no. 3 of art. 36 of the CIMT and expressly requests the verification and declaration of the exemption from the Head of the Tax Office", which did not occur in the present case;

l. (…) "the exemption of art. 270 of the CIRE is a permanent exemption, whereas the exemption in no. 1 of art. 8 of the CIMT is an exemption subject to lapse (cf. art. 11/6 CIMT and art. 14/2 EBF), if the properties are not sold within 5 years from the acquisition, hence, in view of this the SP must consider whether it can opt for two exemptions which one is suited to the purpose it intends to give to the property, it being not without importance the choice of one or the other exemption", being the taxpayer "subject to supervision by the AT for control of verification of the requirements of the respective benefits, cf. art. 17 EBF";

m. Thus, the AT may, in accordance with the provisions of no. 4 of Article 14 of the EBF, revoke the administrative act that improperly grants a tax benefit.

For the reasons indicated, the AT concludes that the assessment is not tainted by any illegality that invalidates it, and the Applicant's claim should be ruled unfounded. It further requests the dispensation of the testimonial evidence offered by the Applicant, which would only have "as a practical effect corroborate the facts already proven documentally".

The request for constitution of the Arbitral Tribunal was received at the CAAD on 11/12/2015, having been accepted by His Excellency the President of the CAAD and automatically notified to the AT on 22/12/2015.

As the Applicant did not appoint an arbitrator, the undersigned was appointed by His Excellency the President of the Ethics Committee of the CAAD, pursuant to the provisions of no. 1 of Article 6 of the RJAT, a task which she accepted within the legally provided period, without opposition from the Parties.

The Sole Arbitral Tribunal was regularly constituted on 22/02/2016 and is materially competent to hear and decide the dispute that is the subject of the present proceedings.

The Parties have legal personality and capacity, are legitimate and are duly represented (Articles 4 and 10, no. 2, of the RJAT and Article 1 of Ordinance no. 112-A/2011, of 22/03).

The proceedings are not tainted by nullities and no exceptions have been invoked.

By arbitral order of 08/04/2016, taking into account the documentary evidence already incorporated in the proceedings, it was decided to dispense with the meeting referred to in Article 18 of the RJAT, as well as the production of testimonial evidence, determining that the proceedings continue with successive written submissions for a period of 10 days, beginning with the Applicant, setting the date of 20/05/2016 for the pronouncement of the arbitral decision and warning the Applicant that, until that date, it should pay the subsequent arbitral fee.

Both Parties submitted written submissions, in which they reiterated their respective legal positions.

2. FACTS

2.1. Facts Considered Proven:

2.1.1. On 11/06/2014, the Applicant presented, at the Tax Office of ..., the declaration referred to in Article 19 of the CIMT, registered with no....., relating to the acquisition of the urban property registered in the land register under article ... of the parish of..., municipality of Portimão, for the amount of € 348,302.62;

2.1.2. The aforementioned acquisition was subject to the tax benefit referred to in Article 272, no. 2, of the CIRE, as stated in the certificate issued on 5/06/2014, by the ... Civil Court of the Court of Family and Minors of the District of Portimão, in the context of the insolvency proceedings that took place there under no. .../14. ... TBPTM-C, as it was a property seized in favor of the insolvent mass, and had been requested by the Insolvency Administrator;

2.1.3. In view of the recognition of the tax benefit (60 – Code of Insolvency and Company Recovery – Transfers within the scope of liquidation of the insolvent mass (art. 270, no. 2, of D. L. no. 53/04), 100% of taxable income), the assessment registered with no. .../2014, of zero value, was issued;

2.1.4. On 20/06/2014, at the Notarial Office of Dr. C..., located on Avenida..., n.º..., ...floor, in Lisbon, the public deed of purchase and sale of the property previously identified was executed, registered on pages 17 to 19 of Book ...-..., in which signed the Insolvency Administrator, in the capacity of representative of the insolvent mass (seller) and by the attorneys of the Respondent, in its representation (buyer);

2.1.5. Among the real encumbrances that, as of the date of the purchase and sale deed, rested on the acquired property, as stated in the permanent certificate of land registration with code PP-...-...-...-..., exhibited in the act (and PP-...-...-...-..., attached to the Motion), the following were noted: (i) "two voluntary mortgages in favor of..., S. A., now designated A..., S. A., pursuant to presentations thirty-seven, of twenty-nine September two thousand, and twenty-six of February two thousand and two"; (ii) "a mortgage in favor of "A..., S. A.", by presentation five thousand four hundred and sixty-nine of twenty-nine December two thousand and ten" and (iii) "a garnishment in which is the garnishee the "A..., S. A." pursuant to presentation nine hundred and twenty-seven of six March two thousand and twelve", the oldest being that mentioned in (i);

2.1.6. Pursuant to the permanent certificate of land registration with access code PP-...-...-...-..., attached to the proceedings, the mortgages referred to in App. ..., of 20/09/2000, App. ..., of 19/02/2002 and App. ..., of 29/12/2010, were intended to guarantee loans granted to the insolvents;

2.1.7. By means of official letter no. .../..., of the Tax Office of..., dated 23/03/2015, registered with receipt notification, the Applicant was notified to, within 30 days from the date of notification, proceed to the payment of the additional IMT assessment, in the amount of € 16,828.96, by means of a Document to be requested at that Tax Office, assessment which it could challenge or contest, pursuant to the CPPT;

2.1.8. The Applicant proceeded to pay the contested assessment on 24/04/2015 (Document...) and filed an administrative appeal on 2/06/2015, with grounds identical to those of the present request for arbitral pronouncement, in which it requested the annulment of the additional IMT assessment, the restitution of the tax paid, plus compensatory interest and the conversion of the initially granted exemption to that provided for in Article 8, no. 1, of the CIMT;

2.1.9. By official letter no....., of the Financial Directorate of … – Tax Justice Division, of 28/09/2015, sent under registration no. RD ... PT, the Applicant was notified, in the person of its Representative, of the order rejecting Administrative Appeal no. ...2015...;

2.1.10. The information supporting the decision to reject the Administrative Appeal fully reproduces the information provided by the Tax Office of..., as follows:

[Content follows but omitted for brevity]

2.1.12. Pursuant to official letter no. .../..., of the Tax Office of Coimbra..., dated 16/09/2015, under the matter "CONTROL OF IMT EXEMPTIONS UNDER NO. 2 OF ART. 270, OF THE CIRE AND OF AL E) OF ART. 269 OF THE CIRE" the Applicant was notified to exercise the right of prior hearing provided for in Article 60, no. 1, paragraph c), of the LGT, notification made ineffective by official letter no. .../..., of 2/10/2015, of the same Tax Office, as the matter dealt with therein had already been the subject of a decision in the administrative appeal.

2.2. Grounds for the Facts Proven:

The Tribunal's conviction regarding the facts proven resulted from critical analysis of the documentary evidence attached to the request for arbitral pronouncement and to the Motion submitted by the Respondent.

2.3. Facts Not Proven

There are no facts relevant to the decision of the case that should be considered unproven.

3. LEGAL GROUNDS – SUBSTANTIATION

3.1. Order of Assessment of Defects

Not accepting the decision rejecting the appeal that confirmed the additional IMT assessment, by revocation of the tax benefit previously granted, the Applicant comes to request the declaration of illegality of both the aforementioned decision and the assessment act, imputing to both procedures various defects, with the formulation of subsidiary requests.

In accordance with the provisions of no. 1 of Article 124 of the CPPT, subsidiarily applicable to tax arbitral proceedings, pursuant to Article 29, no. 1, paragraph a), of the RJAT, in the absence of defects leading to the declaration of non-existence or nullity of the contested act, the court should assess the defects argued that determine its voidability, and no. 2, paragraph b), of the same article provides that, as to the latter, the order of knowledge thereof will be that indicated by the challenger, whenever a relationship of subsidiarity is established between them, without prejudice to defects whose merits would ensure the most stable or effective protection of the offended interests being considered first.

The order of assessment invoked by the Applicant will be followed in the case of the present proceedings.

3.1.1. Failure to Observe the Duty to Hear the Taxpayer

Although the verification of the defect of failure to provide prior hearing before issuing the contested assessment may not be suitable to ensure the most stable and effective protection of the Applicant's interests, as the AT is not prevented from, within the statute of limitations period for the right to assess, renewing the act without the defect that is now being pointed out to it, it is important to begin by making reference to it, on the one hand, given that, according to the Applicant, "Although the decision that is the immediate object of the impugnatory claim be the express rejection of the (...) Administrative Appeal, the various illegalities of the assessment act that is the subject of the aforementioned Administrative Appeal cannot (...) fail to be invoked (whose legal consequence is translated into its annulment) (...)" (cf. Article 20 of the p. i.), while the AT considers that "only [was] pointed out to the IMT assessment the defect of failure to observe the duty to hear the passive subject" (cf. Article 5 of the AT's Reply) and that the dispensation of prior hearing was due to the fact that "the assessment was based on the documents brought to the proceedings and the declaration of the taxpayer itself, as the administration could not act differently than it did", the situation in question being framed in no. 2 of Article 60 of the LGT; on the other hand, because, the Applicant invoking the omission of the right of hearing referred to in Article 60, no. 1, paragraph c), of the LGT, the AT contends that the aforementioned provision relates to the revocation of tax benefits, a matter that does not fall within the competence of tax arbitral tribunals (Article 26 of the Reply).

Let us begin with this latter aspect, as it is logically prior:

The competences legally fixed to arbitral tribunals functioning under the aegis of the CAAD comprise, in particular, the appreciation of claims relating to the declaration of illegality of assessment acts (Article 2, no. 1, paragraph a) – first part, of the RJAT), the tax arbitral proceedings having been conceived as an alternative means to judicial impugnation proceedings (cf. the legislative authorization granted to the Government by Article 124, no. 2 (first part) of Law no. 3-B/2010, of 28 April – Budget Law for 2010).

The judicial tax proceedings referred to in Article 97 of the CPPT comprise various types of proceedings, the handling of which follows, in some cases, the rules defined in that Code and, in others, the rules of proceedings in administrative courts, notably of the special administrative action, by referral of Article 97, no. 1, paragraph p) and no. 2, of the CPPT: "p) The contentious appeal of the total or partial rejection or revocation of exemptions or other tax benefits, when dependent on recognition by the tax administration, as well as other administrative acts relating to tax matters that do not involve appreciation of the legality of the assessment act." and "2 - The contentious appeal of administrative acts in tax matters, which do not involve appreciation of the legality of the assessment act, by the tax administration, comprising the central government, regional governments and their members, even when practiced by delegation, is regulated by the rules on proceedings in administrative courts.", respectively.

In the concrete case at hand, the act challenged by the Applicant is not, outright, the revocation of the tax benefit that was initially recognized for it by the AT, which it admits is not applicable to it, but rather the assessment act subsequent to that revocation, without having been given the possibility of prior hearing, as well as the decision of the administrative appeal (a second-instance act), in which the legality of the assessment now contested was appreciated.

Thus, as the act of rejection of the administrative appeal is the immediate object of the request for arbitral pronouncement, its mediate object is the primary assessment act, the declaration of illegality of which is requested and for the appreciation of which the arbitral tribunal is competent.

With respect to the invoked defect of failure to provide prior hearing before issuing the contested assessment, case law of the Supreme Administrative Tribunal has understood that, "(…) by virtue of the constitutional recognition of the right of hearing, that formula "based on the taxpayer's declaration" must be interpreted to the extent of only dispensing with hearing when the assessment is carried out in harmony with the position that results from the taxpayer's declaration, in both the factual and legal aspects".

As underscores Pedro Machete in «Prior Hearing of the Taxpayer, Fundamental Problems of Tax Law, Vislis, 1999» pag. 324, «only the assessment carried out exclusively on the basis of the taxpayer's declaration and understood with reference to the same legal framework in which such declaration was presented justifies dispensation of hearing. The consideration of any other elements beyond the taxpayer's declaration or a different legal framework will already require its hearing».

Thus, when decided in a sense divergent from the taxpayer's position and in a sense unfavorable in relation to that position, as occurs in the case at hand, hearing, in principle, cannot be dispensed with (cf. in this sense, Annotated General Tax Law, Diogo Leite Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, 4th edition, Encontro da Escrita, pág. 508 and Judgment of this Section of 16.06.2004, appeal 1877/03.)

And we say that hearing, in principle, cannot be dispensed with because it may happen that the interested party has been able to express himself in an earlier phase of the procedure, without new facts being invoked, a hypothesis in which no. 3 of art. 60 of the LGT provides for the possibility of dispensation of the right of hearing." (…)

"As it follows from art. 60, no. 5 of the LGT, in any of the circumstances referred to in no. 1, for purposes of exercising the right of hearing, the tax administration must communicate to the passive subject the draft decision and its grounds.

Indeed, the law intends for taxpayers to know in advance the reasons for the unfavorable acts of which they are to be recipients so that they may present an anticipated defense of their interests, drawing the Administration's attention to possible errors or omissions and that, in this way, disputes between the Administration and taxpayers are prevented (In this sense, Pedro Machete, ob. cited, pág. 323.) " – Cf. the Judgment of the Plenary Session of the Tax Section, of the STA, in process no. 01524/13, of 2 December 2015, available at http://www.dgsi.pt/.

As it follows from the facts established in the present proceedings, the contested IMT assessment did not have as its basis the declaration of the Applicant, as it was given "a different legal framework" from that declared; what had as its basis the declaration of the taxpayer was, as the AT recognizes in its Reply, that "the transfer in question was exempt from IMT under the provisions of arts. 269, no. 2 and 270 of the CIRE". The different legal framework given to the declaration of the passive subject, put the AT under the obligation to proceed with the hearing of the passive subject, before issuing the corrective assessment.

The consequence of the failure to hear the taxpayer, in cases where it is mandatory, as is concluded to be the case herein, constitutes a defect of the assessment act, which leads to its annulment, even if the latter had the opportunity to express itself in the administrative appeal, on the matters regarding which prior hearing was omitted, as the principle of validation of the primary act may only be applied "in situations where no doubts whatsoever can be raised about the irrelevance of the exercise of the right of hearing on the decision content of the act, which leads, in practice, to its restriction to cases where the fixing of facts relevant to the decision is not at issue"[1].

As hearing of the Applicant was mandatory, for the reasons indicated, it is concluded that its omission constitutes the invoked defect of failure of prior hearing before issuing the assessment act.

3.1.2. Possibility of Conversion of the Tax Benefit Improperly Recognized to the Benefit Established by No. 1 of Article 8 of the CIMT

As an alternative, the Applicant invokes the possibility of conversion of the tax benefit improperly granted under the provisions of Article 270, no. 2, of the CIRE, which it considers not to be applicable to it, to that which it considers to have a right to, provided for in no. 1 of Article 8 of the CIMT, as at the date of transmission the requirements upon which its recognition depends were met.

No. 1 of Article 8 of the CIMT, in the wording given to it by Law no. 53-A/2006, of 29/12, establishes that "1 - Acquisitions of property by credit institutions or by commercial companies whose capital is directly or indirectly dominated by those institutions, in execution proceedings brought by those institutions or by another creditor, as well as those carried out in bankruptcy or insolvency proceedings, are exempt from IMT, provided that, in any case, they are intended for the realization of credits resulting from loans made or guarantees given".

The requirements are, therefore, cumulative of the right to the IMT exemption established in the aforementioned provision: (i) that the acquiring passive subject be a credit institution (or commercial company whose capital is directly or indirectly dominated by it); (ii) that the acquisition takes place in execution proceedings brought by the acquiring institution or by another creditor or in bankruptcy or insolvency proceedings and (iii) that the acquisition be intended for the realization of credits resulting from loans made or guarantees given.

Substantive requirements of the exemption that are met in the situation in question and which the AT does not contest, as (i) the Applicant is a credit institution; (ii) the acquisition took place in the context of the insolvency proceedings that took place before the ... Civil Court of the Court of Family and Minors of the District of Portimão under no. .../14. ... TBPTM-C and (iii) the acquisition was intended for the realization of credits resulting from loans made by the Applicant in favor of the insolvents, as follows from its status as creditor with real guarantee on the transferred property, duly recorded in the property registration entry as of the date of acquisition.

What served as the ground for the issuance of the additional IMT assessment act and the rejection of the administrative appeal was not the lack of any of those substantive requirements, but rather the fact that the requested exemption was not requested at a date prior to that of the acquisition.

However, not listed in Article 10 of the CIMT, the recognition of the exemption provided for in no. 1 of Article 8 of the same Code, with only reference being made to Circular no. 5/2011, of the DGCI, of 11/03, according to which "The exemption positivized in art. 8, no. 1, of the CIMT, affecting situations of acquisition of property by credit institutions, intended for the realization of credits, in execution or insolvency proceedings, has an automatic nature, its recognition assuming merely declarative efficacy" and "(…) upon verification of the omission in the verification or declaration of IMT exemption by the judicial authorities, the competent Tax Office should promote the appropriate procedure for automatic recognition, provided that the taxpayer complies with the assessment periods provided in art. 36, no. 3, of the CIMT and expressly requests the verification and declaration of the exemption by the Head of the Tax Office" (emphasis ours).

As the aforementioned administrative instruction imposes that, in case of "omission in the verification or exemption of IMT by the judicial authorities" the services shall promote (emphasis ours) the "appropriate procedure for automatic recognition, provided that the taxpayer complies with the assessment periods provided in art. 36, no. 3, of the CIMT", nothing seems to prevent that this same procedure be promoted, actively, in particular through recourse to hearing of the passive subject, in case of manifest error in the identification of the requested tax benefit, as is the case herein.

On the other hand, pursuant to Article 12 of the Statute of Tax Benefits (EBF), a provision inserted in Part I – General Principles, applicable to all tax benefits, whether those included in the EBF, or those contained in tax codes, or other separate statutes that enshrine them, "The right to tax benefits must be reported as of the date of verification of their respective requirements, even if dependent on declarative recognition by the tax administration or on agreement between it and the benefited person, unless the law provides otherwise.".

As the act of recognition does not have constitutive efficacy, but only declarative efficacy of the right to the tax benefit, nothing would prevent such recognition from taking place at a moment later than that of the transmission, provided that, on that date, the substantive requirements for the right to the exemption are met, as demonstrated to be met in the situation under analysis.

Not having the AT attended to the verification of the requirements upon which the Applicant's right is based, neither at the moment of issuing the additional IMT assessment that is the mediate object of the present proceedings, nor in the administrative appeal in which its annulment was requested, it cannot but be concluded that there is an error regarding the requirements both in the issuance and in the administrative confirmation of the contested act.

3.2. Right to Compensatory Interest

Paragraph b) of no. 1 of Article 24 of the RJAT determines that the arbitral decision on the merits of the claim of which no appeal or challenge is available binds the tax administration from the end of the period provided for appeal or challenge, and this, in the precise terms of the merits of the arbitral decision in favor of the passive subject and until the end of the period provided for the voluntary execution of sentences of judicial tax tribunals, shall "restore the situation that would exist if the tax act that is the subject of the arbitral decision had not been practiced, adopting the acts and operations necessary for that purpose", which includes "the payment of interest, regardless of its nature, in the terms provided for in the General Tax Law and in the Code of Procedure and Tax Process.".

Likewise, Article 100 of the LGT, applicable to tax arbitral proceedings by virtue of the provisions of paragraph a) of no. 1 of Article 29 of the RJAT, establishes that "The tax administration is obliged, in case of total or partial merits of administrative appeals or appeals, or of judicial proceedings in favor of the passive subject, to the immediate and full restoration of the situation that would exist if the illegality had not been committed, including the payment of compensatory interest, in the terms and conditions provided by law.".

Providing no. 1 of Article 43 of the LGT, that "Compensatory interest is due when it is determined, in an administrative appeal or judicial challenge, that there was an error imputable to the services which resulted in the payment of the tax debt in an amount greater than that legally due.".

In the case at hand, it appears manifest that, if the illegality of the IMT assessment act is declared, for the reasons set out above, the Applicant's right to compensatory interest on the amount improperly paid must be recognized, as is provided for in no. 5 of Article 61 of the CPPT.

3.3. Matters of Prejudicial Knowledge

In the judgment, the judge must pronounce on all matters that he is obliged to appreciate, refraining from pronouncing on matters of which he is not obliged to know (final segment of no. 1 of Article 125 of the CPPT), and the matters on which the court's powers of cognition rest are, in accordance with no. 2 of Article 608 of the CPC, subsidiarily applicable to tax arbitral proceedings, by referral of Article 29, no. 1, paragraph e), of the RJAT, "the matters which the parties have submitted to its appreciation, except those whose decision is prejudiced by the solution given to others (…)".

Having proceeded to the appreciation of the relevant matters for the decision of the case and, concluding that the defects of omission of the duty of prior hearing and error regarding the requirements of law in the issuance of the contested assessment are merited, the knowledge of the remaining matters brought to the proceedings by the Parties is prejudiced.

4. DECISION

On the basis of the facts and legal grounds set out above and, pursuant to Article 2 of the RJAT, it is decided, ruling the present request for arbitral pronouncement entirely meritorious:

4.1. To declare the illegality of the contested IMT assessment, determining its annulment;

4.2. To order the AT to restore the amount improperly paid by the Applicant, plus compensatory interest, from the date of the improper payment until the date of issuance of the respective credit note.

VALUE OF THE PROCEEDING: In accordance with the provisions of Article 306, nos. 1 and 2, of the CPC, 97-A, no. 1, paragraph a), of the CPPT and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the proceeding is fixed at the value of € 16,828.96 (sixteen thousand, eight hundred and twenty-eight euros and ninety-six cents).

COSTS: calculated in accordance with Article 4 of the Regulation of Costs in Tax Arbitration Proceedings and Table I attached thereto, in the amount of € 1,224.00 (one thousand two hundred and twenty-four euros), to the charge of the Tax and Customs Authority.

Lisbon, 20 May 2016.

The Arbitrator,

/Mariana Vargas/

Text prepared by computer, pursuant to no. 5 of Article 131 of the CPC, applicable by referral of paragraph e) of no. 1 of Article 29 of Decree-Law 10/2011, of 20 January.

The wording of this decision is governed by the 1990 spelling agreement.

[1] Cf. CAMPOS, Diogo Leite de, RODRIGUES, Benjamim Silva and SOUSA, Jorge Lopes de, "General Tax Law" Annotated and Commented, 4th Edition, 2012, Encontro da Escrita, pags. 515 to 517.

Frequently Asked Questions

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What is the IMT exemption available to credit institutions when acquiring property in insolvency proceedings?
Credit institutions in Portugal benefit from an IMT exemption under Article 8(1) of the IMT Code when acquiring property through insolvency proceedings, execution proceedings, or dation in payment (dação em pagamento). This exemption recognizes that such acquisitions do not represent a demonstration of wealth but rather the recovery of debt from loans previously granted. The rationale, confirmed by Supreme Administrative Court jurisprudence, is that IMT is a wealth tax intended to tax the economic capacity demonstrated by onerous acquisitions. When a bank acquires property as payment for outstanding loans in insolvency or execution contexts, there is no actual wealth acquisition—the institution is merely converting an existing credit into real estate. This exemption is automatic upon presentation of proper documentation to the tax office under Article 36(3) of the IMT Code.
How does the conversion (convolação) of an IMT exemption work under Article 8(1) of the CIMT?
The conversion (convolação) of IMT exemptions refers to the ability to switch from one exemption basis to another when both were potentially applicable at the time of acquisition. According to administrative practice referenced in Circulars 16/88 (revised by Circular 18/95), if the legal requirements for a different exemption were met at the acquisition date, taxpayers may request conversion to the more appropriate exemption regime. In this case, the bank sought to convert from the erroneously granted Article 270(2) CIRE exemption (general insolvency liquidation exemption) to the Article 8(1) CIMT exemption (specific to credit institutions). The conversion mechanism allows correction of administrative errors or initial misclassifications without requiring the taxpayer to pay tax when a valid exemption existed. However, the Tax Authority's position is that it acts based on official documents presented and has no obligation to investigate alternative exemption possibilities not evidenced in the initial submission.
Can a bank challenge an additional IMT assessment when the wrong exemption basis was initially applied?
Yes, banks can challenge additional IMT assessments when the wrong exemption basis was initially applied, as demonstrated in this case. The challenge can proceed through administrative appeal followed by tax arbitration under the Legal Framework for Arbitration in Tax Matters (RJAT). Key grounds for challenge include: (1) procedural violations, such as failure to provide prior hearing as required under Article 60(1)(c) of the General Tax Law when revoking previously granted benefits; (2) substantive errors in applying the correct exemption regime; (3) violation of principles of good faith, cooperation, and justice when tax authorities fail to alert taxpayers to errors despite having knowledge of the correct legal framework; and (4) the right to convert between exemption regimes when factual requirements existed at acquisition. Banks must pay the contested amount before filing administrative appeal, and can request reimbursement plus compensatory interest under Article 43 of the General Tax Law if successful. The challenge must demonstrate that the correct exemption under Article 8(1) CIMT should have applied from the outset.
What is the difference between the IMT exemption under Article 270(2) CIRE and Article 8(1) CIMT for credit institutions?
The key differences between Article 270(2) CIRE and Article 8(1) CIMT exemptions are: Article 270(2) of the Insolvency Code provides a general exemption for sales conducted within the liquidation of assets seized in favor of the insolvent estate, regardless of the purchaser's identity. This exemption applies broadly to all buyers in insolvency asset liquidations. Article 8(1) of the IMT Code, conversely, provides a specific exemption exclusively for credit institutions (banking entities) when acquiring property through three mechanisms: insolvency proceedings, execution proceedings, or dation in payment. The Article 8(1) exemption recognizes the particular nature of credit institutions recovering collateral or debt through these processes. The fundamental distinction lies in the beneficiary: Article 270(2) is purchaser-neutral and based on the sale context, while Article 8(1) is purchaser-specific, requiring the acquirer to be a credit institution acting in the context of debt recovery. When a bank acquires property in insolvency proceedings, both exemptions might technically apply, but Article 8(1) is the more specific provision designed for financial institutions' credit recovery activities.
What are the deadlines and procedures for claiming an IMT exemption on property acquired through insolvency liquidation?
For claiming IMT exemptions on property acquired through insolvency liquidation, the procedure follows Article 36(3) of the IMT Code and Article 23 CIMT. The taxpayer must present official documents supporting the exemption claim at the competent tax office when requesting the IMT assessment. Under Article 23 CIMT, the Tax Authority is bound by official documents presented, particularly judicial certificates and court documents from insolvency proceedings. The tax office issues the assessment (liquidação) based on these documents, automatically recognizing applicable exemptions. For credit institutions specifically claiming the Article 8(1) exemption, documentation must evidence: (1) the institution's status as a credit institution; (2) acquisition through insolvency proceedings, execution, or dation in payment; and (3) the connection to debt recovery activities. Tax Administration Circular 5/2011 of March 11 establishes procedures for automatic recognition of tax benefits. If the wrong exemption is initially granted, taxpayers can seek administrative correction or conversion between exemption regimes, though this may require administrative appeal if the Tax Authority issues an additional assessment revoking the original benefit. Time limits for administrative appeals follow the General Tax Law provisions.