Summary
Full Decision
ARBITRAL DECISION
The Arbiters José Pedro Carvalho (Presiding Arbiter), Maria Antónia Torres and Suzana Fernandes da Costa, designated by the Ethics Council of the Centre for Administrative Arbitration to constitute an Arbitral Tribunal, hereby agree as follows:
ARBITRAL DECISION (consult full version in PDF)
I – REPORT
On 01-03-2018, A..., NIPC..., with registered office in ..., ..., ..., ..., ...-... Lisbon, in its capacity as sole participant of the CLOSED SPECIAL REAL ESTATE INVESTMENT FUND B... (LIQUIDATED) (hereinafter designated, in abbreviated form, as "B..." or "Fund"), with tax identification number ..., also with registered office in ..., ..., ..., ..., ... -... Lisbon, filed an application for constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter, in abbreviated form designated as RJAT), seeking the declaration of illegality of the supplementary corporate income tax (IRC) assessment acts no. 2016..., no. 2016... and no. 2016... and the respective interest accrual statements no. 2016... and no. 2016..., relating to the tax periods of 2012, 2013 and 2014 in the total amount of €69,389.29.
To substantiate its request, the Applicant alleges, in summary, that:
the taxable matter, as per article 22 of the EBF, should be based on relevant accounting results, such that recourse to cash flows proposed by the Tax Authority is unlawful;
the "Fund" should be taxed according to the real property income obtained from the operation of the ..., being deductible therefrom the maintenance and conservation expenses incurred with the income-generating property in its entirety, even though part of it did not generate income;
the amount recorded during the month of July 2014 in account 878 – Other Current Operations does not correspond to income, but rather a re-debit of an expense;
the amount recorded in August 2012 in the customer account "4198001003 – C... did not represent any benefit for the "Fund";
the amount recorded in account "888 - Other Current Income" relates to account reconciliations.
On 02-03-2018, the application for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.
The Applicant did not proceed to nominate an arbiter, such that, pursuant to the provisions of subparagraph a) of paragraph 2 of article 6 and subparagraph a) of paragraph 1 of article 11 of the RJAT, the President of the Ethics Council of CAAD designated the undersigned as arbiters of the collective arbitral tribunal, who communicated their acceptance of the appointment within the applicable period.
On 19-04-2018, the parties were notified of these designations and did not express any intention to challenge any of them.
In accordance with the provisions of subparagraph c) of paragraph 1 of article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 11-05-2018.
On 19-06-2016, the Respondent, duly notified for such purpose, filed its response defending itself by exception and by refutation.
Also notified for such purpose, the Applicant pronounced itself, in writing, on the matter of exception contained in the Respondent's response.
Pursuant to the provisions of subparagraphs c) and e) of article 16, and paragraph 2 of article 29, both of the RJAT, the holding of the meeting referred to in article 18 of the RJAT was waived.
Having been granted a period for the submission of written arguments, the same were submitted by the parties, pronouncing themselves on the evidence produced and reiterating and developing their respective legal positions.
It was indicated that the final decision would be notified by the end of the period set in article 21(1) of the RJAT.
The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with articles 2, paragraph 1, subparagraph a), 5 and 6, paragraph 1, of the RJAT.
The parties have legal personality and capacity, are legitimate and are legally represented, in accordance with articles 4 and 10 of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.
The proceedings are not affected by any nullities.
Thus, there is no obstacle to the consideration of the case.
Having considered all the foregoing, it is necessary to render judgment.
II. DECISION
A. MATTER OF FACT
A.1. Facts established as proven
The Applicant is the sole participant of the CLOSED SPECIAL REAL ESTATE INVESTMENT FUND B... (LIQUIDATED)
The CLOSED SPECIAL REAL ESTATE INVESTMENT FUND B... (LIQUIDATED) – hereinafter designated as "Fund" – was a closed real estate investment fund of full distribution, constituted by private subscription.
The "Fund" was constituted on 22-10-2009, with an initial planned duration of 7 years, having commenced its activities on 15-12-2009.
The administration, management and representation of the "Fund" were the responsibility of "D..., S.A."
The functions of depositary of the "Fund" were assumed by E... S.A., which had custody of all movable assets, with all applications of the "Fund" being made with this Bank.
The "Fund" was constituted with initial capital of €6,650,000.00, represented by 1,330,000 units of participation with the unit value of €5.00.
As of 31-12-2014, the "Fund" had capital of €134,609.00, represented by 1,645,057 units of participation with the unit value of €0.0818.
The objective of the "Fund" consisted of achieving, from a medium and long-term perspective, increasing capital appreciation through the constitution and management of a portfolio of values predominantly of a real estate nature.
On 16 December 2009, through a deed of purchase and sale and assumption of debt, the "Fund" invested its capital in the acquisition of the ..., located in the parish of ..., municipality of Lisbon.
The "Fund" in the years 2012, 2013 and 2014 did not proceed to any further acquisition.
The "Fund" allocated all autonomous fractions that constituted the ... to rental activity for non-residential purposes.
Under the contracts concluded with the tenants, the latter committed themselves to pay a monthly fee for the use of the property, as well as to bear the expenses inherent to the maintenance of common areas, apportioned according to the area of the various fractions that comprise the ... .
The "Fund" adopted as its basis for determining real property income subject to tax its accounts, starting from the income recorded therein and adding the balance between reversals and adjustments for doubtful collection.
To that overall income amount, the "Fund" deducted expenses recorded with IMI, insurance, repairs and refurbishments and other common expenses, obtaining a taxable matter to which it applied the IRC rate referred to in article 22 of the EBF.
In the fiscal years of 2012, 2013 and 2014, the "Fund" determined the following amounts of IRC:
[table content omitted]
The "Fund" re-debited the common expenses of the building according to the areas of the fractions and in accordance with the terms contractually established, only bearing those expenses when there were unrented fractions or when a limit for the re-debit of expenses had been contractually established, with the difference being borne by it.
D..., as management company of the "Fund", determined the income of the same having as its basis the accounting relevant income and not the actual cash payments and receipts.
The "Fund" recorded the following expenses with IMI of the various fractions of the ...:
€49,048.83 in 2012, relating to 2011;
€42,041.70 in 2013, relating to 2012;
€22,575.28 in 2014, relating to 2013.
Such amounts were only paid in 2014.
In the calculation of real property income subject to tax carried out by the Tax Authority, only the amount of €42,041.70 was considered, as IMI, that is, the IMI relating to 2012 and paid in 2014.
The "Fund" incurred expenses with fractions that did not generate receipt of income in the periods in question, in the following amounts:
€2,932 in 2012, relating to fractions H, I and J;
€2,860 in 2013, relating to fractions B, C and L;
€3,624.48 in 2014, relating to fractions B, C, L, Q;
In the fiscal years of 2012, 2013 and 2014, the "Fund" incurred expenses with common expenses, corresponding, in particular, to expenses with building administration, cleaning, general maintenance (electrical, elevators, electronic security, among others) and utilities, in the amount of €6,341.79, €11,659.68 and €66,750.13, respectively, for each of those years.
During the month of July 2014, the "Fund" recorded in its accounts, in account "878 – Other current operations" interest charged to its customer F..., Lda., in the amount of €4,503.48.
These interest charges relate to the alienation of the ... in 2014.
Having the "Fund" and the purchaser agreed on an initial date for the deed of purchase and sale of the ..., it was not possible for the purchaser to comply with it, such that the "Fund" re-debited the additional amount of interest incurred.
In 2012, faced with a repeated situation of non-compliance by tenant C..., the "Fund" executed the guarantee that had been given to it by the same, and the value received exceeded the debt owed to the "Fund" by the amount of €33,582.22.
That amount did not exceed all the rents owed by C... relating to the fractions it occupied in the ..., as there were still rent debts to the former owner, G... .
Faced with the prospect of returning that surplus to G... or to C... itself, the "Fund" recorded a liability in 2012 under the heading "Other accruals and deferrals".
The "Fund" recorded in November 2014, in its accounts, in account "888-Other Current Income" the amount of €15,222.15, relating to an account reconciliation.
The account reconciliation relates to a derecognition in accounting of debtor and creditor balances originating in prior years and with significant age.
This derecognition corresponded to a set of accounting entries and did not have implicit any forgiveness on the part of any potential creditors, who maintained the possibility of collecting their debts.
Associated with the movement in question, no cash flow occurred for the Applicant.
On 26-03-2015, the assembly of participants decided to proceed with the liquidation of the "Fund", which took place on 22-12-2016, and the proceeds from this operation were entirely delivered to the Applicant, in its capacity as sole participant of the "Fund" on the date of the operation.
The "Fund" was subject to an external inspection action through Service Orders no. OI2015..., OI2015... and OI2015..., covering the tax periods of 2012, 2013 and 2014.
On 15-11-2016, the "Fund" was notified of the Tax Inspection Report.
The Tax Authority determined an amount of tax owed of €60,154.59, arising from divergences in the manner of determining the taxable matter of the "Fund" in light of its respective regime, in particular with respect to real property income and other income.
In the course of the inspection action, the following corrections were made:
[table content omitted]
The "Fund" was notified of the supplementary IRC assessment notes no. 2016..., no. 2016... and no. 2016... and the interest accrual statements no. 2016... and no. 2016....
The Applicant filed a discretionary objection against the supplementary assessment acts relating to the periods of 2012, 2013 and 2014.
The "Fund" was notified of the dismissal of the discretionary objection on 02-01-2018, through Official Letter no. ... of 29 December 2017.
A.2. Facts established as not proven
With relevance to the decision, there are no facts that should be considered as not proven.
A.3. Justification for the matter of fact proven and not proven
With respect to the matter of fact, the Tribunal does not need to pronounce itself on everything that was alleged by the parties, falling instead to it the duty to select the facts that matter for the decision and to discriminate between proven and unproven matter (cfr. article 123, paragraph 2, of the CPPT and article 607, paragraph 3 of the CPC, applicable ex vi article 29, paragraph 1, subparagraphs a) and e), of the RJAT).
Thus, the facts pertinent to the trial of the case are chosen and defined in accordance with their legal relevance, which is established in attention to the various plausible solutions of the question(s) of Law (cfr. former article 511, paragraph 1, of the CPC, corresponding to current article 596, applicable ex vi article 29, paragraph 1, subparagraph e), of the RJAT).
Thus, having regard to the positions taken by the parties, in light of article 110/7 of the CPPT, the documentary evidence and the Administrative Procedure file attached to the record, the facts listed above were considered proven, with relevance to the decision, taking into account that, as was written in the Decision of the Tax Court of the South of 26-06-2014, rendered in proceeding 07148/13[1], "the probative value of the tax inspection report (...) may have probative force if the assertions contained therein are not challenged".
No consideration was given to facts alleged by the parties and presented as facts, consisting of strictly conclusive statements, insusceptible of proof and whose veracity must be assessed in relation to the concrete matter of fact consolidated above.
B. ON THE LAW
Of the matter of exception.
The Respondent begins by arguing, as a preliminary matter to the consideration of the merits, that "resulting, clear and unequivocally from the learned initial request, the direct challenge of the IRC assessment act no. 2016... and respective compensatory interest, the request formulated (leading to the declaration of illegality of the act and consequently its proportional annulment) should be declared unfounded, as out of time, and consequently, the Defendant Entity should be absolved of the proceedings – cf. subparagraph e), of paragraph 1, of article 278 of the current Code of Civil Procedure, applicable ex vi article 29, paragraph 1, subparagraph e) of Decree-Law no. 10/2011, of 20 January."
The Respondent's position is based on the understanding that the Applicant should have identified as the subject matter of the arbitral pronouncement the act of dismissal of the discretionary objection filed by it.
With all due respect, it is understood that, in this matter, the Respondent's position does not prevail. In fact, and from the outset, necessarily the request for declaration of illegality of the assessment act has underlying it the declaration of illegality of all subsequent acts[2] and whose validity is affected by that declaration, where it obviously includes the act of dismissal of the discretionary objection.
Moreover, and furthermore, with respect to the dismissal, insofar as there are no defects in the act itself of the decision on the discretionary objection/hierarchical appeal, or of the respective procedure, that act will be merely confirmatory and, as such, not subject to appeal in itself.
On the other hand, and as has been recognized by national case law, if, in cases such as those of the present record, the immediate subject matter of the proceedings is the act of decision on the discretionary objection/hierarchical appeal, its mediate subject matter will be the primary assessment act itself[3].
This situation is, moreover, perfectly clear in administrative contentious proceedings, as results from article 50(1) of the CPTA, properly combined with article 59(4) of the same Code. Also, the framework of tax arbitral contentious proceedings corroborates this understanding, since article 2 of the RJAT takes as the reference of the competence of arbitral tribunals, the primary acts[4], with secondary acts being relevant as references for the timeliness of the impugnatory claim, as results from article 10(1)(a) of that Framework, where it is imposed that applications for constitution of an arbitral tribunal be submitted within 90 days, counted from the facts provided for in paragraphs 1 and 2 of article 102 of the Code of Procedure and Tax Process.
That is, in short and in all accuracy, the Applicant's claim was correctly formulated, as it relates to subparagraph a) of paragraph 1 of article 2 of the RJAT (assessment act), and was submitted within the period set by subparagraph a) of paragraph 1 of article 10 of the same statute (90 days counted from the decision on the discretionary objection)[5].
The exception of untimeliness/late submission of the request, invoked by the Respondent, must therefore be rejected.
On the merits of the case.
As summarized by the Respondent, "the essential questions to be resolved concern:
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on the one hand, the reasons for the divergence between the Tax Authority and the Applicant around the method for determining the net real property income subject to taxation in IRC, insofar as knowing whether a cash basis perspective or an economic perspective is adopted, that is, whether the rents actually received or the rents recorded in accounts as income or revenue should be considered;
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and, on the other hand, the criteria to be applied in determining deductible expenses, insofar as, in the understanding of the Tax Authority:
(i) expenses (maintenance, conservation and IMI) incurred with fractions that, in the periods in question, did not give rise to receipt of rents, should not be accepted as deductible for the purposes of determining net real property income;
(ii) the common expenses borne by the Applicant do not fall within the concept of maintenance expenses; and
(iii) the provisions deducted also do not integrate the concept of 'maintenance and conservation expenses'."
The dispute in question in the present arbitral action is based, consensually, on the interpretation of article 22(6) of the applicable EBF (text in force in 2013, as given by Law no. 66-B/2012, of 31 December) whose text prescribes:
"6 - The income of real estate investment funds, which are constituted and operated in accordance with national legislation, are subject to the following tax regime:
a) In the case of real property income, not relating to social housing subject to legal regimes of controlled costs, taxation takes place autonomously at a rate of 25%, which is levied on net income after deducting maintenance and conservation expenses effectively incurred, duly documented, as well as the real estate property tax, with the payment of the tax being made by the respective management entity by the end of April of the following year, and any tax withheld being considered as payment on account of this tax;"
In execution of such a provision, the Applicant calculated its taxable profit, presented its tax return (IRC) and levied the same, having as its basis its accounting records, records, which were not called into question by the Tax Authority during the inspection.
The Tax Authority, for its part, considered that the procedure adopted by the Applicant was not what was legally required of it, understanding that the taxable profit subject to tax should be computed based on net real property income after deducting maintenance and conservation expenses effectively incurred by the fund and duly documented, taking into account the provisions of article 8(1) and (2) of the IRS Code.
The Respondent sustains, in support of its thesis, that "the tax regime for real estate investment funds had as its guiding line the taxation of income obtained by the funds as closely as possible to the taxation that would occur if the same income were obtained by individuals", therefore, "at the level of gross income, the paradigm for the provisions of subparagraph a) of paragraph 6 of article 22 of the EBF are revenues of category F and the definition of 'rents', provided by paragraph 1 of article 8 of the IRS Code, which expressly refers to the fact that the tax is levied on rents paid or made available, making clear that neither rents collected in advance nor those rents that the tenants have not been able to pay or make available to the landlord constitute income of a particular year, as they have not satisfied them".
The Respondent finally suggests that "If what the Applicant alleges is true (...) that, in subparagraph a) of paragraph 6 of article 22 of the EBF, the taxation of the income of Real Estate Investment Funds (FII) is not expressly equated to the taxation of individuals, this constitutes a natural consequence of the tax regime for Movable and Real Estate Investment Funds".
With all due respect, it is judged that the interpretation formulated and applied by the Tax Authority, and which has just been described, is not correct, as the ground for the corrections sub iudice.
In fact, both the postulate of filling the regime of article 22(6) of the applicable EBF by recourse to the taxation regime for category F income in the IRS, as well as the postulate of tax neutrality vis-à-vis individuals as the cornerstone of the regime for taxation of real property income of FII, lack material and teleological foundation, as will now be explained.
Thus, and from the outset, the hermeneutical process followed by the Tax Authority, and now sustained by the Respondent, obscures a fundamental fact, which is the circumstance that, by definition, Real Estate Investment Funds (FII), and consequently the Applicant, as companies and passive subjects of IRC, engage in business activities.
This circumstance, from the outset, given the predominance of the category B regime over category F in IRS, consecrated, among other things, in article 3(1) and (2)(a) of the IRS Code, evidences the inadequacy of the filling performed by the Tax Authority of the regime of article 22(6) of the applicable EBF by recourse to the taxation regime for category F income in the IRS, as well as the fallacy of the reasoning of the supposed tax neutrality of the FII regime in relation to individuals in IRS.
In fact, individuals who, like FII, engage in business in activities generating real property income, will be taxed, by force of the aforementioned article 3(1) and (2)(a) of the IRS Code, according to the category B regime, and not the category F regime, thus demonstrating that the position applied by the Tax Authority and sustained by the Respondent does not accomplish, in any way, any kind of neutrality in relation to passive subjects of IRS who obtain real property income, in the same circumstances as FII, noting that article 41(1) of the applicable IRS Code, which incorporates the method of taxation applied in casu by the Tax Authority, is restricted to "gross income referred to in article 8", that is, to real property income subject to taxation in category F, and not to that species of income to which category B is applicable.
It further adds that taxation under category F in IRS has other characteristics of its own, which do not occur with respect to FII, such as the absence of an obligation to maintain organized accounts (which in IRS is restricted to certain cases subject to category B – cfr. article 28 of the applicable IRS Code), which, from the outset, justifies that income subject to category F of the IRS has a specific regime (and perhaps more restrictive) with respect to the consideration of expenses, and which, on the other hand, passive subjects subject to the category F regime of the IRS – insofar, at least, as they do not have nor have to have organized accounts – are not subject to the autonomous taxation provided for in article 73 of the IRS Code, unlike FII, which, as passive subjects of IRC, are subject to autonomous taxation provided for in article 88 of the IRC Code.
It is further noted that the putative neutrality would, moreover, always be evacuated by the circumstance that real property income of FII is taxed autonomously at the rates of 20% (until 2012) and 25% (from 2013 onwards), while real property income subject to category F in IRS are subject to rates of 15% (until 2011), 16.5% (2012) and 28% (from 2013), which denotes the absence of legislative purpose of establishing any conjunction between the two regimes.
It is thus judged that the understanding of the Respondent, according to which "it does not result from the applicable legal norms, particularly from subparagraph a) of paragraph 6 of article 22 of the EBF, that all expenses incurred are deductible, in particular when there are no revenues generated by the same property or autonomous fraction of property to which they can be attributed", has no foundation.
Rather, it is considered that FII, as passive subjects of IRC, should be taxed in accordance with the rules of the respective Code, with the necessary adaptations for the application of article 22(6) of the EBF[6], which means, among other things, the application of article 17(1) of the applicable IRC Code, that is, and with respect to real property income, its determination based on accounts and possibly corrected in accordance with the IRC Code.
Thus, those should be considered as real property income which, in accordance with accounting norms, are qualifiable as such, deducted from expenses which, in the same terms, are of the same nature, added to those which have the nature of common expenses, in the proportion that they are attributable to that income.
To that understanding the letter of article 22(6) of the EBF will not be an obstacle, contrary to what appears to the Respondent.
In fact, and it is believed to be, with respect to the matter of literality, sufficiently clarifying, article 3(2)(a) of the applicable IRS Code, referring to the taxation of real property income in the context of category B of IRS, uses precisely the same expression of article 22(6) of the EBF – "real property income" – without any knowledge of any understanding sustaining that such income should be taxed in the terms now applied by the Tax Authority.
In view of the above, and it being established that the Applicant calculated its IRC, in accordance with its accounts, and that the same was not questioned by the Tax Authority, which did not detect any inaccuracies therein, given the legal error verified, the IRC assessments that are the subject of the present arbitral action must be annulled, as well as the interest assessments that rest on them.
C. DECISION
On these grounds, this Arbitral Tribunal decides to render the arbitral request filed fully founded and, in consequence:
Annul the supplementary IRC assessment no. 2016..., no. 2016... and no. 2016... and the interest accrual statements no. 2016... and no. 2016...;
Condemn the Respondent in the costs of the proceeding, in the amount set out below.
D. Case Value
The value of the case is fixed at €69,389.29, in accordance with article 97-A, paragraph 1, subparagraph a), of the Code of Procedure and Tax Process, applicable by force of subparagraphs a) and b) of paragraph 1 of article 29 of the RJAT and paragraph 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.
E. Costs
The arbitration fee is fixed at €2,448.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, once the claim was fully founded, in accordance with articles 12, paragraph 2, and 22, paragraph 4, both of the RJAT, and article 4, paragraph 4, of the cited Regulation.
Let it be notified.
Lisbon, 06 November 2018
The Presiding Arbiter
(José Pedro Carvalho)
The Arbiter Member
(Maria Antónia Torres)
The Arbiter Member
(Suzana Fernandes da Costa)
[1] Available at www.dgsi.pt, as well as the remaining case law cited without mention of provenance.
[2] Notwithstanding having been removed from the list of void acts contained in article 133(1) and (2)(i) of the former Administrative Code, void shall be the consequent acts that are inconsistent with the judgment rendered in impugnatory proceedings, as results, among other things, from article 179(2) of the current CPTA, and their annulment is still covered by the obligation to reestablish legality imposed by articles 100 of the LGT and 24(1)(b) of the RJAT.
[3] In this sense, cfr., for example, the Decision of the Supreme Administrative Court of 16-11-2011, rendered in proceeding 0723/11, available at www.dgsi.pt, in whose summary it can be read: "The judicial challenge of dismissal of a discretionary objection has as its immediate object the decision on the objection and as its mediate object the defects attributed to the assessment act."
[4] Cfr. article 2(1)(a) of the RJAT: "tax assessment acts, self-assessment acts,...".
[5] Cfr., in this sense, Carla Castelo Trindade, "Legal Framework for Tax Arbitration - Annotated", Almedina, 2016, pp. 69 et seq. and 241 et seq.
[6] Which, moreover, was reaffirmed by the redaction given by Decree-Law no. 7/2015, of 13 January to article 22 of the EBF, which in paragraph 1 came to provide that "Movable investment funds, real estate investment funds, movable investment companies and real estate investment companies are subject to taxation under IRC, in accordance with the terms provided in this article, which are constituted and operated in accordance with national legislation." (our emphasis).
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