Arbitral Tribunal Jurisdiction Over IMT and IMI Tax Assessments on Real Estate Funds – CAAD 809/2014-T

ARBITRAL DECISION

The arbitrators Dr. Jorge Lopes de Sousa (arbitrator-president), Dr. Carla Castelo Trindade and Prof. Doctor Tomás Castro Tavares, designated by the Deontological Board of the Administrative Arbitration Center to form the Arbitral Tribunal, constituted on 19-02-2015, agree as follows:

1. Report

A… - …, S.A., with registered office at Rua …, nº …, - … - … LISBON, registered at the competent Commercial Registry Office under the unique registration number and legal entity number …, with share capital of € 375,000.00 (hereinafter "A"), managing entity of B…, TIN …, registered with the CMVM under code … (hereinafter "B"), came, pursuant to articles 95 of the General Tax Law, 99, paragraph a) of the Code of Tax Procedure and Process, 43 of the Code of the Municipal Tax on Onerous Transfer of Immovable Property, 129 of the Code of the Municipal Property Tax and 2, 3 and 10 of the Legal Regime for Arbitration in Tax Matters, approved by Decree-Law no. 10/2011 of 20 January (hereinafter RJAT) to submit a petition for constitution of a collective arbitral tribunal, in which the Tax and Customs Authority is the Respondent.

The Claimant seeks to have declared illegal and to have annulled the following assessments:

a) Assessment of the Municipal Tax on Onerous Transfer of Immovable Property (IMT) made by Office no. … of the Finance Service of ... (General Entry no. 2014…), dated 12/08/2014 and notified to the Claimant on 14/08/2014, in the amount of € 519,572.60;

b) Assessment of the Municipal Property Tax (IMI) no. 2010 …, dated 13-08-2014 and notified to the Claimant on 30/09/2014, in the amount of € 11,255.85;

c) Assessment of the Municipal Property Tax no. 2011 …, dated 13-08-2014 and notified to the Claimant on 30/09/2014, in the amount of € 615,007.80;

d) Assessment of the Municipal Property Tax no. 2012 …, dated 13-08-2014 and notified to the Claimant on 30/09/2014, in the amount of € 13,525.78.

e) Partially the assessment of the Municipal Property Tax no. 2013 …, notified to the Claimant on 1-10-2014, in the amount of € 11,593.53.

The petition for constitution of the arbitral tribunal was accepted by the President of the CAAD and notified to the Tax and Customs Authority on 15-12-2014.

Pursuant to the provisions of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of the RJAT, the Deontological Board appointed as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the assignment within the applicable period.

On 04-02-2015 the parties were duly notified of such appointment, and did not express willingness to refuse the designation of the arbitrators, in accordance with article 11 no. 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Code of Ethics.

In accordance with the requirement laid down in paragraph c) of no. 1 of article 11 of the RJAT, the collective arbitral tribunal was constituted on 19-02-2015.

The Tax and Customs Authority replied, raising the exception of lack of material jurisdiction of this Arbitral Tribunal to rule on the matter relating to IMI exemption and defending the lack of merit of the arbitral ruling petition and its absolution from the claim.

The Claimant replied to the exception.

On 13-05-2015, the meeting provided for in article 18 of the RJAT took place, in which witness evidence was produced and it was agreed that the proceedings would continue with successive written submissions.

The parties presented submissions.

The parties have legal personality and capacity, are entitled and are duly represented (articles 4 and 10, no. 2, of the same statute and article 1 of Ordinance no. 112-A/2011, of 22 March).

The proceedings do not suffer from nullities and no obstacle arises to the examination of the merits of the case.

The exception of lack of material jurisdiction raised by the Tax and Customs Authority must first be examined.

2. Question of Lack of Material Jurisdiction

The Tax and Customs Authority raises the exception of lack of material jurisdiction of this Arbitral Tribunal on the grounds that the matter concerns the examination of an IMI exemption and, in the view of the Tax and Customs Authority, the matter relating to the recognition of tax exemptions is not within the scope of the material jurisdiction of the Arbitral Tribunal.

The jurisdiction of the arbitral tribunals operating at the CAAD is defined, in the first place, by article 2, no. 1, of the RJAT, which establishes the following:

1 - The jurisdiction of the arbitral tribunals comprises the examination of the following claims:

a) The declaration of illegality of acts of assessment of taxes, self-assessment, withholding at source and payment on account;

b) The declaration of illegality of acts of determination of taxable matter when not giving rise to the assessment of any tax, of acts of determination of taxable income and of acts of determination of patrimonial values;

In the second place, the jurisdiction of the arbitral tribunals operating at the CAAD is limited by the undertaking of the Tax and Customs Authority which, pursuant to article 4, no. 1, of the RJAT, came to be defined by Ordinance no. 112-A/2011, of 12 March, which establishes the following, insofar as relevant:

The services and bodies referred to in the preceding article undertake to the jurisdiction of the arbitral tribunals operating at the CAAD which have as their object the examination of claims relating to taxes whose administration is entrusted to them referred to in no. 1 of article 2 of Decree-Law no. 10/2011, of 20 January, with the exception of the following:

a) Claims relating to the declaration of illegality of acts of self-assessment, withholding at source and payment on account which have not been preceded by recourse to administrative procedures in accordance with articles 131 to 133 of the Code of Tax Procedure and Process;

b) Claims relating to acts of determination of taxable income and acts of determination of taxable matter, both by indirect methods, including the decision of the revision procedure;

c) Claims relating to customs duties on importation and other indirect taxes levied on goods subject to import duties; and

d) Claims relating to tariff classification, origin and customs value of goods and tariff quotas, or whose resolution depends on laboratory analysis or procedures to be carried out by another Member State within the framework of administrative cooperation in customs matters.

As can be seen, only in relation to customs matters is the definition of jurisdiction based on the type of taxes to which the claims are directed. And as regards these, the Tax and Customs Authority only undertook to recognize jurisdiction regarding taxes administered by it.

As regards the rest, jurisdiction is defined only having regard to the type of acts which are the subject of challenge, there being, in particular, no prohibition against examining matters relating to tax exemptions or any other questions of legality relating to acts of the types referred to in article 2 of the RJAT. It should be understood in this regard that an assessment of tax which proceeds from disregard of an exemption does not cease to be a tax act. And the examination of the legality or illegality of such disregard is therefore not ceased to be the examination of a claim relating to the declaration of illegality of acts of assessment.

In the case at hand, acts of assessment of IMI (and IMT) are challenged, which fall within paragraph a) of no. 1 of article 2 of the RJAT, and whose examination is not excluded by any of the provisions of the aforementioned Ordinance.

Therefore, the exception of lack of material jurisdiction raised by the Tax and Customs Authority is without merit.

Factual Matters

2.1. Facts Proven

The following facts are considered proven:

a) B…, TIN …, has as its managing entity the Claimant A… - …, S.A., TIN …;

b) B… is a closed fund, authorized through Ordinance no. …/95, published in Series II of the Official Journal of …-…-1995;

c) B… has a Management Regulation which appears in document no. 1 attached with the arbitral ruling petition, the content of which is reproduced, in which, among other things, the following is stated:

"The investment policy of B… is aimed at the acquisition of immovable property dedicated to tourist activity for the purpose of lease, such as:

• tourist animation with an innovative character;

• hotel and tourist animation involving the recovery of historical architectural and cultural heritage;

• hotels requiring modernization and resizing;

• tourist properties involving the recovery of unfinished immovable property, whose works have been stalled for more than five years and which constitute a factor of environmental degradation;

• financial restructuring of economically viable enterprises,"

d) B… prepared the Activity Report for the financial year ended 31-12-2010, which appears in document no. 2 attached with the arbitral ruling petition, the content of which is reproduced, where it is indicated, among other things, that the participants in the Fund in the financial year 2010 are the following:

[table content]

e) B… prepared the Management Report for the financial year 2013, which appears in document no. 3 attached with the arbitral ruling petition, the content of which is reproduced, where it is stated that the participants in B… are the following:

[table content]

f) B… prepared the Report and Accounts for the financial year 2013, which appears in document no. 4 attached with the arbitral ruling petition, the content of which is reproduced, in which it is stated, among other things, that A…, managing entity of B…, is a public company with predominantly public capital whose mission consists in implementing public policies aimed at strengthening the competitiveness of national tourism, intervening on the Real Estate component of companies in the sector;

g) The essential objective of this real estate investment fund is to strengthen the financial capacity of tourism companies which it achieves through operations consisting of the acquisition from tourism companies and simultaneous lease to them of immovable property dedicated to tourist activity (testimony of witnesses);

h) At A… - …, S.A., an internal communication was prepared which appears in document no. 5 attached with the arbitral ruling petition, the content of which is reproduced, relating to the immovable property referred to in the Tax Inspection Report, referring to a meeting of executives of A… with legal representatives of C… - …, Ltd, with the objective of analyzing a purchase and sale and lease operation by one of the Real Estate investment funds managed by A…, of an Immovable property where a hotel would be installed, indicating the following characteristics:

Immovable property: 5-star hotel with 38 rooms

location: beach of …, municipality of ...

unit integrated in a resort (which corresponds to the 2nd phase of the project …) which also includes: complex of indoor and outdoor swimming pools, SPA, several restaurants, meeting rooms, commercial spaces, tourist village (132 dwellings/apartments of various types).

total investment: 32M€ (of which hotel (12M€), tourist apartments (2.5M€), tourist village (17.5M€))

planned schedule:

• obtaining the LUT; within approximately 4 months

• opening: April 2010;

and of the proposed operation:

• acquisition of the immovable property after obtaining the LUT

• operation would be previously approved by A… so that promoters could obtain interim financing

• acquisition value: 6M€-8M€, depending on negotiations to be undertaken with Barclays to unencumber the immovable property

(...)

The project has had financial support from Barclays. Given the situation of the real estate market, the project faces a situation of lack of liquidity: it is estimated that for the completion of the Hotel an amount of approximately 3M€ is necessary.

The promoters proposed to D… an investment of 5M€.

In view of the above and given that the liquidity of E… (part dedicated to tourism) is approximately 41.5 M€ but the projects under analysis amount to approximately 84 M€ (of which the amount of approximately 15M€ has already been approved in the Executive Board), we consider, subject to better opinion, that analysis of the proposed operation should be carried out within B… or B… II. It is also important to note that the choice of Fund (B… or B… II) through which this operation could be carried out will be analyzed in a separate document, given the current liquidity of the Funds and portfolio of projects under analysis."

i) On 03-12-2009, a meeting of the Executive Board of A… - …, S.A. was held in which approval was deliberated for the acquisition of the immovable property referred to at the value of 6.5 M€ and its lease for a period of 15 years and rent indexed to 12-month Euribor plus 2%. (document no. 6 attached with the arbitral ruling petition, the content of which is reproduced);

j) By letter dated 10-12-2009, the Claimant addressed to C… – …, S.A. (hereinafter "C…"), the letter which appears in document no. 7 attached with the arbitral ruling petition, the content of which is reproduced, in which the following is stated, among other things:

Following the contacts had with Your Excellency, and the analysis of the proposed operation, we hereby inform you that the Executive Board of A…-…, S.A., by deliberation of 3 December 2009, approved the completion of the operation of acquisition with subsequent lease of the immovable property "Hotel …", under the following conditions:

1. B… II will acquire the immovable property from C…-…, S.A. (C…) for the amount of € 6,500,000.00 (six million five hundred thousand euros);

2. B… II will lease to F…-…, S.A. (F…), for a period of fifteen years, renewable, the immovable property, for the amount equal to the sum of the product of the acquisition value with the EURIBOR rate at 12 months plus two percent and the amount corresponding to half a percent of the turnover volume;

3. F… and C… will hold, after fifteen years, the option to purchase the immovable property for the amount of € 8,127,000 (eight million, one hundred twenty-seven thousand euros);

4. A bank guarantee will be provided by F…, to guarantee the obligation of payment of rents and other eventual obligations defined in the lease contract. The guarantee will be issued for the amount of the annual rent and must be annually renewed for the amount of the total rents owed for each of the subsequent years;

5. Valid and updated insurance will be maintained, at the expense and charge of the lessee, for the entire duration of the lease, against all risks, namely fire, flooding and other disasters, relating to the immovable property, in favor of the lessor, with a clause of reversion to the lessor of the indemnification resulting from such disaster or disasters;

6. The immovable property will be delivered free of any liens, charges and liability.

It is important to note that it must be proven, by means of an electronic declaration from IAPMEI, that C… and F… are SMEs pursuant to Decree-Law no. 372/2003, of 6 November and Commission Recommendation 2003/361/CE, of 6 May and that, during the duration of the lease, F… will not undergo changes in its shareholding structure that have implications for its qualification as an SME.

k) By letter dated 05-01-2010, the Claimant addressed to C… - …, S.A., the letter which appears in document no. 8 attached with the arbitral ruling petition, the content of which is reproduced, in which the following is stated, among other things:

Following the contacts had with Your Excellency, and the meeting of the past 17 December 2009, we hereby inform you that the Executive Board of A…-…, S.A., by deliberation of 22 December 2009, decided, with respect to the operation of acquisition with subsequent lease of the immovable property "Hotel …", approved on 3 December 2009 in the terms described in the letter of 10 December 2009, with Ref. No. …/2009, to authorize that:

"the lease contract be concluded with C…-…, S.A. (C…), as tenant;

• in the annual updating of the rent, under the terms provided for in point 3 of the letter referred to above, the turnover considered corresponds to the total value of the revenues obtained in the hotel in the immediately preceding calendar year, and that the amount of food and beverage revenues considered cannot exceed, in each year, the amount indicated in the table presented in annex;

• in the first year of the duration of the lease the payment of rent for the first four months be made between the ninth and twelfth month of that same year;

• the purchase option of the immovable property, provided for in point 5 of the letter referred to above, be held by C… or by a company to be indicated previously by this to the lessor, which has as its object the operation of hotel establishments;

• the purchase option of the immovable property may be exercised from the third year of the duration of the lease in accordance with the following formula -8,127,000€X[(1.01)^(-n)], where n is the number of years remaining to fulfill the period of effective duration of the lease, counting, for this purpose, as complete regardless of the number of months remaining.

In the expectation of your reply, we present our best regards and place ourselves at your disposal to provide any clarification you deem necessary.

l) Following approval of the investment, C… could use a tranche of the mortgage credit contracted with Barclays Bank and originally intended for the construction of the tourist village to finance the completion of the hotel construction works, assuming the commitment to reimburse this tranche intended for the tourist village through additional and interim financing to be contracted with that bank (article 23 of the arbitral ruling petition and witness testimony);

m) On 09-04-2010, the Municipal Chamber of ... issued usage authorization no. …/2010, by which it authorizes the use as a hotel of the urban property designated as Lot …, located in …, parish of …, municipality of ..., described in the Real Estate Registry Office of ... under no. … and registered in the respective property tax record under article … (document no. 9 attached with the arbitral ruling petition, the content of which is reproduced);

n) On 23-06-2010, C… concluded with Barclays Bank Plc an additional and interim bank loan - in the form of a credit facility with mortgage - in the amount of € 6,500,000.00, granted for a period of 6 months (document no. 11 attached with the arbitral ruling petition, the content of which is reproduced);

o) This credit facility had as its sole objective the anticipation of the funds resulting from the financing already approved with B… which would be realized in November 2010 (witness testimony);

p) On 21-09-2010, C… requested from the Head of the Finance Service of the municipality of ..., exemption from IMI for a period of 7 years, with respect to the above-mentioned property, on the ground that tourism utility had been attributed definitively to Hotel … for a period of 7 years (page 9 of document "PA2.pdf" of the administrative file, the content of which is reproduced);

q) On 22-09-2010, the Head of the Finance Service of the municipality of ...

"Having analyzed the documents attached to the file deemed appropriate for the decision, namely the Order no. …/2010 of the State Secretary for Tourism, published in the Official Journal, 2nd Series, no. …, of … of … 2010, which grants tourism utility definitively to Hotel …, located in … - ... - property of the applicant, and, in exercise of the jurisdiction granted to me by the aforementioned no. 4 of article 47 of the EBF, combined with no. 2 of the same article, I grant the exemption from Municipal Tax on Immovable Property, for a period of 7 (seven) years to the urban property registered in the property tax record of the parish of …, of this municipality, under article no. …, counted from the date of the grant of tourism utility/date of the usage authorization …/2010, issued by the Municipal Chamber of ... on 9 April 2010 and ending on 9 April 2017" (page 11 of document "PA2.pdf" of the administrative file, the content of which is reproduced);

r) The Order referred to in the preceding paragraph was notified to C… through an office letter dated 22-09-2010 (page 12 of document "PA2.pdf" of the administrative file, the content of which is reproduced);

s) On 12-11-2010, A… made the self-assessment of IMT relating to the acquisition of the aforementioned urban property enjoying exemption from such tax (document no. 14 attached with the arbitral ruling petition, the content of which is reproduced);

t) A… requested, on 23-11-2010 from the Finance Service of Lisbon-… the waiver of VAT exemption in the acquisition of Hotel …, having instrumented this request with several documents, among which are the proof of IMT assessment, with express reference to the benefit provided for in article 20 of Decree-Law no. 423/83, of 5 December and the draft lease contract (document no. 14 attached with the arbitral ruling petition, the content of which is reproduced);

u) On 25-11-2010, B… acquired from C…, for the price of € 7,000,000, the urban property designated as Lot …, located in …, parish of …, municipality of ..., described in the Real Estate Registry Office of ... under no. … and registered in the respective property tax record under article … (resulting from the prior registration article …) having simultaneously leased the acquired immovable property to the former owner (document no. 15, attached with the arbitral ruling petition, the content of which is reproduced);

v) Following the acquisition of the immovable property, the Finance Service of ... proceeded to change the respective owner in favor of the Claimant, having on that occasion maintained the IMI exemption resulting from article 47 of the EBF (document no. 15-A attached with the arbitral ruling petition, the content of which is reproduced);

w) Following an internal Service Order no. …2013…, dated 27-08-2013, issued by the Finance Directorate of Faro, within the scope of the authorization granted, pursuant to article 17 of the Complementary Regime of the Tax Inspection Procedure (RCPIT), by the Finance Directorate of Lisbon, a tax inspection action on B… was initiated on 03-04-2014, which was concluded on 05-05-2014;

x) The beginning and end of the tax inspection procedure were not notified to the Claimant, nor was it given notice of the OI2013…;

y) Following the inspection, the Tax and Customs Authority prepared a Tax Inspection Report in which, among other things, the following is stated:

1. On 2010/11/25, by public deed of purchase and sale and lease [Book … - A, Pages 90 to 93 and complementary document and respective annexes pages 242 to 265) executed in the Notary's Office of … (TIN …), the taxpayer B… Managed By A… - … SA (B…), TIN …, represented by A… - … SA, TIN…, acquired the urban property, composed of a set of ten buildings, with two stories and grounds with swimming pool, intended as a Hotel, designated as lot …, located in …, parish …, municipality of ..., registered in the respective property tax record under article … and with patrimonial value of €3,751,950.00.

2. It is stated in the aforementioned deed that the taxpayer, B…, leases the urban property identified to the selling company, C… - …, SA, TIN … (which takes the lease for non-residential purposes and for a fixed period), in accordance with the terms set out in the complementary document.

3. It is also stated that there are filed certificates of waiver of VAT exemption both with respect to its transfer of said immovable property, proof that the selling company expressed the intention, under nos. 5 and 6 of article 12 of the VAT Code, to waive VAT exemption in operations relating to immovable property, with VAT being due by the acquirer, and with respect to the lease of the same, proof that B…, expressed the intention, under nos. 4 and 6 of article 12 of the VAT Code, to waive VAT exemption in the aforementioned operations relating to immovable property.

4. The acquisition of the aforementioned immovable property was made from company C… - …, SA, for the total amount of €7,000,000.00, having unduly benefited from the exemption of IMT, provided for in article 20 of DL 423/83, of 05 December, relating to Tourism Utility.

5. In the complementary document to the respective deed, page 242 verso paragraph c), it is stated that in the identified immovable property (article …)"....... in which is installed the hotel establishment called "Hotel …....."

6. In fact, by order of the State Secretary for Tourism of 2010/07/12, order no. …/2010 published in the Official Journal no. …, 2nd Series, of 2010/…/…, tourism utility was granted definitively to "Hotel …", in accordance with the terms of no. 1 of article 2 and no. 3 of article 7 of Decree-Law no. 423/83, of 5 December.

7. With the applicant being company C… - …, SA (TIN …), it was granted a validity of 7 years from the date of the usage authorization for tourism purposes, no. …/2010, issued by the Municipal Chamber of ... on 2010/04/09, pursuant to no. 1 of article 11 of said Decree-Law no. 423/83, of 5 December.

8. The exemption from IMT was based on the provision of no. 1 of article 20 of DL 423/83 of 5 December, which states that: "Properties or autonomous units acquired for the installation of enterprises qualified as tourism utility are exempt from sisa and inheritance and donation taxes, with stamp duty reduced to one-fifth, even if such qualification is granted on a provisional basis...".

9. From the reading of this legal provision are excluded enterprises qualified as tourism utility already installed, which are not the subject of remodeling or extension. The intention in granting such benefits to these acquisitions aims solely to foster investment and boost tourism activity for those developers who intend to construct/create establishments, not being applicable to mere acquisition of properties which constitute or integrate already constructed and installed enterprises.

10. Indeed, this understanding is in accordance with the decision handed down in the Order of the Supreme Administrative Court no. 3/2013, case no. 968/12 - 2nd Section (published in OR no. 44, 1st Series, of 4 March 2013), handed down in an enlarged judgment, in accordance with article 148 of the Code of Administrative Court Procedure (CPTA), in which one can read:

"It appears clear from the considerations of the Working Group that the legislator intended to boost tourism activity by providing for the exemption/reduction of payment of Sisa/Stamp tax for those developers who intend to construct/create establishments (or readapt and remodel existing units) and not when it is a mere acquisition of units (or accommodation units) integrated in the enterprises and intended for operation, even if they are acquired on a date prior to the very installation/licensing of the enterprise." (paragraph 5 of page 1211)

"..., it appears evident that the acquirer of the units does not become, for that reason, a co-financer of the enterprise, with responsibility for installation, since it is investing in real estate products within the so-called residential tourism, as any end consumer, whether the acquisition is made off-plan or after installation/construction of the enterprise." (paragraph 9 of page 1211)

"..., the developers of the enterprises are the sole responsible for real estate investment, with the risk thereof falling on them, as well as for obtaining the licenses necessary to make them fit for operation and exploitation." (paragraph 11 of page 1211)

"The benefit is only justified with respect to whoever carries out the installation of the enterprise and places it on the market and not in relation to all who use and operate it, even if through purchase of its units." (paragraph 13 of page 1211)

"... in the concept of installation cannot be included the acquisition of accommodation units that form part of the enterprise, because that acquisition is made with a view to its operation which can only occur after the final act of the installation procedure, ..."(paragraph 12 of page 1212)

1. Now, for all the above mentioned, it is considered that the IMT exemption in question was unduly recognized, since the acquisition of the property in question "Hotel…'' by the acquirer was not intended for the installation of the establishment/enterprise, which was already duly installed.

2. Thus, the undue recognition of this situation resulted in the failure to pay IMT, in the amount of €455,000.00, as demonstrated below:

3. Regarding the Municipal Tax on Immovable Property (IMI), it is verified that company C… -…, SA, in accordance with the aforementioned article 47 of the EBF, requested on 2011/01/07 the exemption of the aforementioned property (article 3584) of the parish of …, for a period of 7 years, which was recognized for the period 2010 to 2016 inclusive, in accordance with the order of 2011/01/10 of the Head of Finance of the Service of ....

4. The aforementioned article 47 of the EBF, provides in its no. 1 that "Properties integrated in enterprises to which tourism utility has been attributed are exempt from municipal tax on immovable property, for a period of seven years."

5. It further provides in its no. 4 that "In the cases provided for in this article, the exemption is recognized by the head of finances of the area where the property is situated, by properly documented request, which must be presented by taxpayers within 60 days counted from the date of publication of the order granting tourism utility."

6. Consulting the Municipal Tax on Immovable Property (IMI) system, it is noted that the respective unit benefits from exemption for tourism utility, starting in 2010 and ending in 2016, in accordance with article 47 of the Fiscal Benefits Statute (EBF).

7. The taxpayer, upon acquiring the property, ownership, of the immovable property from company C… — …, SA, and to benefit from the exemption provided for in 47 of the EBF, should have complied with the provision of no. 4 of the aforementioned article, that is, presented a request to the Tax Administration (former DGCI), within the legal period, requesting exemption from the entity competent to recognize it, Head of Finances of the area where the property is situated, which did not occur.

8. Now, such procedure not having been carried out, it results that from the moment the immovable property is the subject of transfer of its ownership, ownership, to the taxpayer, the previously recognized exemption ceases, not being transferred to the acquirer thereof, that is, does not accompany the property, and the presentation of a request for recognition of the same is necessary, in accordance with the aforementioned no. 4 of article 47 of the EBF, the omission of this procedure having as a consequence the loss of the benefit of exemption for tourism utility of that immovable property.

9. The taxpayer, pursuant to no. 1 of article 8 of the Code of Municipal Tax on Immovable Property (CIMI), on the date of 2010/12/31 was owner of the aforementioned property, property which, from the date of its acquisition, by change of owner, does not benefit from the exemption requested and recognized to company C… - …, SA.

(...)

Decree-Law no. 423/83, of 5 December, was a legal instrument for fostering and encouraging investment in the tourism sector, which was intended to be of quality. This boost that was intended to be given to the tourism sector is evident from article 5 itself.

In fact, the law only recognizes the possibility of tourism utility being attributed to enterprises that result from direct investment, reflected either in the construction of new enterprises, or in the remodeling, improvement or re-equipment in whole or in part, or in the performance of works leading to an increase in capacity of at least 50%.

For that reason, the legislator understood that tax benefits should be granted in terms of transfer tax (current IMT) and stamp tax to the owning companies that carry out the investment effort.

The legislator intended to boost this sector of activity, by providing for exemption/reduction of payment of transfer/stamp tax, subject to certain conditions, to those who create tourism establishments, and not to those who merely buy properties/units belonging to already installed enterprises.

When the legislator says in no. 1 of article 20, "for installation" this means that it is only acquisitions of properties made with the intention to construct/improve tourism enterprises in them, and not acquisition of properties/units integrated in already constructed and installed enterprises.

This understanding and interpretation followed by the Tax Administration, and which results from the historical element, rational/teleological, but also literal meaning of the legal norms in question, is the understanding also followed by the Administrative Court of the South, Order no. 4424/10, of 2011/10/18 and Order of the Supreme Administrative Court no. 3/2013.

The acquisition of the property intended as a Hotel by the taxpayer, the lease for a period of 15 years to the former owner and the purchase option granted, configures an operation and a financing modality (paragraphs 33, 34 and 35).

The aforementioned financing operation falls within the scope of the essential objective of the taxpayer (paragraph 16, 17), real estate investment fund, to contribute to strengthening the financial capacity of tourism companies, through the acquisition and lease of properties dedicated to tourism activity (paragraph 36).

As the taxpayer itself states (paragraph 18), these operations allow on one hand the separation between the ownership of real estate assets and their management and on the other the provision of companies with immediate financial liquidity, so what is at issue is not the acquisition of property with the intention of constructing/improving a tourism enterprise in it but rather ensuring conditions for the investment/financing carried out by B….

However, it is the former owner company, C…, who promoted the installation and carried out the investment effort (as stated by the taxpayer paragraphs 41 to 50) it not being relevant for purposes of the benefit of said IMT exemption the financing of that investment, as raised by the taxpayer in its paragraph 51, stating that in terms of economic substance, B…'s investment/financing was intended for the installation of the hotel establishment, having financed the real estate investment carried out by C… in that tourism enterprise, nor the fact of whether or not the repercussion of said tax has occurred (52 to 56), stating that those who benefit economically and financially from the IMT exemption enjoyed by the Hotel acquisition is C…, the promoter/builder of the tourism enterprise, as it does not have to bear the expense corresponding to this tax in the rents charged by B….

Nor does it become relevant the fact that the property continues to be dedicated to tourism operation, since the operation itself falls outside the provision established in article 20 of Decree-Law no. 423/83, which recognizes the exemption from payment of transfer tax/IMT.

Regarding IMI, and as is correctly stated by the taxpayer (72 to 74) it was incorrectly stated in point 13 of chapter III that company C… requested on 2011/01/07, when it should have been stated 2010/09/21, the exemption of the aforementioned property (article 3584) of the parish of …, for a period of 7 years, which was recognized for the period 2010 to 2016 inclusive, in accordance with the order of 2011/01/10, when it should have been stated 2010/09/22 of the Head of Finances of the Service of ....

Regarding the issues raised by the taxpayer and as already stated in chapter III, the taxpayer, upon acquiring the property, ownership, of the immovable property from company C…- …, SA, and to benefit from the exemption provided for in 47 of the EBF, should have complied with the provision of no. 4 of the aforementioned article, that is, presented a request to the Tax Administration duly documented to benefit from the effects of the grant of tourism utility, within the period of sixty days counted from the acquisition of the property.

In fact, to benefit from the exemption in tax terms, it is necessary for the interested party to take initiative through the presentation of a request to the Tax Administration, within the legal period, requesting exemption from the entity competent to recognize it, Head of Finances of the area where the property is situated.

Now, such procedure not having been carried out, and as already stated in chapter III (in point 18) it results that from the moment the immovable property is the subject of transfer of its ownership, ownership, to the taxpayer, the previously recognized exemption ceases, not being transferred to the acquirer thereof, that is, does not accompany the property, and the presentation of a request for recognition of the same is necessary, in accordance with the aforementioned no. 4 of article 47 of the EBF, the omission of this procedure having as a consequence the loss of the benefit of exemption for tourism utility of that property.

The taxpayer, pursuant to no. 1 of article 8 of the Code of Municipal Tax on Immovable Property (CIMI), on the date of 2010/12/31 was owner of the aforementioned property, property which, from the date of its acquisition, by change of owner, does not benefit from the exemption requested and recognized to company C… - …, SA.

In fact and in terms of recognition of tax benefits, from the moment that the property for which exemption was previously recognized has been the subject of transfer, transitioning to the legal sphere of another, the previously recognized exemption is not transferred, therefore does not follow the property, it is necessary for there to be initiative on the part of the acquirer through the presentation of a request, accompanied by the necessary documents which prove, certify the determining fact of the exemption, directed to the Head of Finances of the area where it is situated, within the sixty-day period.

In view of the above, and as already stated in chapter III and verifying that, having the taxpayer not presented a request to request exemption, pursuant to article 47 of the EBF, it results that the aforementioned property, on 2010/12/31, no longer benefited from the exemption for tourism utility, whereby the taxpayer is benefiting unduly from said exemption from the year 2010.

B…, as stated by the taxpayer (paragraph 7), is a closed real estate investment fund of particular subscription, whose constitution was authorized by Ordinance no. …/95 (2nd Series), of the Office of the State Secretary Adjunct and of the Treasury, published in the Official Journal, II Series, of …/…/1995 which approved the respective management regulation.

In the year 2010 and with the entry into force of Law no. 3-B/2010, of 28 April, through its article 109, article 49 of the Fiscal Benefits Statute was amended, repealing its no. 2 and limiting the application of the exemptions provided for in its no. 1, relating to municipal tax on immovable property and municipal tax on onerous transfer of immovable property, to properties integrated in open real estate investment funds, pension funds and savings-retirement funds that are constituted and operate in accordance with national legislation.

Thus, in view of the above and there being no cause for exclusion from taxation, the corrections proposed in chapter III in terms of IMT and IMI are to be maintained.

z) By office letter dated 12-08-14, received on 14-08-2014, the Tax and Customs Authority notified the Claimant in the terms which appear in document no. 1 attached with the arbitral ruling petition, the content of which is reproduced, which includes, among other things, the following:

By deed of purchase and sale and lease executed in the Notary's Office of Dr. …, on 25 November 2010, pages 90 to 93 of book no. …, it acquired for the price of €7,000,000.00, the urban property intended as a Hotel, designated as lot no. …, located in …, …, parish of …, registered in the urban property tax record of the parish of …, municipality of ..., under article no. …, with exemption from Municipal Tax on Onerous Transfer of Immovable Property under article 20 of DL 423/83, of 5 December, relating to Tourism Utility.

In view of the report drawn up by the Tax Inspection Services of the Finance Directorate of Faro following the Service Order no. OI2013…, sanctioned by order of 2014-07-02 of the Deputy Finance Director of Lisbon, a copy of which is attached, it was verified that it unduly benefited from the IMT exemption under the provision of no. 1 of article 20 of DL 423/83, of 5/12, in the amount of €455,000.00 (€7,000,000.00 * 6.5%).

Thus, you are notified, pursuant to no. 1 of article 38 of the Code of Municipal Tax on Onerous Transfer of Immovable Property (CIMT) and article 36 of the Code of Tax Procedure and Process (CPPT), to within 30 days from the date of the signature of the receipt notice, request from this Finance Service, a collection document to effect payment of the sum of €519,572.60 (five hundred nineteen thousand, five hundred seventy-two euros and sixty cents), being €455,000.00 of IMT and €64,572.60 of compensatory interest counted from the date of the deed (2010-11-25) until the date of the analysis carried out by the Tax Inspection Services (2014-06-11), corresponding to 1295 days, at the rate of 4%.

From the IMT assessment you may claim or challenge in accordance with the terms and periods established in articles 70, 99 and 102 of the CPPT.

If payment is not made within the aforementioned period, executive proceedings will take place, pursuant to no. 3 of article 38 of the CIMT.

aa) Still following the inspection, the Tax and Customs Authority made the following IMI assessments:

– Assessment of Municipal Tax on Immovable Property (IMI) no. 2010 …, dated 13-08-2014 and notified to the Claimant on 30-09-2014, in the amount of € 11,255.85;

– Assessment of Municipal Tax on Immovable Property no. 2011 …, dated 13-08-2014 and notified to the Claimant on 30-09-2014, in the amount of € 615,007.80;

– Assessment of Municipal Tax on Immovable Property no. 2012 …, dated 13-08-2014 and notified to the Claimant on 30-09-2014, in the amount of € 13,525.78;

– Assessment of Municipal Tax on Immovable Property no. 2013 …, notified to the Claimant on 1-10-2014, which includes the amount of € 11,593.53, relating to the property located in the Municipality of ..., referred to in the Tax Inspection Report;

bb) Following a request from C… - …, S. A., by Order no. …/2010, of …-…-2010, of the State Secretary for Tourism, published in the Official Journal, 2nd Series, of …-…-2010, the content of which is reproduced, tourism utility was granted to Hotel …, for a period of 7 years;

cc) On 09-09-2014, the Claimant paid the sum of € 519,572.60 relating to the IMT assessment with the document identification number … (page 5 of document "PA2.pdf", of the administrative file and document no. 25 attached with the arbitral ruling petition, the content of which is reproduced);

dd) On 01-10-2014, the Claimant paid the sums of € 11,255.85, € 15,007.80, and € 13,525.78 corresponding to the IMI assessments nos. 2010 …, 2011 … and 2012 …, respectively (documents attached to the respective assessments with the arbitral ruling petition);

ee) On 09-10-2014, the Claimant paid the sum of € 30,968.76, corresponding to assessment no. 2013 …, which includes the sum of € 11,593.53 relating to the part of the assessment corresponding to the property referred to in the Tax Inspection Report (documents attached to the assessment with the arbitral ruling petition);

ff) In entering into the contract for acquisition and lease of the immovable property referred to in the Tax Inspection Report, the Claimant was convinced that IMT and IMI exemptions would be applicable, the amount of rents having been determined on the basis of this assumption;

gg) The Tax Administration only from 2010 onwards began to apply the understanding that in situations of the type of the one which is the subject of the contract concluded by the Claimant with C… IMT and IMI exemptions were not applicable;

hh) On 24-11-2014, the Claimants submitted the petition for constitution of the arbitral tribunal which gave rise to the present proceedings.

2.2. Facts Not Proven

It was not proven whether the deed of purchase and sale and lease of the immovable property was obtained through a procedure carried out by the Tax Administration with the Notary's Office … or if it was sent to it ex officio.

2.3. Grounds for Establishment of Factual Matters

The facts were established as proven on the basis of the documents attached with the arbitral ruling petition and the administrative file and witness testimony.

The witnesses appeared to testify with impartiality and with knowledge of the facts they reported.

3. Legal Matters

3.1. Order of Examination of Defects

In accordance with the provision of article 124 of the CPPT, subsidiarily applicable by force of the provision of article 29, no. 1, of the RJAT, not being attributed to the IRS declaration defects leading to a declaration of non-existence or nullity, nor indicated a relationship of subsidiarity, the order of examination of the defects must be one which, according to the prudent judgment of the judge, most stably or effectively protects the interests offended.

The imputation of defects in a relationship of subsidiarity is permitted by article 101 of the CPPT.

Underlying the establishment of an order of examination of defects is a legislative option to the effect that the merit of one of the defects prejudices the examination of the remainder, for if it were always necessary to examine all the defects, it would be indifferent the order by which its examination took place.

In the case at hand, the Claimant imputes defects to the IMT assessment according to an order of subsidiarity, as results from the 2nd part of article 78, the 2nd part of article 135 and 2nd part of article 167 of the arbitral ruling petition, in which, after raising the defect of omission of an essential legal formality, states that:

If so understood differently, which is only admitted out of mere duty of representation and without conceding, it will still be said that the IMT assessment no. 2014… of 14 August 2014 is illegal by violation of the provision of no. 1 of article 20 of Decree-Law no. 423/83, of 5 December (emphasis ours).

(...)

Even if so understood, which is only admitted out of duty of representation and without conceding, it will still be said that the aforementioned IMT assessment relating to the acquisition of Hotel … is unconstitutional as it violates the principle of legitimate expectation inherent to the concept of Rule of Law set out in article 2 of the Constitution of the Portuguese Republic (emphasis ours).

(...)

Even if so considered, which is only admitted out of mere duty of representation and without conceding, it will still be said that the IMT assessment no. 2014… of 14 August 2014 by revoking the benefit granted under article 20 of Decree-Law no. 423/83, of 5 December, is illegal by violation of the provision of articles 140 and 141 of the Administrative Procedure Code (emphasis ours).

Those expressions "if so understood differently", "even if so understood" and "even if so considered" reveal that the Claimant only seeks to have examined the defects of violation of the provision of no. 1 of article 20 of Decree-Law no. 423/83, unconstitutionality by violation of the principle of confidence and illegality of the revocation of the benefit of IMT exemption, which it also imputes to the IMT assessment, if the defect of omission of an essential legal formality does not obtain.

With respect to the IMI assessments, the Claimant imputes in the first place a defect of violation of article 47 of the Fiscal Benefits Statute (EBF) and then cumulatively a defect of violation of the same article and of article 15, no. 2, of the EBF.

3.2. Defect of Failure to Notify the Beginning and End of Tax Inspection

The Claimant imputes to the IMT assessment a procedural defect, for not having been notified of the beginning and end of the tax inspection, which it understands should be qualified as external.

In accordance with the provision of article 13, no. 1, of the Complementary Regime of the Tax Inspection Procedure (RCPIT), the inspection procedure is "external, when the inspection acts are effected, totally or partially, in the installations or dependencies of the taxpayers or other obligated parties, of third parties with whom they maintain economic relations or in any other place to which the administration has access" and is "internal, when the inspection acts are effected exclusively in the services of the tax administration through formal and consistency analysis of documents".

Pursuant to article 49 of the RCPIT, "the external inspection procedure must be notified to the taxpayer or obligated party with a minimum advance notice of five days with respect to its beginning".

As results from article 13, no. 1, it is not only the place where the inspection acts are performed that is relevant to qualify the procedure as internal or external, the activity developed in it being also decisive, so that, whenever the activity is not limited to mere formal and consistency analysis of documents that have been presented to the Tax and Customs Authority, one is faced with an external procedure.

That reference to the formal and consistency analysis of documents as the sole activity that can be carried out in an internal inspection procedure shows that this has as its object the elements declared and presented to the Tax and Customs Authority by the taxpayers, translating into mere verification of their formal correctness and their adequacy to confirm the declared elements.

In the case at hand, it was not determined how the public deed came into the possession of the Tax and Customs Authority, which moreover is not even contained in the administrative file sent to the Arbitral Tribunal. Furthermore, the activity developed does not limit itself to a formal and consistency analysis of documents in the possession of the Tax and Customs Authority, which alone prevents the inspection from being qualified as internal.

Therefore, the Claimant is right to argue that the inspection procedure should be qualified as external, and therefore, pursuant to article 49 of the RCPIT, its beginning should have been notified to the Claimant with a minimum advance notice of five days.

As stated in the judgment of the Central Administrative Court South of 27-02-2014, handed down in case no. 07343/14, in line with other decisions it cites, "the qualification given by the Tax Administration to a procedure does not have a binding character, if it comes to be revealed that the content of the acts performed is contrary to the qualification given, that is, the formal classification of the procedure will, subsequently, be validated, or not, by the acts that the Tax Administration actually performs. In a situation where the acts materially performed reveal the existence of a procedure different from that which was formally indicated by the Tax Administration, that is, an external "de facto" procedure, although formally qualified as internal, the defects relating to the lack of prior notification to the taxpayer required by art. 49, no. 1, of the R.C.P.I.T., as well as the absence of a service order required by art. 46, no. 2, of the same statute, should have as a consequence, in particular, the invalidity of any eventual assessment that comes to be made, thus leading to its annulment (cf. AC.TCA South-2nd Section, 10/07/2012, case 5289/12; AC.TCA South-2nd Section, 13/02/2014, case 7026/13; Diogo Leite de Campos and Others, General Tax Law annotated and commented, 4th edition, Encontro da Escrita Publisher, 2012, page 385 et seq.; Joaquim Freitas da Rocha and Another, R.C.P.I.T. annotated and commented, 1st Edition, Coimbra Publisher, 2013, page 81 et seq.; João Fernando Damião Caldeira, The Tax Inspection Procedure - A Contribution to its Understanding in Light of Fundamental Rights, University of Minho, 2011, page 91 et seq.)".

On the other hand, the thesis sustained by the Tax and Customs Authority in its submissions, by saying that "the situation of the records falls, indeed, within the provision of article 50, paragraph a) of the RCPIT", ends up confirming the external nature of the tax inspection procedure. In fact, this article 50, no. 1, paragraph a), aims to dispense prior notification when "the procedure aims only at the consultation, collection or crossing of documents intended to confirm the tax situation of the taxpayer or obligated party" and prior notification only takes place in external procedures.

In any case, as understood by the Central Administrative Court South "flowing from the content of the report and the grounds that served as the basis for the corrections made that the procedure did not aim only at the collection of information, rather it can be said that it was much more than that, as it was on that information that the entire inspection action was based, we are faced with a materially external inspection. The said "internal" inspection did not result from a mere inspection analysis on the formal correctness of the documents delivered and their consistency with the declarations presented".

That is, in light of the definition of internal inspection resulting from article 13, paragraph a), of the RCPIT, it is not only the place where the inspection acts are performed that characterizes this type of inspection, but also, and primarily, its content, which must be limited to an analysis of documents, without drawing any consequence from it.

This has as a corollary that if the Tax and Customs Authority, through this analysis, understands that there is reason to carry out something more, namely to effect a correction and a subsequent assessment, the purpose and scope of the inspection must be altered, pursuant to article 15 of the RCPIT which establishes that "the purposes, scope and extension of the inspection procedure may be altered during its execution by reasoned order of the entity that ordered it, and must be notified to the entity inspected".

Furthermore, this conclusion that an inspection which does not limit itself to formal and consistency analysis of documents must have the external inspection regime applied, namely the notification to the taxpayer of its beginning, is corroborated by the fact that the RCPIT grants rights to that party which can only be adequately exercised during the inspection process if it has knowledge of its beginning, as is the case with the possibility of requesting alteration of the scope and extension of the procedure (article 15, no. 2, of the RCPIT) or proceeding to regularize the tax situation during the inspection procedure, with reduction of penalty (article 62, no. 4, of the RCPIT and 29, no. 1, of the General Regime for Tax Violations).

In addition, with respect to the actual location of the performance of the inspection acts, in the case at hand, the administrative file that the Tax and Customs Authority presented to this Arbitral Tribunal has manifest omissions in its preparation, as it does not even contain the deed and attached documents upon which the Tax and Customs Authority based itself to assess the IMT, nor any document which allows determining how it came into the possession of the Tax and Customs Authority.

Therefore, it being affirmed by the Claimant in the present proceedings that the deed was necessarily obtained through a procedure with the notary's office in which the deed was concluded, the fact that the manner in which the documents were obtained is not revealed in the file makes it practically impossible for the Claimant to prove these facts, the impossibility being culpable and attributable to the Tax and Customs Authority, as it has the legal duty to organize and present to the Arbitral Tribunal the administrative file with all the documents that served as the basis for the decision (article 17, no. 2, of the RJAT).

Thus, by virtue of the provision of article 344, no. 2, of the Civil Code, it is on the Tax and Customs Authority that falls the burden of proof of how the deed and attached documents referred to in the Tax Inspection Report were obtained.

In these terms, it must be considered procedurally established that, as the Claimant states, the Tax and Customs Authority carried out at least one procedure with the notary's office where the deed was concluded, to obtain it.

Thus, one is faced with an external inspection, whose beginning was not communicated to the Claimant, as required by article 49, no. 1, of the RCPIT, which constitutes a procedural irregularity that affects the decision of the procedure.

On the other hand, the thesis of the Tax and Customs Authority that "the irregularity in the inspection procedure was remedied by the Claimant's intervention in the procedure, without the same having been invoked", has no legal support, for, as results from the express terms of article 66 of the LGT, although taxpayers and other interested parties may, in the course of the procedure, claim against any acts or omissions of the tax administration, "interested parties may appeal or challenge the final decision on the grounds of any illegality", including procedural ones.

As results from the factual matters established, the Claimant was not notified of the beginning of the inspection carried out on the basis of the Service Order OI2013…, of 27-08-2013, therefore a procedural defect occurred which implies the avoidability of the inspection procedure and of the assessment acts based thereon.

3.3. Defects of Prejudiced Knowledge

Given the procedural defect attributable to the IMT assessment, knowledge of the defects of violation of law that the Claimant attributes to it on a subsidiary basis is prejudiced, as stated in point 3.1 of this judgment.

3.4. Defects of Violation of Articles 15, No. 2, and 47 of the Fiscal Benefits Statute Attributed to IMI Assessments

The Claimant attributes to the IMI assessments, separately, defects of violation of article 47 of the EBF, in the first place, because in the Tax Inspection Report it was understood that it should have requested IMI exemption after the execution of the deed of acquisition of the property and, in the second place, because of violation of the same article cumulatively with article 15, no. 2, of the same Code, because the tax benefit that was recognized to C… was transferable.

The two issues are related, as if the tax benefit is transferable there will be no need for the Claimant to request its recognition so the issue of transferability of the tax benefit will be examined first.

The Tax and Customs Authority made IMI assessments relating to the property acquired by B… from C…, relating to the years 2010, 2011, 2012 and 2013, understanding the following, in summary:

– company C… -…, SA, pursuant to the aforementioned article 47 of the EBF, requested on 2011/01/07 the exemption of the aforementioned property (article …) of the parish of …, for a period of 7 years, which was recognized for the period 2010 to 2016 inclusive, in accordance with the order of 2011/01/10 of the Head of Finances of the Service of ...;

– Consulting the Municipal Tax on Immovable Property (IMI) system, it is noted that the respective unit benefits from exemption for tourism utility, starting in 2010 and ending in 2016, in accordance with article 47 of the Fiscal Benefits Statute (EBF);

– The taxpayer, upon acquiring the property, ownership, of the immovable property from company C… — …, SA, and to benefit from the exemption provided for in 47 of the EBF, should have complied with the provision of no. 4 of the aforementioned article, that is, presented a request to the Tax Administration (former DGCI), within the legal period, requesting exemption from the entity competent to recognize it, Head of Finances of the area where the property is situated, which did not occur.

– not having such procedure been carried out, it results that from the moment the immovable property is the subject of transfer of its ownership, ownership, to the taxpayer, the previously recognized exemption ceases, not being transferred to the acquirer thereof, that is, does not accompany the property, and the presentation of a request for recognition of the same is necessary, in accordance with the aforementioned no. 4 of article 47 of the EBF, the omission of this procedure having as a consequence the loss of the benefit of exemption for tourism utility of that property.

– The taxpayer, pursuant to no. 1 of article 8 of the Code of Municipal Tax on Immovable Property (CIMI), on the date of 2010/12/31 was owner of the aforementioned property, property which, from the date of its acquisition, by change of owner, does not benefit from the exemption requested and recognized to company C… - …, SA.

The Claimant understands that this understanding violates the provision of articles 15, no. 2, and 47 of the CIMI.

These articles establish the following, in the versions in effect from April 2010:

Article 15

Transmission of Tax Benefits

1 - The right to tax benefits, without prejudice to the provision of the following numbers, is non-transferable inter vivos, being, however, transferable mortis causa if the requirements of the benefit are met in the transferee, save if such is of a strictly personal nature.

2 - The right to objective tax benefits which are indissociable from the legal regime applicable to certain assets is transferable inter vivos, namely those which benefit the income from bonds, public debt securities and properties subject to the limited rent regime.

3 - It is equally transferable inter vivos, by authorization of the Minister of Finance, the right to tax benefits granted, by act or tax contract, to natural or legal persons, provided that the requirements of the benefit are met in the transferee and the protection of public interests pursued thereby is assured.

Article 47 ( )

Properties Integrated in Enterprises to Which Tourism Utility Has Been Attributed

1 - Properties integrated in enterprises to which tourism utility has been attributed are exempt from municipal tax on immovable property, for a period of seven years.

2 - Properties integrated in enterprises to which tourism utility has been attributed on a provisional basis benefit from the exemption provided for in the preceding number, from the date of attribution of tourism utility, provided that the period set for the opening or reopening to the public of the enterprise or for the end of the works has been observed.

3 - Urban properties dedicated to tourism housing benefit from exemption from municipal tax on immovable property, for a period of seven years counted from the end of the respective works.

4 - In the cases provided for in this article, the exemption is recognized by the head of finances of the area where the property is situated, by properly documented request, which must be presented by taxpayers within 60 days counted from the date of publication of the order granting tourism utility.

5 - If the request is presented beyond the period referred to in the preceding number, the exemption begins from the immediately following year, inclusive, to that in which it was presented, ceasing, however, in the year in which it would have ended, if the request had been presented in time.

6 - In all aspects not regulated in this article or in the Code of Municipal Tax on Immovable Property, the provision of Decree-Law no. 423/83, of 5 December applies, with the necessary adaptations.

As results from the text of no. 1 of article 47, the exemption from municipal tax on immovable property, for a period of seven years, is recognized to "properties integrated in enterprises to which tourism utility has been attributed the tax benefit".

This is therefore an objective exemption, whose recognition is made by the head of finances of the area where the property is situated, by properly documented request, which must be presented by taxpayers within 60 days counted from the date of publication of the order granting tourism utility, pursuant to no. 4 of the same article 47.

It follows immediately from the content of this no. 4 that, once appealed for and the tax benefit recognized, the property to which it was recognized enjoys it for the period of seven years, without need of a new request, even in cases of change of ownership.

In fact, it would not be understood any other solution, for if the tax benefit is recognized for the property for the referred period, it is indifferent who may be its owner during the referred period.

On the other hand, as it is an objective tax benefit indissociable from the legal regime applicable to properties integrated in enterprises to which tourism utility has been attributed, the tax benefit is transferable to whoever the ownership of the property is transferred to.

Therefore, it must be concluded that the IMI assessments violate the provision of the aforementioned articles 15, no. 2, and 47, nos. 1 and 4, of the EBF, which justifies their annulment for defect of violation of law.

3.5. Illegality of the Compensatory Interest Assessment

Compensatory interest forms part of the tax debt itself, with which it is jointly assessed (article 35, no. 8, of the LGT).

Thus, the assessment of compensatory interest had as its presuppositions the assessments of IMT and IMI.

Given that the assessments are affected by defects which justify their annulment, the assessments of compensatory interest are affected by those same defects and therefore must also be annulled.

4. Indemnificatory Interest

The Claimant further requests that reimbursement be determined of the sums it paid "in the total amount of € 570,955.56, plus indemnificatory interest, at the legal rate accrued from 9 September 2014 until complete reimbursement of these amounts".

In accordance with the provision of paragraph b) of art. 24 of the RJAT, an arbitral decision on the merit of the claim which is not subject to appeal or challenge binds the tax administration from the end of the period provided for appeal or challenge, and this must, in the exact terms of the merit of the arbitral decision in favor of the taxpayer and until the end of the period provided for for the voluntary execution of the sentences of the tax courts, "restore the situation which would exist if the tax act which is the subject of the arbitral decision had not been performed, adopting the acts and operations necessary for such purpose", which is in harmony with the provision of art. 100 of the LGT [applicable by force of the provision of paragraph a) of no. 1 of art. 29 of the RJAT] which establishes that "the tax administration is obliged, in case of total or partial merit of a claim, judicial challenge or appeal in favor of the taxpayer, to immediate and full restoration of the legality of the act or situation which is the subject of the dispute, including the payment of indemnificatory interest, if applicable, from the end of the period of execution of the decision".

Although art. 2, no. 1, paragraphs a) and b), of the RJAT uses the expression "declaration of illegality" to define the jurisdiction of the arbitral tribunals operating at the CAAD, not making reference to condemnatory decisions, it should be understood that their jurisdictions include the powers which in judicial challenge proceedings are attributed to the tax courts, this being the interpretation which harmonizes with the sense of the legislative authorization on which the Government based itself to approve the RJAT, in which is proclaimed, as the first directive, that "the tax arbitral process should constitute an alternative procedural means to the judicial challenge proceedings and to the action for recognition of a right or legitimate interest in tax matters".

The judicial challenge procedure, despite being essentially a procedure for annulment of tax acts, admits condemnation of the Tax Administration in the payment of indemnificatory interest, as is inferred from art. 43, no. 1, of the LGT, in which is established that "indemnificatory interest is due when it is determined, in a gracious claim or judicial challenge, that there was error attributable to the services from which results payment of the tax debt in an amount exceeding that legally due" and from art. 61, no. 4 of the CPPT (in the version given by Law no. 55-A/2010, of 31 December, to which corresponds no. 2 in the original version), that "if the decision which recognized the right to indemnificatory interest is judicial, the period of payment is counted from the beginning of the period of its voluntary execution".

Thus, no. 5 of art. 24 of the RJAT in saying that "payment of interest is due, regardless of its nature, in accordance with the terms provided for in the General Tax Law and in the Code of Tax Procedure and Process" should be understood as permitting recognition of the right to indemnificatory interest in the arbitral process.

It is therefore necessary to examine the request for reimbursement of the amount unduly paid, plus indemnificatory interest.

In the case at hand, it is manifest that, following the illegality of the assessment acts, there is a place for reimbursement of the tax paid, by virtue of the aforementioned arts. 24, no. 1, paragraph b), of the RJAT and 100 of the LGT, as this is essential to "restore the situation which would exist if the tax act which is the subject of the arbitral decision had not been performed".

With respect to indemnificatory interest, it is also clear that, following the declaration of illegality of the assessments made, there is a place for the payment of indemnificatory interest as the illegality of the assessments is attributable to the Tax Administration, which, on its own initiative, performed them illegally.

Consequently, the Claimant has a right to indemnificatory interest, pursuant to article 43, no. 1, of the LGT and article 61 of the CPPT, calculated on the sum it unduly paid, at the legal interest rate provided for in article 559 of the Civil Code and, currently, in Ordinance no. 291/2003, of 8 April (articles 43, no. 4, and 35, no. 10, of the LGT), from the date it states, 09-09-2014, until reimbursement of the sum paid.

5. Decision

In accordance with the above, the arbitrators agree as follows:

In these terms, the arbitrators agree:

a) To find the arbitral ruling petition to have merit:

b) To annul the following IMI assessments:

– Assessment of Municipal Tax on Immovable Property (IMI) no. 2010 …, dated 13-08-2014 and notified to the Claimant on 30-09-2014, in the amount of € 11,255.85;

– Assessment of Municipal Tax on Immovable Property no. 2011 …, dated 13-08-2014 and notified to the Claimant on 30-09-2014, in the amount of € 615,007.80;

– Assessment of Municipal Tax on Immovable Property no. 2012 …, dated 13-08-2014 and notified to the Claimant on 30-09-2014, in the amount of € 13,525.78;

c) To annul partially the assessment of Municipal Tax on Immovable Property no. 2013 …, notified to the Claimant on 1-10-2014, with respect to the amount of € 11,593.53, relating to the property located in the Municipality of ..., referred to in the Tax Inspection Report;

d) To annul the IMT assessment referred to in document no. …, in the amount of € 517,572.60;

e) To condemn the Tax and Customs Authority to reimburse the Claimant the sum of € 570,955.56, plus indemnificatory interest, at the legal interest rate provided for in article 559 of the Civil Code and, currently, in Ordinance no. 291/2003, of 8 April (articles 43, no. 4, and 35, no. 10, of the LGT), from the date it states, 09-09-2014, until reimbursement of the sum paid.

6. Value of the Proceedings

In accordance with the provision of art. 306, no. 2, of the CPC and 97-A, no. 1, paragraph a), of the CPPT and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at € 570,955.56.

7. Costs

Pursuant to art. 22, no. 4, of the RJAT, the amount of costs is fixed at € 8,568.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Respondent.

Lisbon, 12 July 2015

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(Carla Castelo Trindade)

(Tomás Cantista Tavares)
(dissented as per statement attached)

Dissenting Opinion

1. I dissented, for the reasons described below, disagreeing with the thesis upheld in the arbitral decision - according to which, the obtaining by the TA of a copy of a public deed during inspection automatically transforms it into an external inspection, with the need for prior express notification of such nature to the taxpayer, under penalty of a procedural defect which contaminates, by illegality, the consequent tax assessment.

2. The law distinguishes two types of inspection (external and internal) depending on the scope and coverage of the inspection activity (art. 13 of the RCPIT): in the internal, the inspection acts are carried out only in the TA services with the analysis of the regularity and validity of the documents; in the external, conversely, the TA obtains and analyzes information and documents, from the taxpayer and third parties (or in their possession), obtained by displacement or request.

3. The law establishes relevant differences for each type of inspection, in particular: external inspection requires express notification to the taxpayer, communicating to it its beginning (art. 49 of the RCPIT); and the limitation period for assessments is extended by the time that external inspection lasts (up to 6 months) - art. 46, no. 1, of the GRL.

It is understandable that this is so: the duty of cooperation (of the taxpayer and third parties), with delivery of information and documents and allowing displacement of the TA to their facilities, presupposes prior knowledge of the existence of inspection (assured with that notification) - art. 9 and 10 of the RCPIT; and in external inspections, more complex and time-consuming (also due to displacement and cooperation of third parties), the taxpayer's guarantee of limitation of assessment is partially compressed, in function of the characteristics and needs of the external inspection.

4- In the present case, the TA, in an internal inspection, attached a public deed to the grounds, and proceeded to assess taxes on the basis of mere legal reasons (legal interpretation of tax benefits); that is, there are no discrepancies between the declarations in the deed and the records of the taxpayer.

1. The law partially compresses contractual autonomy, in the form of freedom of form, by requiring, under penalty of nullity, that certain contracts, considered more relevant, take a solemn form (authentic document or public deed), with the intervention of a specialized third party (the notary), not only as a guarantee of the correctness of the declarations of the will of the parties, but also to guard in time the public proof of that act, for the protection of the parties and third parties (art. 363, 364 and 369 to 371 of the Civil Code).

Consequently, one of the functions of the notary is to make available the text of the deed to any person who requests it (TA included), as a document of its authorship (made and kept by it). This is the practical translation of the public nature of the document.

1. For me, the obtaining by the TA of the public deed does not transform, ipso facto, the inquiries underway into external inspection. It remains internal (with no need for specific prior notification to the taxpayer), based on literal, logical and teleological argumentation.

2. Literal: according to art. 13 of the RCPIT, inspection is internal when the inspection acts are carried out exclusively in the TA services through formal and consistency analysis of documents (section a)); and it is external, when there are inspection acts in the facilities of i) the taxpayer, ii) other obligated parties, iii) third parties that maintain economic relations with the taxpayer, iv) or in any other place to which the TA has access (section b)).

I argue that the obtaining by the TA of a public deed is not an inspection act in accordance with art. 13 of the RCPIT (collection of information and documents from the parties or third parties), but solely the knowledge of a public document, which the legal system intends to be freely accessible to all persons. Thus, the TA when obtaining this document is not accessing private information of the parties or third parties - that to which the inspection acts are intended; nor does the notary provide it in exercise of the duty of cooperation of tax origin (art. 9 of the RCPIT), but does so in obedience to the public nature of authentic documents, in a legal imposition that is not tax-based.

1. The teleological argument flows from the reason for being of external inspection and the legal nature of authentic documents.

When, in the context of tax inspection, the TA can obtain private documents and information from the taxpayer or third party (usually with displacement), the entities being subject to the duty of cooperation of tax origin - it is clear that such acts should be preceded by legitimizing notification. But if such information is requested from entities with public duty of cooperation, of non-tax origin, the need for such legitimizing notification is not apparent, especially since such duty of cooperation already exists independently of any imposition from a tax source.

On the other hand, and as I referred to above, the public nature of the authentic document means that its obtaining by the TA cannot be reduced to an inspection act strictly speaking, but only to the knowledge of a public document, freely accessible to all, for the protection of public interests (and not tax-based).

1. The logical argument - test of common sense to the interpretation of the law - stems from the unusual provoked by the interpretation conveyed by the arbitral sentence: if the TA, in an internal inspection, accesses and uses informational elements of a newspaper article, in paper or on-line, or even ancient records, obtained from the physical archive of such periodicals, does this mean that the inspection automatically becomes external, under penalty of annulment of the consequent assessment? I think not, because such acts and information are in the public domain, accessible independently of any duty of cooperation of tax origin. And if this is so with newspapers, it should be so even more so with proper legal force with public acts and documents, by legal imposition.

And what protection is afforded to the taxpayer's guarantees by allowing the extension of the limitation period for the right to assess? With the interpretation of the arbitral decision it may open the door to dilatory expedients of inspection (obtaining a deed, or an old newspaper article) merely to transform it into an external one, with a view to abusively extending the imminent limitation period of the right to assess.

1. The content of the public deed adds nothing to the object of the grounds. The material issue in this case does not stem from the analysis of the deed or its discrepancy with the elements and records of the taxpayer. But if this were to occur, then the TA, after obtaining the deed, would transform the inspection into an external one, in order to obtain new data and information from the taxpayer or third parties, with a view to confirming the actual factual situation, as provided for in art. 15 of the RCPIT.

2. And even if all this interpretation did not prevail - a hypothesis admitted as a precaution - it would still dispense with the need for prior notification (and therefore the assessment would not be illegal due to a procedural defect), in accordance with art. 50, no. 1, section a), of the RCPIT.

Lisbon, 12 July 2015

Tomás Cantista Tavares