Process: 83/2018-T

Date: September 17, 2018

Tax Type: IMT

Source: Original CAAD Decision

Summary

This CAAD arbitral decision addresses whether a property transfer through dação em cumprimento (payment in kind) during a Special Revitalization Process (PER) qualifies as a 'resale' for IMT exemption purposes under Article 7(1) of the CIMT Code. The Claimant, a real estate company engaged in buying and selling properties, acquired properties for resale but subsequently transferred them to creditors through performance in payment contracts during financial restructuring. The Tax Authority assessed IMT of €121,673.14 plus compensatory interest, arguing the exemption lapsed because dação em cumprimento does not constitute resale. The Claimant contended that performance in payment should be equated with resale since both achieve the same economic result—transfer of property ownership—and argued that limiting the exemption only to purchase-and-sale contracts violates constitutional principles of contributive capacity and equality. The Tax Authority maintained that Article 7(1) exemptions apply strictly to companies that resell properties as merchandise in commercial activity, not those transferring assets to settle debts. The tribunal examined whether the statutory language 'resale' encompasses alternative transfer mechanisms like dação em cumprimento, the application of caducidade provisions under Article 11(5) CIMT when properties are not resold within prescribed deadlines, and whether strict interpretation of tax benefits precludes extending exemptions beyond expressly enumerated situations. The case raises fundamental questions about interpreting IMT exemptions for real estate companies facing financial distress and whether functional equivalence between legal mechanisms justifies extending tax benefits beyond literal statutory text.

Full Decision

ARBITRATION DECISION - CAAD

The arbitrators José Poças Falcão (president), Francisco Nicolau Domingos and A. Sérgio de Matos (members), appointed by the Ethics Council of the Administrative Arbitration Centre (CAAD) to form the present arbitral tribunal, agree as follows:

REPORT

A..., S.A., legal entity no. ..., with registered office at Rua..., no. ..., ... - ... - Porto, hereinafter referred to as the Claimant, filed on 05/03/2018 a request for the constitution of a tribunal and for an arbitral award concerning the express dismissal of the hierarchical appeal no. ...2015... which upheld the dismissal of the administrative complaint and, indirectly, concerning the legality of the official assessment of the Municipal Tax on Onerous Property Transfers (IMT) and of compensatory interest (121,673.14 € of IMT and 4,733.59 € of compensatory interest) on the ground that, in its view, it suffered from the defect of violation of law.

The Ethics Council appointed the undersigned signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the statutory period.

On 17/05/2018 the arbitral tribunal was duly constituted.

In compliance with the provision of article 17, nos. 1 and 2 of Decree-Law no. 10/2011, of 20 January (RJAT), the Respondent was notified on 24/05/2018 to, if it wished, present a reply, request the production of additional evidence and remit the administrative file (PA).

On 27/06/2018 the Respondent presented its reply, in which it defends the complete rejection of the request for an arbitral award, given the legality of the tax and compensatory interest assessment.

On 02/07/2018 the tribunal decided to reject the requested witness evidence with the reasoning described in the order dated that day, to dispense with the holding of the meeting to which article 18, no. 1 of the RJAT refers, on the basis of the non-existence of exceptions to be decided and the lack of necessity to invite the parties to correct the procedural documents, granted twenty days for the parties, if they wished, to present their final written submissions and set a deadline for issuing the arbitral award.

The parties presented their final written submissions on 14/09/2018 and 13/09/2018, respectively, maintaining their initial position.

POSITION OF THE PARTIES

The Claimant begins by alleging that the question to be resolved consists in determining whether an entity that, in a professional capacity, engages in the activity of buying and selling real property and, in that context, acquires a property for resale and which, faced with financial difficulties, resorts to a Special Revitalization Process (PER) in which the transfer of the right of ownership over properties is arranged, in the form of performance in payment, should be precluded from the possibility of benefiting from the exemption provided for in article 7 of the Code of the Municipal Tax on Onerous Property Transfers (CIMT).

In its position, although the said provision constitutes a tax benefit and, therefore, should be subject to strict interpretation, it should be concluded that the contract concluded complied with all the requirements demanded by the CIMT for the application of the exemption and, as such, the assessment is illegal, as it suffers from the defect of violation of law.

In its view, the problem arises in the question of whether performance in payment can be considered covered, for the purposes of the CIMT, in the concept of resale, as well as in the answer: if the use made of a property that is the subject of performance in payment differs from that made of a property that is the subject of resale?

In its opinion, performance in payment falls within the concept of resale, and the answer to the second question should also be negative.

Subsidiarily, it argues that any limitation (to purchase and sale) of article 7, no. 1 of the CIMT and article 11 of the CIMT suffer from unconstitutionality, due to violation of the principles of contributive capacity and equality. In all rigor, the application of the said rules, in such a way as to exclude performance in payment, violates the aforementioned constitutional principles, inasmuch as it constitutes an unjustified differential treatment between resale and performance in payment, when doctrine and case law defend that both situations present the same economic reality.

In a third line, it petitions for the condemnation of the Tax Authority and Customs Authority (AT) to pay indemnificatory interest given the existence of error attributable to the services, calculated from the date of the improper payment until actual and full fulfillment.

The Respondent defends itself in its reply as follows:

Lapse of the Exemption

The exemption provided for in article 7, no. 1 of the CIMT is intended to benefit companies whose commercial purpose is the purchase and sale of real property, who resell those properties without having to bear the IMT from the first purchase, that is to say, treating them as merchandise in the context of business activity.

However, in its view, the Claimant did not resell the properties in the context of its commercial activity, but rather gave them in payment of debts and obligations it had to Bank B..., S.A., through the celebration of a performance in payment contract. Thus, the properties cannot be considered merchandise that is traded in the commercial context, as occurs in purchase and sale.

Therefore, it does not agree with the Claimant's position when it argues that the purposes of resale and performance in payment coincide entirely.

In a second line, it argues that if the legislator did not provide for IMT exemptions in these special situations of PER, nor does the exemption rule provide for other contracts, referring only to purchase and sale, the Claimant's request for annulment has no legal basis.

In summary, the assessment of IMT and compensatory interest should be maintained in the legal order.

On the Violation of the Principle of Contributive Capacity and Equality

The interpretation carried out by the AT is not unconstitutional, as it merely permits the exemption to be granted when properties are acquired for resale and not upon any other interpretation; the legal text is perfectly clear and the contracts in question are not identical.

It is inconceivable that the AT has carried out an interpretation that violates the principle of equality; on the contrary, if it had not assessed the IMT, it would have violated the principle of fiscal equality, inasmuch as it would be benefiting the Claimant to the detriment of other taxpayers.

On the Right to Indemnificatory Interest

Given that there is no "error attributable to the services" in the issuance of the assessment in question, the right to indemnificatory interest cannot be recognized.

In this sequence, the following are the questions that the tribunal must address:

  • Whether the express dismissal of the hierarchical appeal suffers from error regarding the legal presuppositions;

  • Whether the AT must be condemned to reimburse the Claimant for the amount paid in IMT and compensatory interest;

  • Whether the AT must be condemned to the payment of indemnificatory interest.

CASE MANAGEMENT

The arbitral tribunal was duly constituted on the basis of articles 2, no. 1, subparagraph a) and 10, no. 1 of the RJAT, and is competent to address and decide the request for an arbitral award.

The parties, who are duly represented, enjoy legal personality and capacity and have standing (articles 4 and 10, no. 2, of the same legislation and 1 of Ministerial Order no. 112-A/2011, of 22 March).

The proceedings are free of nullities.

4. FACTUAL MATTERS

4.1. Facts Deemed Proven

4.1.1. The Claimant is a commercial company whose purpose is the "civil construction industry, purchase, sale, resale and leasing of real property assets."

4.1.2. The Claimant was subject to a PER that proceeded through its terms in the Commercial Court of Vila Nova de Gaia under no. .../12...TYVNG.

4.1.3. In the content of the said PER it is stated that the Claimant agreed to effect performance in payment of fractions AI, AJ, AZ and BG of the property registered in the urban property matrix of the parish of ... and ... under article ... (previous article ... of the parish of ...), for 2,109,267.92 € to Bank B..., S.A. (current C...).

4.1.4. The Claimant acquired from D..., S.A. on 07/08/2013 fractions AI, AJ, AZ and BG of the property registered in the urban property matrix of the parish of ... and ... under article ..., for 2,109,267.92 €, with it being recorded in the deed that the document certifying the IMT exemption was filed, under article 7, no. 1 of the CIMT.

4.1.5. In the PER it was stated that the aforementioned fractions would be the subject of performance in payment by D..., S.A. to the Claimant to extinguish a credit of the latter, with its source in a civil construction works contract.

4.1.6. On 07/08/2013 the Claimant celebrated a deed of performance in payment of the fractions previously acquired for the extinction of banking liabilities to Bank B..., S.A. (current D...) in the amount of 2,109,267.92 €.

4.1.7. The Tax Inspection Service of the Finance Directorate of Porto sent OI no. 2014... to the Finance Service of Porto -..., for having found that there was a lapse of the IMT exemption.

4.1.8. The Finance Service of Porto - ... prepared a proposal for correction of the assessment (121,673.14 € of IMT and 4,733.59 € of compensatory interest), due to lapse of the IMT exemption, provided for in article 7 of the CIMT.

4.1.9. On 10/10/2014 the Claimant was notified of the assessment of IMT and compensatory interest, in the total amount of 126,406.73 €.

4.1.10. The Claimant on 02/02/2015 filed an administrative complaint against the said assessment.

4.1.11. By order of the Head of the Finance Service of Porto – ... of 23/06/2015 (sent on 30/06/2015) the administrative complaint was expressly dismissed.

4.1.12. The Claimant filed a hierarchical appeal on 31/07/2015.

4.1.13. By letter dated 05/12/2017 the hierarchical appeal was expressly dismissed.

4.1.14. The Claimant made voluntary payment of the assessment of IMT and compensatory interest on 23/10/2015.

4.1.15. The request for an arbitral award was filed on 05/03/2018.

4.2. Facts Not Deemed Proven

There are no facts with relevance to the arbitral award that have not been deemed proven.

4.3. Reasoning of the Factual Matters Deemed Proven

The factual matters deemed proven have their source in the documents used for each of the facts alleged and whose authenticity was not called into question.

5. LEGAL MATTERS

5.1 Question of the Equivalence of Performance in Payment to Resale of the Fractions

The Claimant understands that performance in payment should be equated with resale; the Respondent maintains that performance does not fall within the concept of resale and that therefore the Claimant's request for annulment should fail.

The first question that the tribunal must address is the following: does the concept of resale, provided for in article 7 of the CIMT, include performance in payment?

To answer the question it is important not only to describe the content of the applicable rules, but also to proceed with their interpretation.

Thus, article 7 of the CIMT provides that: "1 - Acquisitions of properties for resale are exempt from IMT, in accordance with the following number, provided that it is verified that the declaration provided for in article 112 of the Code of Income Tax of Individuals (IRS) or in subparagraph a) of no. 1 of article 109 of the Code of Income Tax of Legal Entities (IRC), as applicable, was presented prior to acquisition, relating to the exercise of the activity of property buyer for resale.

2 - The exemption provided for in the preceding number does not prejudice the assessment and payment of the tax, in general terms, except if it is recognized that the acquirer normally and habitually exercises the activity of property buyer for resale.

3 - For the purposes of the latter part of the preceding number, it is considered that the taxpayer normally and habitually exercises the activity when it proves its exercise in the previous year by means of a certificate issued by the competent finance service, and it must always be stated in that certificate whether, in the previous year, a property was acquired for resale or resold a property previously acquired for that purpose.

4 - When the property has been resold without being again for resale, within a period of three years, and tax has been paid, it shall be annulled by the finance chief, at the request of the interested party, accompanied by a document proving the transaction."

It is also important to cite the content of article 11, no. 5 of the CIMT which provides as follows: "The acquisition referred to in article 7 shall cease to benefit from the exemption as soon as it is verified that the properties acquired for resale were given a different use or that they were not resold within a period of three years or were resold again for resale."

First and foremost, let us briefly examine the concept of performance in payment. The institute under study constitutes a modality of extinction of obligations through: "...the performance of a prestación different from that which is due, for the purpose of, by means of agreement of the creditor, immediately extinguishing the obligation."[1] But what is its legal nature? For civil law doctrine, the thesis that equates it to a purchase and sale has no validity. It is argued that there is not, in the species of fact that make up the performance in payment: "...the intention, on the part of the parties, to create or establish a new obligation, but merely to extinguish the obligation with a performance different from that which is due."[2] Furthermore, that thesis does not explain, in particular, "...the possibility of the rebirth of the original obligation, in the manner in which it is admitted by article 838, in fine."[3]

Performance in payment may have as its object the transfer of the right of ownership over a thing, as well as another distinct right, for example, usufruct and the right of credit over a third party.

However, beyond the literal content of the exemption, it is equally important to analyze the legislative purpose associated with its provision, since only in this way is it possible to determine whether performance in payment should, for the purposes of IMT, be equated with resale.

The ratio of the exemption is found in the subjection to Income Tax of Individuals (IRS) and to Income Tax of Legal Entities (IRC) of gains obtained from the resale of the asset, taxation which is of greater perfection, as it takes into account the respective revenues and costs, permitting taxation according to actual income and giving effect to the principle of contributive capacity.[4] Furthermore, properties acquired with the purpose of resale constitute merchandise and not capital, a circumstance that indicates their taxation as income. Or, in other words, article 7 of the CIMT establishes an exemption for the acquisition of properties for resale, when the acquisition of goods takes place within the scope of the activity of purchasing real property for that purpose, by individuals or legal entities, and, within the scope of such activity, they are intended for sale in the state in which they were acquired.

In summary, the IMT intends to apply to the final acquirer, leaving aside intermediate acquisitions. Furthermore, the resale referred to in article 7 of the CIMT requires the celebration of a purchase and sale contract.

The central question in these proceedings – to determine whether performance in payment fulfills the concept of resale – has long been the subject of analysis by state and arbitral case law.

Even within the scope of SISA, case law[5] maintained that: "Performance in payment of a property acquired with SISA exemption, effected within the exemption period by a taxpayer engaged in the activity of property buyer for resale, causes the exemption to lapse by virtue of the property being given a purpose different from resale, in accordance with no. 1 of article 16 of CIMSISSD." Case law[6] continues to adopt this position when it observes: "...nor does the allegation that performance in payment of properties cannot fail to deserve, for the purposes of applying the exemption provided for in articles 7 and 11 of the CIMT, the same tax treatment as purchase and sale (resale)"

It is submitted at the outset that we agree with the said case law position. On the one hand, while it is unquestionable that one of the effects of performance in payment consists in the transfer of the right of ownership over a property, the legislator refers to "resale" and not to "transfer." On the other, while it is true that performance in payment involves the transfer of the right of ownership, for tax purposes, we are not facing a true resale, since that to which article 7 of the CIMT refers requires that the "resale" have underlying the pursuit of profit; the new alienation of the asset, at a determined price as a result of the commercial activity of the alienator. However, performance in payment is a source of extinction of obligations, so that, for the purposes of article 7 of the CIMT, performance in payment is irrelevant.

In conclusion, if a performance in payment was granted, the necessary requirements were not fulfilled for the Claimant to benefit from the exemption, since the legal transaction was in particular celebrated without any intention to obtain profit, so the Claimant's request for annulment fails.

5.2. Question of the Unconstitutionality Due to Violation of the Principle of Equality and Contributive Capacity

The Claimant argues that the interpretation of article 7 and 11 of the CIMT carried out by the AT, which excludes performance in payment from the exemption, suffers from unconstitutionality, inasmuch as it constitutes an unjustified differential treatment between resale and performance in payment, when doctrine and case law maintain that both situations present the same economic reality.

Is the Claimant correct? The constitutional principle of equality comprises a dimension of prohibition of arbitrariness; this limit imposes equal treatment of equal factual situations and distinct treatment of diverse situations.[7]

Article 7 of the CIMT constitutes an exemption rule, contrary to the principle of generality and equality of taxation, and therefore incapable of application to situations not expressly provided for in the benefit, and as such should be subject to strict interpretation.[8]

If this is so, the interpretation carried out does not suffer from any unconstitutionality, since performance in payment does not fall within the concept of "resale," which is what the legislator has determined to be worthy of IMT exemption, provided that the requirements set forth in article 7, no. 1 of the CIMT are observed.

In summary, the interpretation carried out by the AT does not suffer from any unconstitutionality.

5.3. Question of the Reimbursement of the Amount of the IMT Assessment and Compensatory Interest and of the Condemnation to the Payment of Indemnificatory Interest

In light of the above, this question is moot.

6. DECISION

Accordingly, this Arbitral Tribunal agrees to judge the request for an arbitral award completely unfounded, with all legal consequences.

7. VALUE OF THE PROCEEDINGS

In accordance with the provision of article 306, no. 2, of the Code of Civil Procedure (CPC) and 97-A, no. 1, subparagraph a), of the Code of Tax Procedure and Process (CPPT) and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT), the value of the proceedings is fixed at 126,406.73 €.

8. COSTS

In accordance with the provisions of articles 22, no. 4 of the RJAT and 4, no. 4 of the RCPAT and in Table I attached thereto, the amount of costs is fixed at 3,060.00 €, at the expense of the Claimant, given its lack of success.

Notify parties.

Lisbon, 17 September 2018

José Poças Falcão

(President)

Francisco Nicolau Domingos

(Member)

A. Sérgio de Matos

(Member)

REVISED ARBITRATION DECISION - CAAD

The arbitrators José Poças Falcão (president), Francisco Nicolau Domingos and A. Sérgio de Matos (members), appointed by the Ethics Council of the Administrative Arbitration Centre (CAAD) to form the present arbitral tribunal, agree, following and as a consequence of the award of the TCAS handed down in case no. 97/18.7BCLSB, which annulled the previous arbitral award handed down on 18 September 2018:

1. REPORT

1.1

A... – S.A., legal entity no. ........, with registered office at Rua .........- Porto, hereinafter referred to as the Claimant, filed on 05/03/2018 a request for the constitution of a tribunal and for an arbitral award concerning the express dismissal of the hierarchical appeal no. .............. which upheld the dismissal of the administrative complaint and, indirectly, concerning the legality of the official assessment of the Municipal Tax on Onerous Property Transfers (IMT) and of compensatory interest (121,673.14 € of IMT and 4,733.59 € of compensatory interest) on the ground that, in its view, it suffered from the defect of violation of law.

1.2

The Ethics Council appointed the undersigned signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the statutory period.

1.3

On 17/05/2018 the arbitral tribunal was duly constituted.

1.4

In compliance with the provision of article 17, nos. 1 and 2 of Decree-Law no. 10/2011, of 20 January (RJAT), the Respondent was notified on 24/05/2018 to, if it wished, present a reply, request the production of additional evidence and remit the administrative file (PA).

1.5

On 27/06/2018 the Respondent presented its reply, in which it defends the complete rejection of the request for an arbitral award, given the legality of the tax and compensatory interest assessment.

1.6

On 02/07/2018 the tribunal decided to reject the requested witness evidence with the reasoning described in the order dated that day, to dispense with the holding of the meeting to which article 18, no. 1 of the RJAT refers, on the basis of the non-existence of exceptions to be decided and the lack of necessity to invite the parties to correct the procedural documents, granted twenty days for the parties, if they wished, to present their final written submissions and set a deadline for issuing the arbitral award.

1.7

The parties presented their final written submissions on 14/09/2018 and 13/09/2018, respectively, maintaining their initial position.

2. POSITION OF THE PARTIES

The Claimant begins by alleging that the question to be resolved consists in determining whether an entity that, in a professional capacity, engages in the activity of buying and selling real property and, in that context, acquires a property for resale and which, faced with financial difficulties, resorts to a Special Revitalization Process (PER) in which the transfer of the right of ownership over properties is arranged, in the form of performance in payment, should be precluded from the possibility of benefiting from the exemption provided for in article 7 of the Code of the Municipal Tax on Onerous Property Transfers (CIMT).

In its position, although the said provision constitutes a tax benefit and, therefore, should be subject to strict interpretation, it should be concluded that the contract concluded complied with all the requirements demanded by the CIMT for the application of the exemption and, as such, the assessment is illegal, as it suffers from the defect of violation of law.

In its view, the problem arises in the question of whether performance in payment can be considered covered, for the purposes of the CIMT, in the concept of resale, as well as in the answer: if the use made of a property that is the subject of performance in payment differs from that made of a property that is the subject of resale?

In its opinion, performance in payment falls within the concept of resale, and the answer to the second question should also be negative.

Furthermore, the Claimant also alleges that "(...) having regard to the particular circumstances surrounding the celebration of the transaction in question, which is susceptible of being subsumed within the concept of JUST IMPEDIMENT: it was not by its will, but because it was thus imposed upon it by the PER, that the Claimant transferred the property under a performance in payment, and not under a purchase and sale contract. (...) Now, in a decision of 6 March 2013, the STA expressly admitted the possibility that the lapse provided for in article 11 of the CIMT would not operate when we are faced with a just impediment to, within a period of three years, re-transfer the property under a purchase and sale contract (see award handed down in case 0104/13), having then considered that only could one conclude as to the existence of a just impediment in light of "a true impossibility of carrying out the sale, even with losses, it not being sufficient the difficulty or, possibly, the impossibility of carrying it out in the manner desired due to circumstances not attributable to the seller". (...) In the case in question, there is no doubt that this true impossibility, not attributable to the Claimant, occurred: even if the Claimant desired to transfer the property under a purchase and sale contract, that possibility was barred to it by the PER. Either the Claimant transferred it under a performance in payment, or it breached the PER, violated the conditions imposed by its creditors, and – certainly – would have found itself faced with a request for the decretal of its insolvency, which would have prevented it, ultimately, from transferring the property (...)"

Subsidiarily, it argues that any limitation (to purchase and sale) of article 7, no. 1 of the CIMT and article 11 of the CIMT suffer from unconstitutionality, due to violation of the principles of contributive capacity and equality. In all rigor, the application of the said rules, in such a way as to exclude performance in payment, violates the aforementioned constitutional principles, inasmuch as it constitutes an unjustified differential treatment between resale and performance in payment, when doctrine and case law defend that both situations present the same economic reality.

In a third line, it petitions for the condemnation of the Tax Authority and Customs Authority (AT) to pay indemnificatory interest given the existence of error attributable to the services, calculated from the date of the improper payment until actual and full fulfillment.

The Respondent defends itself in its reply as follows:

i) Lapse of the Exemption

The exemption provided for in article 7, no. 1 of the CIMT is intended to benefit companies whose commercial purpose is the purchase and sale of real property, who resell those properties without having to bear the IMT from the first purchase, that is to say, treating them as merchandise in the context of business activity.

However, in its view, the Claimant did not resell the properties in the context of its commercial activity, but rather gave them in payment of debts and obligations it had to Bank ........, S.A., through the celebration of a performance in payment contract. Thus, the properties cannot be considered merchandise that is traded in the commercial context, as occurs in purchase and sale.

Therefore, it does not agree with the Claimant's position when it argues that the purposes of resale and performance in payment coincide entirely.

In a second line, it argues that if the legislator did not provide for IMT exemptions in these special situations of PER, nor does the exemption rule provide for other contracts, referring only to purchase and sale, the Claimant's request for annulment has no legal basis.

In summary, the assessment of IMT and compensatory interest should be maintained in the legal order.

ii) On the Violation of the Principle of Contributive Capacity and Equality

The interpretation carried out by the AT is not unconstitutional, as it merely permits the exemption to be granted when properties are acquired for resale and not upon any other interpretation; the legal text is perfectly clear and the contracts in question are not identical.

It is inconceivable that the AT has carried out an interpretation that violates the principle of equality; on the contrary, if it had not assessed the IMT, it would have violated the principle of fiscal equality, inasmuch as it would be benefiting the Claimant to the detriment of other taxpayers.

iii) On the Right to Indemnificatory Interest

Given that there is no "error attributable to the services" in the issuance of the assessment in question, the right to indemnificatory interest cannot be recognized.

In this sequence, the following are the questions that the tribunal must address:

a) Whether the express dismissal of the hierarchical appeal suffers from error regarding the legal presuppositions;

b) Whether the non-lapse provided for in article 11 of the CIMT is verified due to the impossibility of carrying out sales within the 3-year period;

c) Whether the AT must be condemned to reimburse the Claimant for the amount paid in IMT and compensatory interest;

d) Whether the AT must be condemned to the payment of indemnificatory interest.

3. CASE MANAGEMENT

The arbitral tribunal was duly constituted on the basis of articles 2, no. 1, subparagraph a) and 10, no. 1 of the RJAT, and is competent to address and decide the request for an arbitral award.

The parties, who are duly represented, enjoy legal personality and capacity and have standing (articles 4 and 10, no. 2, of the same legislation and 1 of Ministerial Order no. 112-A/2011, of 22 March).

The proceedings are free of nullities.

4. FACTUAL MATTERS

4.1. Facts Deemed Proven

4.1.1. The Claimant is a commercial company whose purpose is the "civil construction industry, purchase, sale, resale and leasing of real property assets."

4.1.2. The Claimant was subject to a PER that proceeded through its terms in the Commercial Court of Vila Nova de Gaia under no. ..../12....TYVNG.

4.1.3. In the content of the said PER it is stated that the Claimant agreed to effect performance in payment of fractions AI, AJ, AZ and BG of the property registered in the urban property matrix of the parish of Lordelo do Ouro and Massarelos under article 9 (previous article 4467 of the parish of Lordelo do Ouro), for 2,109,267.92 € to Bank ........, S.A. (current ... .......).

4.1.4. The Claimant acquired from B… –, S.A. on 07/08/2013 fractions AI, AJ, AZ and BG of the property registered in the urban property matrix of the parish of Lordelo do Ouro and Massarelos under article …., for 2,109,267.92 €, with it being recorded in the deed that the document certifying the IMT exemption was filed, under article 7, no. 1 of the CIMT.

4.1.5. In the PER it was stated that the aforementioned fractions would be the subject of performance in payment by B… –, S.A. to the Claimant to extinguish a credit of the latter, with its source in a civil construction works contract.

4.1.6. On 07/08/2013 the Claimant celebrated a deed of performance in payment of the fractions previously acquired for the extinction of banking liabilities to Bank ........, S.A. (current ... .......) in the amount of 2,109,267.92 €.

4.1.7. The Tax Inspection Service of the Finance Directorate of Porto sent OI no. 2014..... to the Finance Service of Porto - .., for having found that there was a lapse of the IMT exemption.

4.1.8. The Finance Service of Porto - .. prepared a proposal for correction of the assessment (121,673.14 € of IMT and 4,733.59 € of compensatory interest), due to lapse of the IMT exemption, provided for in article 7 of the CIMT.

4.1.9. On 10/10/2014 the Claimant was notified of the assessment of IMT and compensatory interest, in the total amount of 126,406.73 €.

4.1.10. The Claimant on 02/02/2015 filed an administrative complaint against the said assessment.

4.1.11. By order of the Head of the Finance Service of Porto – … of 23/06/2015 (sent on 30/06/2015) the administrative complaint was expressly dismissed.

4.1.12. The Claimant filed a hierarchical appeal on 31/07/2015.

4.1.13. By letter dated 05/12/2017 the hierarchical appeal was expressly dismissed.

4.1.14. The Claimant made voluntary payment of the assessment of IMT and compensatory interest on 23/10/2015.

4.1.15. The request for an arbitral award was filed on 05/03/2018.

4.2. Facts Not Deemed Proven

  • That the Claimant was unable to carry out the resale of the fractions mentioned above in 4.1.3 for any reason or circumstance imposed upon it, in particular by the PER referred to in point 4.1.2 of the proven facts.

4.3. Reasoning of the Factual Matters

The factual matters deemed proven and not proven have their source in the documents incorporated in the case, including the copy of the administrative file, documentation which was not reciprocally challenged.

It should also be noted, without prejudice to further development below, in the legal decision, that the Claimant did not prove and did not even truly allege concrete facts that could support the conclusion of just impediment for the resale of the fractions within the 3-year period, imposed by article 11, no. 5, of the CIMT, in particular who, how and under what circumstances the alleged impediment to resale occurred or was imposed upon it.

5. LEGAL MATTERS

5.1 Question of the Equivalence of Performance in Payment to Resale of the Fractions

The Claimant understands that performance in payment should be equated with resale; the Respondent maintains that performance does not fall within the concept of resale and that therefore the Claimant's request for annulment should fail.

The first question that the tribunal must address is the following: does the concept of resale, provided for in article 7 of the CIMT, include or is equivalent to performance in payment?

To answer the question it is important not only to describe the content of the applicable rules, but also to proceed with their interpretation.

Thus, article 7 of the CIMT provides that: "1 - Acquisitions of properties for resale are exempt from IMT, in accordance with the following number, provided that it is verified that the declaration provided for in article 112 of the Code of Income Tax of Individuals (IRS) or in subparagraph a) of no. 1 of article 109 of the Code of Income Tax of Legal Entities (IRC), as applicable, was presented prior to acquisition, relating to the exercise of the activity of property buyer for resale.

2 - The exemption provided for in the preceding number does not prejudice the assessment and payment of the tax, in general terms, except if it is recognized that the acquirer normally and habitually exercises the activity of property buyer for resale.

3 - For the purposes of the latter part of the preceding number, it is considered that the taxpayer normally and habitually exercises the activity when it proves its exercise in the previous year by means of a certificate issued by the competent finance service, and it must always be stated in that certificate whether, in the previous year, a property was acquired for resale or resold a property previously acquired for that purpose.

4 - When the property has been resold without being again for resale, within a period of three years, and tax has been paid, it shall be annulled by the finance chief, at the request of the interested party, accompanied by a document proving the transaction."

It is also important to cite the content of article 11, no. 5 of the CIMT which provides as follows: "The acquisition referred to in article 7 shall cease to benefit from the exemption as soon as it is verified that the properties acquired for resale were given a different use or that they were not resold within a period of three years or were resold again for resale."

First and foremost, let us briefly examine the concept of performance in payment. The institute under study constitutes a modality of extinction of obligations through: "...the performance of a prestación different from that which is due, for the purpose of, by means of agreement of the creditor, immediately extinguishing the obligation." But what is its legal nature? For civil law doctrine, the thesis that equates it to a purchase and sale has no validity. It is argued that there is not, in the species of fact that make up the performance in payment: "...the intention, on the part of the parties, to create or establish a new obligation, but merely to extinguish the obligation with a performance different from that which is due." Furthermore, that thesis does not explain, in particular, "...the possibility of the rebirth of the original obligation, in the manner in which it is admitted by article 838, in fine."

Performance in payment may have as its object the transfer of the right of ownership over a thing, as well as another distinct right, for example, usufruct and the right of credit over a third party.

However, beyond the literal content of the exemption, it is equally important to analyze the legislative purpose associated with its provision, since only in this way is it possible to determine whether performance in payment should, for the purposes of IMT, be equated with resale.

The ratio of the exemption is found in the subjection to Income Tax of Individuals (IRS) and to Income Tax of Legal Entities (IRC) of gains obtained from the resale of the asset, taxation which is of greater perfection, as it takes into account the respective revenues and costs, permitting taxation according to actual income and giving effect to the principle of contributive capacity. Furthermore, properties acquired with the purpose of resale constitute merchandise and not capital, a circumstance that indicates their taxation as income. Or, in other words, article 7 of the CIMT establishes an exemption for the acquisition of properties for resale, when the acquisition of goods takes place within the scope of the activity of purchasing real property for that purpose, by individuals or legal entities, and, within the scope of such activity, they are intended for sale in the state in which they were acquired.

In summary, the IMT intends to apply to the final acquirer, leaving aside intermediate acquisitions. Furthermore, the resale referred to in article 7 of the CIMT requires the celebration of a purchase and sale contract.

The central question in these proceedings – to determine whether performance in payment fulfills the concept of resale – has long been the subject of analysis by state and arbitral case law.

Even within the scope of SISA, case law maintained that: "Performance in payment of a property acquired with SISA exemption, effected within the exemption period by a taxpayer engaged in the activity of property buyer for resale, causes the exemption to lapse by virtue of the property being given a purpose different from resale, in accordance with no. 1 of article 16 of CIMSISSD." Case law continues to adopt this position when it observes: "...nor does the allegation that performance in payment of properties cannot fail to deserve, for the purposes of applying the exemption provided for in articles 7 and 11 of the CIMT, the same tax treatment as purchase and sale (resale)"

It is submitted at the outset that we agree with the said case law position. On the one hand, while it is unquestionable that one of the effects of performance in payment consists in the transfer of the right of ownership over a property, the legislator refers to "resale" and not to "transfer." On the other, while it is true that performance in payment involves the transfer of the right of ownership, for tax purposes, we are not facing a true resale, since that to which article 7 of the CIMT refers requires that the "resale" have underlying the pursuit of profit; the new alienation of the asset, at a determined price as a result of the commercial activity of the alienator. However, performance in payment is a source of extinction of obligations, so that, for the purposes of article 7 of the CIMT, performance in payment is irrelevant.

In conclusion, if a performance in payment was granted, the necessary requirements were not fulfilled for the Claimant to benefit from the exemption, since the legal transaction was in particular celebrated without any intention to obtain profit, so the Claimant's request for annulment fails.

5.2. The Lapse of the Exemption Provided for in Article 7 of the CIMT. Just Impediment.

This question reduces to determining whether, given the factual framework described above, one should accept or consider the existence of a situation that may configure a just impediment capable of the suspension or continuous disregard of the lapse period of the exemption, in accordance with the provision of articles 7 and 11, no. 5 of the CIMT.

Well, it is established that the AT proceeded, by means of the act under challenge, to the correction of the assessment (121,673.14 € of IMT and 4,733.59 € of compensatory interest), due to lapse of the IMT exemption, provided for in the cited article 11, no. 5 of the CIMT and in accordance with the interpretations and decisions which were invoked (Award of the STA of 6-3-2013, in case no. 0104/13 and Awards of the TCAS in case numbers 07063/13 and 33/19.3BCLSB) - the claimant alleges or leaves implied in the request for arbitral award that it was the occurrence of a circumstance, which cannot be attributed to it, that the sale did not occur within the aforementioned 3-year period. More specifically: that such sale did not occur because "(...) even if it desired to transfer the property under a purchase and sale contract, that possibility was barred to it by the PER (...)", in such a manner that "(...) either it transferred the property under a performance in payment, or it breached the PER, violated the conditions imposed by its creditors, and - certainly - would have found itself faced with a request for the decretal of its insolvency, which prevented it, ultimately, from transferring the property (...)" [cfr. 191 to 193 of the request for arbitral award].

Now it is important from the outset to consider that, of interest for addressing such question, there is, in the case sub judice, the following factual framework (cfr. above, 4.1.2 to 4.1.6 and 4.2):

(i) From the PER it is stated that the Claimant agreed to effect performance in payment of fractions AI, AJ, AZ and BG of the property registered in the urban property matrix of the parish of Lordelo do Ouro and Massarelos under article…. (previous article …. of the parish of Lordelo do Ouro), for 2,109,267.92 € to Bank ……, S.A. (current ……..); (ii) The Claimant acquired from B…–, S.A. on 07/08/2013 fractions AI, AJ, AZ and BG of the property registered in the urban property matrix of the parish of Lordelo do Ouro and Massarelos under article……, for 2,109,267.92 €, with it being recorded in the deed that the document certifying the IMT exemption was filed, under article 7, no. 1 of the CIMT; (iii) In the PER it was stated that the aforementioned fractions would be the subject of performance in payment by B…. –, S.A. to the Claimant to extinguish a credit of the latter, with its source in a civil construction works contract. (iv) On 07/08/2013 the Claimant celebrated a deed of performance in payment of the fractions previously acquired for the extinction of banking liabilities to Bank ……., S.A. (current ……...) in the amount of 2,109,267.92 €.

Furthermore, it was not proven "(...) that the Claimant had become unable to carry out the resale of the fractions mentioned above in 4.1.3 for any reason or circumstance imposed upon it, in particular by the PER referred to in point 4.1.2 of the proven facts (...)" - cfr. above, 4.2, facts not proven.

This factual framework, without allegation and proof of any other facts capable of being able to integrate the concept of just impediment for the strict compliance, by the Claimant, of the 3-year period for resale of the fractions in question, leads to the inevitable conclusion of non-compliance with that period and, as a consequence and necessarily, to the lapse of the exemption granted to the Claimant in its capacity as acquirer, for resale, of the aforementioned fractions that were the subject of performance in payment.

Or in other words: there is no proof that the transmission of the fractions as performance in payment and not via a purchase and sale contract (cfr. article 189 of the PPA) was "imposed" upon the Claimant; hence the natural and inescapable consequence that the Claimant considered (erroneously, although as was seen), the existence of equivalence between the figures of "performance in payment" and "resale", in particular for the purposes of articles 7, no. 1 and 11, no. 5, of the CIMT and, therefore, it accepted the terms of the PER.

That is to say, in brief or simple conclusion, no real or valid impossibility of the resale of the properties is discerned, even though with losses, that could, in particular, justify the non-compliance with the 3-year period provided for in article 11, no. 5, of the CIMT for reasons not attributable to the claimant.

5.3. Question of the Unconstitutionality Due to Violation of the Principle of Equality and Contributive Capacity

The Claimant argues that the interpretation of article 7 and 11 of the CIMT carried out by the AT, which excludes performance in payment from the exemption, suffers from unconstitutionality, inasmuch as it constitutes an unjustified differential treatment between resale and performance in payment, when doctrine and case law maintain that both situations present the same economic reality.

Is the Claimant correct? The constitutional principle of equality comprises a dimension of prohibition of arbitrariness; this limit imposes equal treatment of equal factual situations and distinct treatment of diverse situations.

Article 7 of the CIMT constitutes an exemption rule, contrary to the principle of generality and equality of taxation, and therefore incapable of application to situations not expressly provided for in the benefit, and as such should be subject to strict interpretation.

If this is so, the interpretation carried out does not suffer from any unconstitutionality, since performance in payment does not fall within the concept of "resale," which is what the legislator has determined to be worthy of IMT exemption, provided that the requirements set forth in article 7, no. 1 of the CIMT are observed.

In summary, the interpretation carried out by the AT does not suffer from any unconstitutionality.

5.4. Question of the Reimbursement of the Amount of the IMT Assessment and Compensatory Interest and of the Condemnation to the Payment of Indemnificatory Interest

In light of the above, and because the request will necessarily fail entirely, the consideration of this question is obviously moot.

6. DECISION

Accordingly, this Arbitral Tribunal agrees to judge the request for an arbitral award completely unfounded, with all legal consequences.

7. VALUE OF THE PROCEEDINGS

In accordance with the provision of article 306, no. 2, of the Code of Civil Procedure (CPC) and 97-A, no. 1, subparagraph a), of the Code of Tax Procedure and Process (CPPT) and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT), the value of the proceedings is fixed at 126,406.73 €.

8. COSTS

In accordance with the provisions of articles 22, no. 4 of the RJAT and 4, no. 4 of the RCPAT and in Table I attached thereto, the amount of costs is fixed at 3,060.00 €, entirely at the expense of the Claimant, given its lack of success.

Notify parties.

Lisbon, 16 July 2021

The Collective Arbitral Tribunal,

José Poças Falcão (President)

Francisco Nicolau Domingos (Member)

A. Sérgio de Matos (Member)

Frequently Asked Questions

Automatically Created

Does a dação em cumprimento (payment in kind) under a PER revitalization process qualify as a resale for IMT exemption purposes under Article 7(1) of the CIMT Code?
No, according to the Tax Authority's position upheld in this proceeding, dação em cumprimento (payment in kind) does not qualify as resale for IMT exemption purposes under Article 7(1) CIMT. The exemption specifically applies to properties acquired for resale in the ordinary course of business activity, treating them as merchandise. When a company transfers property through performance in payment to settle debts during a PER restructuring, this constitutes debt satisfaction rather than commercial resale, causing the exemption to lapse under Article 11(5) CIMT.
When does the IMT resale exemption expire if the property is not resold within the legal deadline?
The IMT resale exemption expires under Article 11(5) of the CIMT Code when properties acquired with the exemption are not actually resold but instead transferred through alternative mechanisms such as dação em cumprimento. The caducidade (expiry) occurs because the property's ultimate disposition differs from the resale purpose that justified the original exemption. Once caducidade is established, the Tax Authority assesses IMT retroactively on the original acquisition plus compensatory interest from the date the tax should have been paid.
Can a company dedicated to buying and selling properties maintain its IMT exemption when transferring property through dação em cumprimento to creditors?
The CAAD arbitral tribunal assesses IMT legality in PER cases by examining whether the taxpayer's property transfers meet the strict requirements of Article 7(1) CIMT exemptions. The tribunal applies rigorous interpretation principles to tax benefits, analyzing whether alternative transfer mechanisms like dação em cumprimento fall within statutory definitions of 'resale.' The assessment includes reviewing hierarchical appeal decisions, examining the economic substance versus legal form of transactions, evaluating constitutional arguments regarding equality and contributive capacity principles, and determining whether compensatory interest assessments result from taxpayer conduct or administrative error attributable to tax services.