Process: 94/2016-T

Date: November 14, 2016

Tax Type: Selo

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 94/2016-T) addresses whether stamp tax is due on a mortgage guarantee securing a €45.5 million bond issuance. The taxpayer paid €273,000 in stamp duty assessed by the notary on the mortgage and subsequently sought annulment, arguing that Article 7(1)(d) of the Stamp Tax Code (Código do Imposto do Selo) provides an exemption. This provision exempts guarantees inherent to operations carried out, registered, settled or compensated through regulated market managing entities or organized market entities registered with CMVM, when such operations involve securities or equivalent instruments. The taxpayer argued that since bonds are securities under Article 1(b) of the Securities Code, and the bond issuance was registered with the Securities Depository managed by D..., the mortgage guarantee should qualify for exemption. The Tax Authority contended that the creation and subscription of securities does not constitute a regulated or organized market operation, and therefore the exemption does not apply. The arbitral tribunal confirmed that bonds are indeed securities and that the mortgage was inherent to a securities operation. However, the tribunal's analysis focused on whether the operation met the additional requirement of being carried out through a regulated market managing entity or an entity authorized by it. The case highlights the technical complexity of applying stamp tax exemptions to financial market operations and the importance of distinguishing between primary market activities (issuance) and secondary market trading. The excerpt does not include the final decision, but the reasoning demonstrates the detailed factual and legal analysis required to determine exemption eligibility under Article 7(1)(d).

Full Decision

AWARD

The arbitrators Judge José Poças Falcão (president arbitrator), Doctor Paulo Lourenço and Doctor Ana Pedrosa Augusto, (co-arbitrators), designated by the Deontological Council of CAAD to form the Arbitral Tribunal, constituted on 6-5-2016, agree as follows:

I. REPORT

A…, S.A., a company with registered office at Rua…, no.…, …, in Lisbon, registered in the Commercial Registry Office under the unique registration number and legal entity…, (hereinafter, the "Claimant"), applied to the Administrative Arbitration Centre (CAAD) for the constitution of an arbitral tribunal in tax matters, pursuant to the provisions of Articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime of Tax Arbitration, hereinafter referred to as "LRTA"), in which the Tax and Customs Authority (AT) is the Respondent, seeking the declaration of illegality and consequent annulment i) of the act of implicit dismissal of the application for official review of the tax act of assessment of Stamp Duty ("SD") regarding the amount of €273,000.00 (two hundred and seventy-three thousand euros) and ii) of the underlying SD assessment, regarding that amount, relating to a guarantee provided in the context of a bond loan.

The application for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority.

Pursuant to the provisions of paragraph a) of no. 2 of Article 6 and paragraph b) of no. 1 of Article 11 of the LRTA, in the wording introduced by Article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council designated as arbitrators of the collective arbitral tribunal the undersigned, who communicated their acceptance of the office within the applicable deadline.

The parties were duly notified of this designation and did not express an intention to refuse it in accordance with the combined provisions of Article 11, no. 1, paragraphs a) and b) of the LRTA and Articles 6 and 7 of the Deontological Code.

The Respondent submitted a Reply.

Subsequently, the meeting provided for in Article 18 of the LRTA was dispensed with by mutual agreement of the parties.

II. ISSUES TO BE DECIDED

Considering the facts and law contained in the application for arbitral decision submitted by the Claimant and the reply of the Respondent, the disputed issue to be decided by the Arbitral Tribunal is whether Article 7, no. 1, paragraph d) of the SDD [Stamp Duty Code], which establishes a tax exemption, is applicable to the transaction carried out by the Claimant, that is, whether in this case there was a "guarantee inherent to operations carried out, registered, settled or compensated through a regulated market managing entity or through an entity indicated or authorized by it in the exercise of legal or regulatory authority, or still by an organized market managing entity registered with the CMVM, which have as their object, directly or indirectly, securities."

III. FACTUAL MATTERS

With relevance to the assessment of the Claimant's application, the following facts are accepted as proven, based on the positions of the parties in their respective pleadings, the copy of the administrative instruction file and other documents attached to the case:

  • The Claimant established a first-degree mortgage by public deed executed on 21 October 2014, to guarantee the timely and proper performance of the obligations for reimbursement of capital and payment of interest due by virtue of the issuance of bonds "B" in the amount of €45,500,000.00;

  • The notary who executed that deed assessed, among other amounts, the Stamp Duty of €273,000.00 relating to the mortgage established to guarantee the value of the bond issuance;

  • The Claimant proceeded to pay the assessed tax;

  • The aforementioned mortgage arose in the context of a financing operation for the Claimant's project, under which various financial contracts were entered into with a group of banks;

  • For those bonds "B", in the amount of €45,500,000.00, it was agreed that the bonds would be placed under a placement contract with subscription guarantee entered into between the Claimant and various underwriting banks;

  • The issuance of bonds was carried out partially in series;

  • Bank C… S.A. was mandated to represent the Claimant, among other things, before D…, S.A. ("D…"), the Securities Market Commission ("CMVM") and the National Coding Agency;

  • Bank C…, S.A. was also mandated as paying agent for interest and capital amortizations due to bond holders to be credited to accounts of... in the name of each bond holder;

  • The issuance of bonds was registered in the Securities Depository, managed by D…;

  • D… was, at the date of the facts, a joint-stock company, whose capital was entirely held by E…, S.A. ("E…");

  • D… has as its purpose the management of settlement systems and centralized securities systems.

Reasoning

The Tribunal's conviction regarding the aforementioned factual framework was based on documentary evidence and the absence of controversy between the parties on such matter, insofar as the essential disagreement lies in the legal-legal characterization of the facts, that is, the application or non-application to the operation in question of the provisions of Article 7, no. 1, paragraph d) of the SDD (Stamp Duty Code).

There are no other facts, with relevance to the subject matter of the case, proved and/or unproved.

IV. LEGAL MATTERS

The Claimant seeks, ultimately, the annulment of the assessment of Stamp Duty for the amount of €273,000.00 relating to the mortgage established to guarantee the value of the bond issuance, understanding that the provisions of Article 7, no. 1, paragraph d) of the SDD would be applicable to the transaction carried out.

The Respondent considers that the SD exemption contained in that Article 7, no. 1, paragraph d) of the SDD is not applicable in the case at hand.

The legal provision invoked establishes an SD exemption for "guarantees inherent to operations carried out, registered, settled or compensated through a regulated market managing entity or through an entity indicated or authorized by it in the exercise of legal or regulatory authority, or still by an organized market managing entity registered with the CMVM, which have as their object, directly or indirectly, securities, of real or theoretical nature, rights equivalent to them, futures contracts, interest rates, currencies or indices on securities, interest rates or currencies."

Thus, for guarantees (such as the mortgage in question) to be exempt from SD under this rule, it will be necessary that:

  • They are inherent to operations carried out, registered, settled or compensated through:

i) a regulated market managing entity; or

ii) through an entity indicated or authorized by it in the exercise of legal or regulatory authority, or still,

iii) by an organized market managing entity registered with the CMVM

  • They have as their object operations on securities or equivalent assets, of real or theoretical nature, rights equivalent to them, future contracts, interest rates, currencies or indices on securities, interest rates or currencies.

It is therefore necessary to ascertain whether the operation in question (bond issuance) can fit the aforementioned assumptions.

A. Object of the Operation

For ease of exposition, it is first necessary to characterize what constitutes the object of the operation. Pursuant to Article 1, paragraph b) of the Securities Code ("SC"), bonds are securities. Now, the operation at issue in the present case refers to the issuance of bonds. Consequently, there can be no doubt that the guarantee provided (mortgage) was inherent to the issuance of securities.

The Respondent indicates that the creation of securities and their subscription does not constitute an operation of a regulated or organized market, and that, as such (as can be inferred from the Reply), the requirement indicated in b. above would not be satisfied.

Now, for the purposes of this specific requirement, it is irrelevant whether operations are carried out in a regulated market, organized market or otherwise. If, as is well known, issuance is the operation through which securities are created and offered to investors who wish to acquire them, one can only conclude that that requirement is fulfilled. The operation had securities as its object.

B. Regulated Market Managing Entity

Given that this concerns an operation on securities, as demonstrated, was the bond issuance (the operation in relation to which the mortgage would be inherent) carried out, registered, settled or compensated through a regulated market managing entity? The answer to this question is negative, and both the Claimant and the Respondent agree on this. At the date of the operation in question (21 October 2014), only E… was a regulated market managing entity, pursuant to the provisions of Ordinance no. 556/2005, of 27 June (at that date, F…, S. A. had already had its registration cancelled with the CMVM[1]). Consequently, and given that the operation was registered in the Securities Depository, managed by D…, there was no intervention by the then sole regulated market managing entity, E….

Before the above conclusion, it is necessary to understand whether the bond issuance was registered in the Securities Depository managed by D…, with D… acting as an entity indicated or authorized in the exercise of legal or regulatory authority by E….

C. Entity Indicated or Authorized in the Exercise of Legal or Regulatory Authority

E… cannot, legally, engage in the activity of management of settlement systems or management of centralized securities systems. The very preamble of Decree-Law no. 357-C/2007, of 31 October, which regulates the legal regime of managed market managing entities, multilateral trading system managing entities, clearing house managing entities, settlement system managing entities and centralized securities system managing entities, is clear: "With regard to the object of regulated market managing entities, there is, on the one hand, the inclusion within its scope of the management of multilateral trading systems and, on the other hand, the exclusion of the possibility of accumulating the activity of settlement system management, the purpose inherent in this second amendment being the segregation of risk between both functions."

On the other hand, entities managing settlement systems and centralized securities systems, such as D…, cannot provide securities market management services (Article 45, no. 2 of Decree-Law no. 357-C/2007 of 31 October).

Based on the above, will D…, given E…'s legal incapacity to act as a centralized securities system managing entity, be an entity authorized or indicated for this purpose by E…, in the exercise of its legal or regulatory authority?

The answer to the stated question must necessarily be found by reference to the operation in relation to which the guarantee is inherent, that is, the bond issuance. For if the bond issuance in question had to necessarily, and by force of legal imperative, require E…'s intervention, then – and given E…'s legal incapacity to manage the centralized securities system - D…'s intervention could result from that authorization or indication. If, on the contrary, the bond issuance did not require such E…'s intervention, then it will not be possible to consider that D…'s intervention took place by authorization or indication of that regulated market managing entity.

In the assessment of this point, the shareholding structure of D… will not be relevant. In fact, as the Respondent correctly states, the fact that E… holds 100% of D…'s share capital is not synonymous with D… having been authorized or indicated by E… to provide management services for centralized securities systems and settlement systems for operations on them. This would always in any case depend on an exercise of legal or regulatory authority for that purpose.

Thus, it is necessary to understand the bond issuance carried out by the Claimant.

Pursuant to Articles 350, nos. 1 and no. 3 of the Commercial Companies Code ("CCC"), the shareholders of the Claimant deliberated a bond issuance. Such issuance is subject to commercial registration, pursuant to Article 351, no. 1 of the CCC, which, in accordance with the documentary evidence attached to the proceedings, occurred.

It also results from the documentation attached to the proceedings that the bonds were nominative and dematerialized (represented by account entry, cf. Article 46, no. 1 of the SC).

By virtue of Article 43 of the SC, the issuance of securities that have not been separated from other securities, as is the case here, is subject to registration with the issuer.

And such individualized registration consists of (cf. Article 61 of the SC):

  • Account opened with a financial intermediary, integrated in a centralized system; or

  • Account opened with a single financial intermediary indicated by the issuer; or

  • Account opened with the issuer or a financial intermediary representing it.

Additionally, in accordance with Article 62 of the SC, only dematerialized securities admitted to trading on a regulated market are mandatorily integrated in a centralized system.

It does not result from what was alleged or from the documents attached to the case that the bonds in question were admitted to trading on a regulated market.

Thus, in fact, the Claimant requested the individualized registration of the bonds in a centralized system managed by D…. However, registration in the Securities Depository was not mandatory, due to the fact that the bonds were not admitted to trading on a regulated market (in this case, one managed by E…). Only in such a case could it be assessed whether D…'s action had been indicated by E… itself, considering its legal incapacity for the registration of securities.

As this is not the situation, it can only be concluded that the bond issuance was registered in the Securities Depository managed by D…, but D… did not act as an entity indicated or authorized in the exercise of legal or regulatory authority by E…. D…'s action was contracted by the Claimant on a private and optional basis, as stated in the Regulation of… no. 3/2000, namely in its Articles 11, 13 and 19.

It remains only to be determined whether D… can be considered a managing entity of organized markets registered with the CMVM.

D. Managing Entity of Organized Markets Registered with the CMVM

As António Soares[2] indicates, the SC provides for the existence of organized securities markets that will function in accordance with rules that are to be freely established by the respective managing entity. This constitution is free, depending only on prior control of legality by the CMVM.

This consideration is sufficient and adequate to understand, from the outset, that D… is not a managing entity of any organized markets since such activity is imperatively prohibited to it by Article 45, no. 2 of Decree-Law no. 357-C/2007 of 31 October.

E. Conclusion

It follows from the analysis of the legal matters contained in points A. to D. above that:

  • The Claimant carried out an operation on securities;

  • The Claimant provided a guarantee inherent to such operation on securities;

  • The operation in question was not carried out through a regulated market managing entity;

  • The operation was not carried out through an entity indicated or authorized by a regulated market managing entity, in the exercise of legal or regulatory authority;

  • The operation was not carried out through a managing entity of organized markets registered with the CMVM.

Consequently, the operation at issue in the present case could not benefit from the SD exemption contained in Article 7, no. 1, paragraph d) of the SDD.

As stated by Artur Santos Rocha and Eduardo José Martins Brás[3], "as results from the text of paragraph d) itself, the exemption contemplates, only, guarantees inherent to operations, which are carried out on national stock exchanges and which have the protection of the regulated market managing entity and have as their object the securities referred to therein.

The understanding of the Tax Authority on the matter is transcribed [Circular 15/2000, of 5/7]: «It is noted, however, that the exemption set forth in paragraphs c) and d) of no. 1 of Article 6 (current Article 7) of the Code, constituting mere transposition of that contained, respectively, in Articles 92, paragraph c), and 94, no. 4, of the previous General Stamp Duty Table, as amended by Decree-Law no. 85/96, of 29 June, only applies to operations carried out on national stock exchanges»."

From the foregoing, it follows that the Claimant's application is unfounded.

V. DECISION

The parties hereby agree in this Arbitral Tribunal to:

a) Judge completely unfounded the applications for declaration of illegality and consequent annulment: i) of the act of implicit dismissal of the application for official review of the tax act of assessment of Stamp Duty ("SD") regarding the amount of €273,000.00 (two hundred and seventy-three thousand euros) and ii) of the underlying SD assessment, regarding that amount, relating to a guarantee provided in the context of a bond loan;

b) Condemn the Claimant, A…, S.A., to pay the costs of the proceedings.

Value of the Proceedings

In accordance with the provisions of Article 306, no. 2 of the CPC [Code of Civil Procedure] and Article 97-A, no. 1, paragraph a) of the CPPT [Tax Procedure Code] and Article 3, no. 2 of the Costs Regulation in Tax Arbitration Proceedings, the value of the proceedings is set at €273,000.00

Costs

Pursuant to Article 22, no. 4 of the LRTA, the amount of costs is fixed at €4,896.00, in accordance with Table I attached to the Costs Regulation in Tax Arbitration Proceedings, at the charge of the Claimant, as previously decided.

  • Let notification be made.

Lisbon, 14-11-2016

The Arbitral Tribunal

José Poças Falcão
(President)

Paulo Lourenço
(Co-Arbitrator)

Ana Pedrosa Augusto
(Co-Arbitrator)

[1] As per information available on the CMVM website, in…

[2] Regulated Markets and Non-Regulated Markets, CMVM Notebooks, no. 7, April 2017, p. 282.

[3] In Taxation of Assets, Property Tax and Stamp Duty (Annotated and Commented), Almedina, Coimbra, 2015, p. 578

Frequently Asked Questions

Automatically Created

Is stamp tax (Imposto do Selo) due on a mortgage guarantee securing a bond issue in Portugal?
Yes, stamp tax (Imposto do Selo) is generally due on mortgage guarantees securing bond issues in Portugal at 0.6% of the guaranteed amount, unless a specific exemption applies. In this case, €273,000 was assessed on a mortgage securing €45.5 million in bonds. However, taxpayers may claim exemption under Article 7(1)(d) of the Stamp Tax Code if the guarantee is inherent to operations on regulated or organized markets involving securities.
What does Article 7(1)(d) of the Portuguese Stamp Tax Code exempt from taxation?
Article 7(1)(d) of the Portuguese Stamp Tax Code exempts from taxation guarantees inherent to operations that are carried out, registered, settled or compensated through: (i) a regulated market managing entity, (ii) an entity indicated or authorized by it in the exercise of legal or regulatory authority, or (iii) an organized market managing entity registered with CMVM. The operations must involve securities (real or theoretical), equivalent rights, futures contracts, interest rates, currencies, or related indices.
Can guarantees linked to securities operations on regulated markets qualify for stamp tax exemption?
Guarantees linked to securities operations on regulated markets can qualify for stamp tax exemption under Article 7(1)(d) if two cumulative conditions are met: (1) the guarantee must be inherent to operations carried out, registered, settled or compensated through a regulated market managing entity or authorized entity, and (2) the operations must have as their object securities or equivalent financial instruments. The key issue is whether bond issuance and subscription constitute regulated market operations or merely primary market activities outside the exemption's scope.
How can taxpayers challenge a stamp tax assessment through arbitration at CAAD?
To challenge a stamp tax assessment through CAAD arbitration, taxpayers must first file an application for official review (revisão oficiosa) with the Tax Authority. If this is implicitly or expressly rejected, they can submit an application for arbitration to CAAD under Articles 2 and 10 of Decree-Law 10/2011. The application triggers the formation of an arbitral tribunal, followed by the Tax Authority's reply, and a decision typically within six months, offering a faster alternative to judicial courts.
What is the procedure for requesting an official review (revisão oficiosa) of a stamp tax liquidation in Portugal?
The procedure for requesting an official review (revisão oficiosa) of a stamp tax liquidation requires submitting a written application to the Tax Authority within four years from the date the tax became due, or two years from payment if later. The application must identify the contested tax act, state the legal and factual grounds, and request annulment or modification. The Tax Authority has four months to decide; silence constitutes implicit rejection, enabling the taxpayer to proceed to arbitration at CAAD or judicial appeal.