IRC Exemption for Religious Congregation as IPSS – CAAD Case 98/2015-T

TAX ARBITRATION CASE LAW

Case No. 98/2015-T

Date of Decision: 2019-10-15
Corporate Income Tax (IRC)
Value of Claim: €231,333.96

Subject Matter: IRC – Exemption – Religious Congregation – Equation to IPSS – Article 10(1) of the Corporate Income Tax Code (CIRC) – Alleged unconstitutionality of classification under Article 10(2)(b) of the CIRC – Reform of arbitration decision (attached to decision).
Replaces the arbitration decision of 3 November 2015

ARBITRATION DECISION

In compliance with the judgment of the Central Administrative Court – South (TCAS) delivered on 11-7-2019, which declared null the arbitration decision of 3-11-2015, the Arbitrators Judge José Poças Falcão (Arbitrator President), Professor Doctor Luís Menezes Leitão and Doctor Diogo Feio, appointed by the Deontological Council of the Administrative Arbitration Centre to constitute an Arbitration Tribunal, hereby agree on the following:

ARBITRATION DECISION

I – REPORT

A…, with headquarters at Rua…, No.…, …, …–…, …–…, …, legal entity No.…, pursuant to the provisions of Article 99 of the Code of Procedure and Procedural Tax Law (CPPT) and Articles 2, No. 1, subparagraph a) and 10, No. 1, subparagraphs a) and No. 2, of Decree-Law No. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters – RJAT), submitted a request for arbitration pronouncement regarding the self-assessment of Corporate Income Tax (IRC) for the year 2009, filed on 22 February 2013 and resulting in a tax amount of 208,744.09 euros, which the Claimant paid.

The Claimant alleges, in support of the request, essentially as follows:

• The Claimant was notified by the Tax and Customs Authority to proceed with filing an income statement, namely concerning the year 2009 and subsequent IRC assessment, with the warning that failure to do so would constitute a situation susceptible to constituting an administrative violation. (Doc. 1);

• Faced with this notification and although disagreeing with its content, the Claimant filed on 22 February 2013 the income statement for the year 2009, proceeded to self-assess the IRC for that year and proceeded with payment of the corresponding tax in the amount of 208,744.09 euros and 22,589.87 euros as compensatory interest (Doc 3);

• Considering from the outset that it was exempt from IRC and should therefore owe no tax amount, the Claimant filed a complaint on 24.06.2013 against the IRC self-assessment act for 2009. (Doc. 4)

• The complaint was dismissed by official order of 30 December 2013 issued by the substitute of the Director of Finance of Lisbon. (Doc. 5)

• Dissatisfied with such decision, the Claimant filed on 03.02.2014 the appropriate hierarchical appeal. (Doc. 6)

• The hierarchical appeal was likewise dismissed by official order of 30 October 2014, issued by the Director of Services of the IRC Service Division (Doc. 7).

• To justify such dismissals, the Respondent essentially argued that the Claimant is not exempt from IRC, as it is not registered as a Private Institution of Social Solidarity (IPSS) or legally equivalent entity with the General Directorate of Social Security.

• Disagreeing with this position, the Claimant seeks hereby to revoke the decision of 30 October 2014, issued by the Director of Services of the IRC Service Division, which dismissed the hierarchical appeal, on the grounds that it is vitiated by violation of law, and consequently to annul the IRC self-assessment act for 2009.

• The Claimant is a Religious Congregation, canonically erected, which develops, beyond religious activity, an activity of health promotion and protection in an establishment belonging to it called "B…".

• The Claimant is organized by National Provinces, with the Portuguese Province being the international headquarters of the Congregation, the first registered in Portugal in 1876 and has activities worldwide.

• The first Constitutions of the Claimant date from 18 October 1901, from which the primary purpose results as «treatment of the sick both in hospitals and in their homes», a characteristic that persists with the approval of its Statutes on 21/09/1937 and subsequently with the celebration of the 1940 Concordat and its respective notification on 6 November 1940 to the Civil Government of Porto, in which the purpose is stated as «to dedicate itself to health assistance to the sick and other services of charity and social assistance». (Doc. 8)

• The Claimant was thus recognized in Portugal, beyond its religious purposes, as an institution of charity and social assistance.

• In the "B…" establishment, specially prepared and licensed for this purpose, the Claimant thus provides preventive, curative and rehabilitation medical care, for which it naturally receives due payment, although never for profit purposes.

• The revenues declared in the income statement for 2009 filed on 22 February 2013 result essentially from the exercise of this activity.

• From which resulted the IRC self-assessment for 2009 and the subsequent payment to the Respondent of the total amount of 231,333.96 euros (IRC and compensatory interest).

• It should be noted that, on the understanding that it was covered by Article 10 of the Corporate Income Tax Code (CIRC), regarding the health area activity developed in "B…", and thus exempt from IRC, the Claimant had previously requested the issuance of a certificate evidencing its IRC exemption. (Doc. 9)

• A request that aimed only to better document the understanding that the Respondent had already conveyed on 8 November 2007. (Doc. 10)

• Nevertheless, the Respondent, through the Deputy General Director of Taxes, dismissed the said request on 21 February 2011, which is why the Claimant, through its representative and undersigning of the present application, filed the appropriate hierarchical appeal against that decision (Doc. 11 and 12).

• Despite the time elapsed, the Claimant's representative and undersigning of the present application has not yet been notified of any decision on the aforementioned hierarchical appeal, as required by Article 40 of the CPPT (Doc. 13).

• Certainly, under the terms of that legal provision, the production of effects of the act depends on compliance with that formality.

• However, and always without the Claimant's representative having been notified of the decision regarding the hierarchical appeal filed against the decision that dismissed the request for issuance of an IRC exemption certificate, the truth is that, as referred to above, the Claimant was notified by the Finance Directorate to file the income statement for the year 2009 (and also for 2010 and 2011), from which resulted the self-assessment now being challenged.

• As stated above, No. 1 of Article 40 of the CPPT provides that notifications to interested parties who have appointed a representative shall be made to that person and at their office address.

• Despite more than 3 years having elapsed since the Claimant, through its representative and undersigning of the present application, filed a hierarchical appeal against the decision that dismissed the claim concerning the dismissal of the request for an IRC exemption certificate, the truth is that it has not been notified of any decision to date.

• The failure to notify any decision in this regard thus maintains the question of the Claimant's IRC exemption pending in the administrative forum, particularly since any decision that might have been made and not notified would have produced no effects whatsoever, as our case law has abundantly decided (see judgments Nos. 0927/10 of 04.05.2011 and 0409/12 of 16.05.2012 of the STA).

• This means that the Respondent's act requiring IRC assessment for 2009 and the subsequent self-assessment act labor, from the outset, under an error regarding factual assumptions: that the administration would have already decided, validly and effectively, the request for issuance of the IRC exemption certificate that the Claimant submitted in July 2007.

• Something that, as can be seen, does not correspond at all to reality!

• In fact, the Claimant's representative in the hierarchical appeal proceedings filed against the decision that dismissed the complaint concerning the decision not to issue the IRC exemption certificate continues without being notified of any final decision thereon, such that any decision that may have been made produces no effect, least of all the effect of justifying the Respondent's understanding that led the Claimant to the IRC self-assessment act for 2009.

• Thus, in basing its requirement for IRC assessment for 2009 on the presumption that the Claimant would not be exempt from IRC, based on an alleged act that, in violation of the provisions of No. 1 of Article 40 of the CPPT, was not notified to the Claimant's representative, the Respondent does nothing more than invalidate the act requiring IRC assessment for 2009 and which led to the Claimant's self-assessment, precisely because such act is based on a fact and a judgment that has not yet produced any effect and that therefore cannot justify the act in question.

• Now, as is recognized both in legal doctrine and case law, error regarding factual assumptions constitutes a violation of law, capable of bringing about, without more, the annulment of the vitiated act – the IRC self-assessment for 2009.

VIOLATION OF LAW

• But even if this were not understood as such, which is admitted only as a mere academic hypothesis, it would still be said that, in truth, the Claimant is manifestly exempt from IRC, contrary to what the Respondent maintains in its decision dismissing the hierarchical appeal.

• In fact, pursuant to subparagraph b) of No. 1 of Article 10 of the CIRC, exempt from IRC are Private Institutions of Social Solidarity (IPSS) and related entities, as well as legal persons legally equivalent thereto.

• The Concordat of 18 May 2004, concluded between the Portuguese Republic and the Holy See ("2004 Concordat"), which came into force on 1 January 2005, introduced profound changes to the existing tax regime, constituting a clear legislative choice to subject to taxation income that was previously exempt and to abandon the concept of total and comprehensive exemption.

• In summary, only monetary and in-kind donations intended for the realization of religious purposes qualify as non-taxable income for purposes of what is established in the 2004 Concordat.

• All other income earned by religious entities may benefit from IRC exemption, by virtue of the provisions of Article 10 of this Tax Code, provided that such entities qualify additionally as:

  • a) Legal persons of administrative public utility;

  • b) Private Institutions of Social Solidarity (IPSS) and related entities, as well as legal persons legally equivalent thereto;

  • c) Legal persons of mere public utility pursuing, exclusively or predominantly, scientific or cultural purposes, charity, assistance, welfare, social solidarity or environmental protection.

• Having the Claimant been canonically erected, constituted and notified to the competent authority on a date prior to the entry into force of the Concordat, its personality is recognized by the State under the terms of Article 10, No. 2 of the Concordat.

• Moreover, by virtue of pursuing, beyond religious purposes, activities of assistance and solidarity, namely in the area of health promotion and protection, without profit purposes, the Claimant is equated to an IPSS, namely for tax purposes, and in the exercise of such activities, as provided for in Articles 12 and 26, No. 5 of the Concordat.

• The Claimant, as a religious organization or institution that proposes and exercises activities such as health protection and promotion, as well as in the area of education and vocational training of citizens, is equally equated to an IPSS under the terms of Articles 1, No. 1, subparagraphs e) and f) and 40 of Decree-Law No. 119/83, of 25 February, which approved the Status of IPSS.

• In fact, from the outset it has developed activities of a social character, namely in the area of health promotion and protection, in particular in "B…", from its genesis, that is, at a time long before Decree-Law 119/83, providing preventive, curative and rehabilitation medical care, such that it is necessary to conclude that it came to be considered an IPSS, regardless of the form it has adopted, by virtue of the provisions of the cited Articles 1, subparagraph e) and 94, No. 5 of the aforementioned statute – Legal Status of IPSS.

• The Claimant, not being formally an IPSS, is therefore, for all purposes, namely tax purposes, equated to an IPSS under the terms of Articles 10, No. 2, 12 and 26, No. 5 of the Concordat and Articles 1, No. 1, subparagraphs e) and f) of Article 1 and 40 of the Status of IPSS.

• Indeed, this is the classification given in the declaration filed with the request for a certificate in which the Health Ministry itself recognizes the activity of B… as legally equated to an IPSS, an establishment part of the Congregation.

• This same conclusion is unequivocally corroborated by the Supreme Administrative Court (STA) in its Judgments of 7 January 2009 (Case No. 0812/08) and 18 January 2012 (Case No. 725/11).

• In fact, it is important to note that the reasoning of the present decision is contradictory with the very terms of applicable legislation.

• As already mentioned, Article 40 of Decree-Law No. 119/83 does not merely subject the entities provided for therein to the Status of IPSS.

• In fact, legal persons of a religious character pursuing the purposes of IPSS referred to in Article 1 of Decree-Law No. 119/83, of 25 February are equitable to IPSS, purposes which, under the law, justify that such entities be exempt from IRC in the activities referred to.

• Furthermore, the fact that the Claimant is, by force of Article 40 of the same statute, subject to the status provided therein does not require that it proceed with the registration provided for IPSS, a fact moreover disproportionate as it is the activity that is exempt, and that same activity, because clearly lacking autonomy and legal personality, cannot obtain the registration that the Respondent seeks.

• On the other hand, if that were the case, there would be no legal persons equated to IPSS, or religious entities that beyond religious purposes pursue social activities, but rather only IPSS.

• That is, legal persons – religious organizations and institutions – that, not being IPSS, pursue activities typical of IPSS, as is the case of the Claimant, thus have two options: either they wish to have the nature of IPSS and may proceed with the registration resulting from Article 7 of that legal statute, or they do not wish to have that nature and it suffices for them to effect the registration that their nature requires.

• Now, as the Claimant is a religious entity, it is only obliged to make the notification referred to in Article 45, a notification that was made long ago, classified by Articles 10, 12 and 26, No. 5 of the 2004 Concordat.

• It is clear from the regime defined that the adoption of the form of one of the entities provided for in Article 10 of the CIRC is a matter of option, and that the assignment to religious legal persons of the rights legally provided for such entities is not prejudiced if they do not adopt the form of those entities.

• On the other hand, it is emphasized that what is at issue regarding IRC exemption relates to the activity developed by the Respondent in the provision of health care through "B…", an establishment held by the latter.

• In that context, moreover, the General Directorate of Health has already considered settled the equation of the Respondent's activity to an IPSS.

• All of this means that equation to IPSS does not occur merely by force of specific legislation such as that applicable to Casas do Povo (People's Houses) and Social Solidarity Cooperatives, as the Respondent erroneously contends.

• The equation to IPSS occurs even by force of what is provided for in Article 40 itself of Decree-Law No. 119/83, this norm not being merely a means of subjecting entities that do not have the nature of IPSS to the status of the latter.

• In fact, it does not seem to make sense to subject legal persons that develop the activities provided for in Article 1 of that statute to the Status of IPSS and then to say that this is not a form of equation to those same IPSS.

• Indeed, in this sense, it is important to take note of the position that the Finance Directorate of Lisbon has already taken, by which it concluded that the Claimant, in the context of developing the activity of providing health care in "B…", is an entity equated to IPSS, basing itself precisely on Articles 40 and 45 of Decree-Law No. 119/83, as shown in the document already attached to the present application.

• And further concluded that Finance Directorate that IRC exemption, in accordance with the provisions of subparagraph b) of No. 1 of Article 10 of the CIRC, is an automatic reality that does not require ministerial recognition!

• Which, moreover, is in line with what the Supreme Administrative Court decided on 7 January 2009, in whose judgment it states that "by qualifying the Respondent as a 'legal person legally equated to IPSS', exempt from IRC under the terms of subparagraph b) of Article 10 of the CIRC, the appealed judgment makes correct interpretation and application of the cited normative and of Article 95(5) of Decree-Law No. 119/83, of 25 February, since that legal provision equates to IPSS the legal persons canonically erected, legally recognized and that exercise purposes subsumable to No. 1 of its Article 1, already existing at the date of entry into force of that statute and that have not wished to use the faculty of adopting one of the legal forms defined for IPSS".

• The same judgment further states that «…the appealed judgment, with the grounds contained therein, considered that the party here appealing met, in fact, the requirements for inclusion in the last segment of subparagraph b) of No. 1 of Article 10 of the CIRC, that is, for purposes of IRC exemption should be held as a legal person legally equated to IPSS. And that because, being a legal person canonically erected, with legal personality recognized under the law before the effective date of Decree-Law 119/83, of 25/2, and pursuing, in addition to the religious purpose, activity classifiable under subparagraph f) of No. 1 of Article 1 of the aforementioned statute – education and vocational training of citizens -, and despite not having used the faculty conferred by No. 5 of Article 94 of Decree-Law 119/83 of establishing itself as a true IPSS, it cannot fail to be considered an entity legally equated to IPSS from a substantive point of view and benefit, thus, from benefits specific to IPSS that the law decides to grant it.»

• As well as the learned Judgment No. 0725/11 of 18 January 2012, available at www.dgsi.pt, which specifies « Therefore, as the provisions determining the application of benefits and tax regime of private legal persons to canonical legal persons are clear, enshrined in Articles 12 and 26(5) of the Concordat, the interpreter cannot seek to assert an interpretation manifestly contrary to the letter of the law..»

• And further, «now according to Article 40 of the Status of IPSS (Decree-Law 119/83, of 25.02), religious organizations and institutions that, in addition to religious purposes, propose to pursue activities directed to the realization of purposes of social solidarity are subject, regarding the exercise of such activities, to the regime established in the Status of IPSS. These entities may, therefore, be qualified as IPSS if, in addition to religious purposes, they also pursue purposes of social solidarity (Article 40 of the Status of IPSS).

Religious organizations thus assume the quality of IPSS under the terms of other institutions, whether civil or religious. The recognition of this quality means their inclusion in a special category of legal persons - legal persons of social solidarity (See Licínio Lopes, Private Institutions of Social Solidarity, Almedina, pages 185-191.).

It is therefore necessary to conclude that religious organizations and institutions and their institutes that propose, in addition to religious purposes, other purposes classifiable under Article 1 of the statute, are legally equated, under the terms of Articles 40 and 41 of the Status of IPSS, to private institutions of social solidarity. And being equated to IPSS, they benefit from automatic IRC exemption under the terms of Article 10, No. 1, subparagraph b) and 2 of the CIRC (Also in this sense Isabel Marques da Silva, op. cit., page 179 and Miguel Cortês Pinto de Melo Marques, IPSS, A Fiscal Approach, journal Taxation, March 2010, page 45)

• By everything that has been set forth, as the Claimant is a canonical legal person pursuing social activities it is equated, regarding such activities, to an IPSS and is thus automatically exempt from IRC, in accordance with the provision in subparagraph b) of No. 1 of Article 10 of this Code, in activities classifiable under Article 1 and Article 1-A, as well as Article 40 of Decree-Law 119/83, republished by Decree-Law 172-A/2014.

• In the case at hand, health and education activities.

• Indeed, it is important to emphasize that the reasoning of the decision now being challenged does not analyze the legal provisions that inform the Claimant's classification, limiting itself merely to invoking an alleged registration that it clearly knows does not exist and, on the other hand, it further states that the cited judgments apply only to the cases tried, without even perceiving that the matter in question, in abstract terms, is exactly the same, meriting thus the same treatment.

• Thus, in concluding that, despite all the exposition made and documentation attached to the present proceedings, the Claimant has not demonstrated that it is exempt from IRC in the activity in question, when it is evident that exactly the opposite is true, the decision does nothing more than violate the norm contained in subparagraph b) of No. 1 of Article 10 of the Corporate Income Tax Code, by failing to apply it to the concrete case.

• And therefore, as the Respondent refuses to admit the illegality of the IRC self-assessment act for 2009 and administrative procedures for this purpose have been exhausted, there remains no alternative for the Claimant but to, by this means, assert its right to IRC exemption in the Claimant's social activity – education and health – now in question, requesting that, in light of the IRC exemption, that act be annulled.

INDEMNITORY INTEREST

• Under the terms of the provision in Article 43 of the General Tax Law (LGT), "indemnitory interest is owed when it is determined, in gracious complaint or judicial challenge, that there was error attributable to the services from which results payment of the tax debt in an amount greater than legally due."

• And Article 100 of the LGT also prescribes the obligation of the Tax Authority to restore the situation that would have existed if no illegality had been committed which, depending on circumstances, will imply the payment of indemnitory interest.

• In this sense, for the Claimant to be recognized as having the right to receive indemnitory interest, the following requirements must be met: a) error attributable to the services in determining the tax due, b) from which said error results payment of tax in an amount greater than legally due, c) that the error of the services be analyzed in the context of gracious complaint or judicial challenge.

• Now, as seen, the illegality – due to lack of substantiation – and the calculation error – as it did not take into account all possible and legal specific deductions – of the additional assessment act has been fully demonstrated in the present proceedings.

• As regards the requirement of error of the services, it seems clear that such exists.

• Thus, the Claimant is owed indemnitory interest at the legal rate, calculated on the amount paid of €231,333.96, from the date the payment was made until its complete reimbursement.

III – DECISION

On these terms, and with the grounds stated, this Arbitration Tribunal decides:

a) To find the preliminary question raised by the Respondent not admissible, as seen;

b) To find the question of unconstitutionality raised by the Respondent not admissible, as stated;

c) To find the request for arbitration pronouncement wholly admissible, with the declaration of illegality, for the reasons stated, of the IRC assessments for the year 2009 and compensatory interest, object of these proceedings, with the consequent annulment of those assessments for suffering from the defect of violation of law, due to error regarding both factual and legal assumptions;

d) To condemn the Respondent to reimburse the Claimant the entire amount paid, in the value of €231,333.96, plus indemnitory interest at the legal rate until complete payment; and

e) To condemn the Respondent to payment of the costs of the present proceedings.

Value of Proceedings

The value of the proceedings is set at €231,333.96, under the terms of Article 32 of the Code of Administrative Procedure and Procedure (CPTA) and Article 97-A of the CPPT, applicable by force of the provision in Article 29, No. 1, subparagraphs a) and b), of the RJAT, and Article 3, No. 2, of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).

Costs

Costs to be borne by the Respondent, in the amount of €4,284.00, under the terms of Table I of the RCPAT, and in compliance with Articles 12, No. 2, and 22, No. 4, both of the RJAT, and the provision in Article 4, No. 4, of the cited Regulation.

Let it be notified.

Lisbon, 15 October 2019

The Collective Arbitration Tribunal,

José Poças Falcão (President)
Luís Menezes Leitão (Member)
Diogo Feio (Member)

ARBITRATION DECISION

The Arbitrators Judge José Poças Falcão (Arbitrator President), Professor Doctor Luís Menezes Leitão and Doctor Diogo Feio, appointed by the Deontological Council of the Administrative Arbitration Centre to constitute an Arbitration Tribunal, hereby agree on the following:

I – REPORT

A…, with headquarters at Rua…, No.…, …–…–…, …–…, Oeiras, legal entity No.…, pursuant to the provisions of Article 99 of the Code of Procedure and Procedural Tax Law (CPPT) and Articles 2, No. 1, subparagraph a) and 10, No. 1, subparagraph a) and No. 2, of Decree-Law No. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters – RJAT), submitted a request for arbitration pronouncement regarding the self-assessment of Corporate Income Tax (IRC) for the year 2009, filed on 22 February 2013 and resulting in a tax amount of 208,744.09 euros, which the Claimant paid.

The Claimant alleges, in support of the request, essentially as follows:

• The Claimant was notified by the Tax and Customs Authority (AT) to proceed with filing an income statement, namely concerning the year 2009 and subsequent IRC assessment, with the warning that failure to do so would constitute a situation susceptible to constituting an administrative violation. (Doc. 1);

• Faced with this notification and although disagreeing with its content, the Claimant filed on 22 February 2013 the income statement for the year 2009, proceeded to self-assess the IRC for that year and proceeded with payment of the corresponding tax in the amount of 208,744.09 euros and 22,589.87 euros as compensatory interest (Doc 3);

• Considering from the outset that it was exempt from IRC and should therefore owe no tax amount, the Claimant filed a complaint on 24.06.2013 against the IRC self-assessment act for 2009. (Doc. 4)

• The complaint was dismissed by official order of 30 December 2013 issued by the substitute of the Director of Finance of Lisbon. (Doc. 5)

• Dissatisfied with such decision, the Claimant filed on 03.02.2014 the appropriate hierarchical appeal. (Doc. 6)

• The hierarchical appeal was likewise dismissed by official order of 30 October 2014, issued by the Director of Services of the IRC Service Division (DSIRC) (Doc. 7).

• To justify such dismissals, the Respondent essentially argued that the Claimant is not exempt from IRC, as it is not registered as a Private Institution of Social Solidarity (IPSS) or legally equivalent entity with the General Directorate of Social Security.

• Disagreeing with this position, the Claimant seeks hereby to revoke the decision of 30 October 2014, issued by the Director of Services of the DSIRC, which dismissed the hierarchical appeal, on the grounds that it is vitiated by violation of law, and consequently to annul the IRC self-assessment act for 2009.

• The Claimant is a Religious Congregation, canonically erected, which develops, beyond religious activity, an activity of health promotion and protection in an establishment belonging to it called "B…".

• The Claimant is organized by National Provinces, with the Portuguese Province being the international headquarters of the Congregation, the first registered in Portugal in 1876 and has activities worldwide.

• The first Constitutions of the Claimant date from 18 October 1901, from which the primary purpose results as «treatment of the sick both in hospitals and in their homes», a characteristic that persists with the approval of its Statutes on 21/09/1937 and subsequently with the celebration of the 1940 Concordat and its respective notification on 6 November 1940 to the Civil Government of Porto, in which the purpose is stated as «to dedicate itself to health assistance to the sick and other services of charity and social assistance». (Doc. 8)

• The Claimant was thus recognized in Portugal, beyond its religious purposes, as an institution of charity and social assistance.

• In the "B…" establishment, specially prepared and licensed for this purpose, the Claimant thus provides preventive, curative and rehabilitation medical care, for which it naturally receives due payment, although never for profit purposes.

• The revenues declared in the income statement for 2009 filed on 22 February 2013 result essentially from the exercise of this activity.

• From which resulted the IRC self-assessment for 2009 and the subsequent payment to the Respondent of the total amount of 231,333.96 euros (IRC and compensatory interest).

• It should be noted that, on the understanding that it was covered by Article 10 of the Corporate Income Tax Code (CIRC), regarding the health area activity developed in "B…", and thus exempt from IRC, the Claimant had previously requested the issuance of a certificate evidencing its IRC exemption. (Doc. 9)

• A request that aimed only to better document the understanding that the Respondent had already conveyed on 8 November 2007. (Doc. 10)

• Nevertheless, the Respondent, through the Deputy General Director of Taxes, dismissed the said request on 21 February 2011, which is why the Claimant, through its representative and undersigning of the present application, filed the appropriate hierarchical appeal against that decision (Doc. 11 and 12).

• Despite the time elapsed, the Claimant's representative and undersigning of the present application has not yet been notified of any decision on the aforementioned hierarchical appeal, as required by Article 40 of the CPPT (Doc. 13).

• Certainly, under the terms of that legal provision, the production of effects of the act depends on compliance with that formality.

• However, and always without the Claimant's representative having been notified of the decision regarding the hierarchical appeal filed against the decision that dismissed the request for issuance of an IRC exemption certificate, the truth is that, as referred to above, the Claimant was notified by the Finance Directorate to file the income statement for the year 2009 (and also for 2010 and 2011), from which resulted the self-assessment now being challenged.

• As stated above, No. 1 of Article 40 of the CPPT provides that notifications to interested parties who have appointed a representative shall be made to that person and at their office address.

• Despite more than 3 years having elapsed since the Claimant, through its representative and undersigning of the present application, filed a hierarchical appeal against the decision that dismissed the claim concerning the dismissal of the request for an IRC exemption certificate, the truth is that it has not been notified of any decision to date.

• The failure to notify any decision in this regard thus maintains the question of the Claimant's IRC exemption pending in the administrative forum, particularly since any decision that might have been made and not notified would have produced no effects whatsoever, as our case law has abundantly decided (see judgments Nos. 0927/10 of 04.05.2011 and 0409/12 of 16.05.2012 of the STA).

• This means that the Respondent's act requiring IRC assessment for 2009 and the subsequent self-assessment act labor, from the outset, under an error regarding factual assumptions: that the administration would have already decided, validly and effectively, the request for issuance of the IRC exemption certificate that the Claimant submitted in July 2007.

• Something that, as can be seen, does not correspond at all to reality!

• In fact, the Claimant's representative in the hierarchical appeal proceedings filed against the decision that dismissed the complaint concerning the decision not to issue the IRC exemption certificate continues without being notified of any final decision thereon, such that any decision that may have been made produces no effect, least of all the effect of justifying the Respondent's understanding that led the Claimant to the IRC self-assessment act for 2009.

• Thus, in basing its requirement for IRC assessment for 2009 on the presumption that the Claimant would not be exempt from IRC, based on an alleged act that, in violation of the provisions of No. 1 of Article 40 of the CPPT, was not notified to the Claimant's representative, the Respondent does nothing more than invalidate the act requiring IRC assessment for 2009 and which led to the Claimant's self-assessment, precisely because such act is based on a fact and a judgment that has not yet produced any effect and that therefore cannot justify the act in question.

• Now, as is recognized both in legal doctrine and case law, error regarding factual assumptions constitutes a violation of law, capable of bringing about, without more, the annulment of the vitiated act – the IRC self-assessment for 2009.

VIOLATION OF LAW

• But even if this were not understood as such, which is admitted only as a mere academic hypothesis, it would still be said that, in truth, the Claimant is manifestly exempt from IRC, contrary to what the Respondent maintains in its decision dismissing the hierarchical appeal.

• In fact, pursuant to subparagraph b) of No. 1 of Article 10 of the CIRC, exempt from IRC are Private Institutions of Social Solidarity (IPSS) and related entities, as well as legal persons legally equivalent thereto.

• The Concordat of 18 May 2004, concluded between the Portuguese Republic and the Holy See ("2004 Concordat"), which came into force on 1 January 2005, introduced profound changes to the existing tax regime, constituting a clear legislative choice to subject to taxation income that was previously exempt and to abandon the concept of total and comprehensive exemption.

• In summary, only monetary and in-kind donations intended for the realization of religious purposes qualify as non-taxable income for purposes of what is established in the 2004 Concordat.

• All other income earned by religious entities may benefit from IRC exemption, by virtue of the provisions of Article 10 of this Tax Code, provided that such entities qualify additionally as:

  • a) Legal persons of administrative public utility;

  • b) Private Institutions of Social Solidarity (IPSS) and related entities, as well as legal persons legally equivalent thereto;

  • c) Legal persons of mere public utility pursuing, exclusively or predominantly, scientific or cultural purposes, charity, assistance, welfare, social solidarity or environmental protection.

• Having the Claimant been canonically erected, constituted and notified to the competent authority on a date prior to the entry into force of the Concordat, its personality is recognized by the State under the terms of Article 10, No. 2 of the Concordat.

• Moreover, by virtue of pursuing, beyond religious purposes, activities of assistance and solidarity, namely in the area of health promotion and protection, without profit purposes, the Claimant is equated to an IPSS, namely for tax purposes, and in the exercise of such activities, as provided for in Articles 12 and 26, No. 5 of the Concordat.

• The Claimant, as a religious organization or institution that proposes and exercises activities such as health protection and promotion, as well as in the area of education and vocational training of citizens, is equally equated to an IPSS under the terms of Articles 1, No. 1, subparagraphs e) and f) and 40 of Decree-Law No. 119/83, of 25 February, which approved the Status of IPSS.

• In fact, from the outset it has developed activities of a social character, namely in the area of health promotion and protection, in particular in "B…", from its genesis, that is, at a time long before Decree-Law 119/83, providing preventive, curative and rehabilitation medical care, such that it is necessary to conclude that it came to be considered an IPSS, regardless of the form it has adopted, by virtue of the provisions of the cited Articles 1, subparagraph e) and 94, No. 5 of the aforementioned statute – Legal Status of IPSS.

• The Claimant, not being formally an IPSS, is therefore, for all purposes, namely tax purposes, equated to an IPSS under the terms of Articles 10, No. 2, 12 and 26, No. 5 of the Concordat and Articles 1, No. 1, subparagraphs e) and f) of Article 1 and 40 of the Status of IPSS.

• Indeed, this is the classification given in the declaration filed with the request for a certificate in which the Health Ministry itself recognizes the activity of B… as legally equated to an IPSS, an establishment part of the Congregation.

• This same conclusion is unequivocally corroborated by the Supreme Administrative Court (STA) in its Judgments of 7 January 2009 (Case No. 0812/08) and 18 January 2012 (Case No. 725/11).

II – SUBSTANTIATION (Continued)

The Law

Having established the facts, it is necessary to address the legal question raised by the Claimant.

The principal legal question posed concerns the possibility of applying subparagraph b) of No. 1 of Article 10 of the Corporate Income Tax Code (CIRC).

Article 10 of the CIRC states three broad exemption situations:

a) Legal persons of administrative public utility;

b) Private Institutions of Social Solidarity, as well as legal persons equated thereto (emphasis added)

c) Legal persons of mere public utility pursuing scientific or cultural purposes, charity, assistance, welfare, social solidarity or environmental protection.

The first two exemptions are automatic (upon fulfillment of their requirements) and the third depends on recognition by the "member of the Government responsible for the finance portfolio". Thus, in the case of subparagraph b) of No. 1 of Article 10 of the CIRC, it is sufficient that the requirements of the article are met for an exemption to exist.

Thus, the exemption shall be granted if there is a Private Institution of Social Solidarity, or a legal person equated thereto. Entities equated are religious institutions that, beyond religious purposes, pursue other purposes that are classifiable under Article 1 of the Status of IPSS (Decree-Law No. 119/83 of 25 February). For this purpose, it is important to note the consideration in subparagraph e) of No. 1 of Article 1 of the Status of IPSS of health promotion and protection, namely through preventive, curative and rehabilitation medical care.

According to Article 3 of the Concordat between the Holy See and the Portuguese Republic of 1940, "recognition by the State of the legal personality of religious associations, corporations or institutes, canonically erected, results from simple written notification to the competent Authority made by the Bishop of the diocese where they have their headquarters, or by their legitimate representative."

In accordance with Article 4 of the same Concordat, (...)"The associations or organizations referred to in the preceding article may acquire and dispose of property under the same terms as other perpetual legal persons under current law may do so, and govern themselves freely under the supervision and oversight of the competent ecclesiastical Authority. If, however, in addition to religious purposes, they also propose purposes of assistance and charity in fulfillment of statutory duties or burdens burdening inheritances, legacies or donations, they shall, to that extent, be subject to the regime instituted by Portuguese law for such associations or corporations, which becomes effective through the competent Ordinary and which can never be more burdensome than the regime established for legal persons of the same nature(...)."

According to Article 10(2) of the Concordat between the Holy See and the Portuguese Republic of 2004, "The State recognizes the personality of legal persons referred to in Articles 1, 8 and 9 in their respective terms, as well as those of other canonical legal persons, including institutes of consecrated life and societies of apostolic life canonically erected, that have been constituted and notified to the competent authority by the bishop of the diocese where they have their headquarters, or by their legitimate representative, until the date of entry into force of this Concordat(...)".

The Claimant was established in 1901 and its first Statutes were approved in 1937, that is, long before the celebration of the 2004 Concordat, therefore No. 3 of Article 10 of this Concordat, which stipulates that canonical legal persons established after the celebration of the Concordat must be registered in a proper register of the State, does not apply.

Under the terms of Article 40 of Decree-Law 119/83, "religious organizations and institutions that, in addition to religious purposes, propose activities classifiable under Article 1 are subject, regarding the exercise of such activities" to the provisions of the same Decree-Law (Status of IPSS).

The activities of the Claimant are thus classified under the cited Article 1, subparagraph e), in the context of health promotion and protection.

According to Article 10(1) of the Corporate Income Tax Code, exempt from IRC are: "(...) b) Private Institutions of Social Solidarity, as well as legal persons legally equated thereto(...)".

As such, there is no doubt that the Claimant is equated to IPSS for purposes of the Corporate Income Tax Code, such that, in my understanding, it should prevail.

Furthermore, Article 40 of the same Status provides that religious entities that, in addition to religious purposes (the distinction between religious and non-religious purposes is provided for in the Religious Freedom Law – Law 16/2001 of 22 June) propose to fulfill activities provided for in Article 1 are subject, "regarding the exercise of such activities, to the regime established in this Status"(emphasis added).

The activities of providing services by those religious entities relating to health are among those having purposes other than religious and, in this light, enjoy the same rights and benefits attributed to private legal persons having purposes of the same nature (Article 12 of the 2004 Concordat; Article 4 of the 1940 Concordat). Specifically, No. 5 of Article 26 of the 2004 Concordat, canonical legal persons dedicated to other purposes, whether non-religious, are subject to the tax regime applicable to the respective activity (reinforcing the applicability to the concrete case of Article 10 of the CIRC).

For the exemption provided for in Article 10 of the CIRC to apply, it is not sufficient to be a canonical legal person, as the attribution of the tax benefit to such entities is not provided for. It must also be an IPSS or a legal person equated thereto, which implies that a religious institution need not formally be an IPSS, it being sufficient that it be materially equated thereto. Thus, regardless of whether the faculty to establish itself as an IPSS has been exercised, such entities may be considered for purposes of applying subparagraph b) of No. 1 of Article 10 of the CIRC.

As there is a legal determination (Article 40 of the Status of IPSS) that subjects religious entities exercising activities beyond religious purposes to the legal regime of the Status of IPSS, it seems evident that when this occurs they are classified under the exemption of Article 10 of the CIRC.

By way of summary: the provision of Article 10(1)(b) of the CIRC applies to canonically erected entities, provided that their existence has been communicated to civil authorities and they pursue also religious purposes (see Judgment of the STA of 07-01-2009 regarding Case 0812/08; Judgment of the STA of 18-01-2012 regarding Case 0725/11 and Isabel Marques da Silva, "The Tax Implications of the New Concordat between the Holy See and the Portuguese Republic" in "Studies in Honor of Professor Doctor António de Sousa Franco", vol. II, Faculty of Law of the University of Lisbon", pages 178 et seq.).

Therefore, the IRC self-assessment act for 2009 which is the object of this request for pronouncement is vitiated by illegality due to violation of the provision in Article 10(1)(b) – 2nd part of the CIRC and 1(1)(e) and f), of Article 40 of the Status of IPSS approved by Decree-Law No. 119/83, of 25 February.

The Alleged Unconstitutionality of the Interpretation Regarding Article 10(2)(b) of the CIRC

The AT alleges in its Response (Articles 101 to 111) that, in summary, it disagrees with the subjection of the Claimant to the status of entity equated to IPSS, taking the position that its classification under Article 10(2)(b) of the CIRC, which exempts from IRC "Private Institutions of Social Solidarity, as well as legal persons legally equated thereto" would be unconstitutional due to violation of the principles of equality and legality.

Under the terms of Article 40 of Decree-Law 119/83 (Status of IPSS), "religious organizations and institutions that, in addition to religious purposes, propose activities classifiable under Article 1 are subject, regarding the exercise of such activities, to the regime established in this Status". Now, the activities of the Claimant are classified under Article 1, subparagraph e), in the context of health promotion and protection, such that the legal equation to the status of IPSS required by Article 10(2)(b) of the CIRC is verified.

With regard to the alleged violation of the principle of equality, the AT argues that the Claimant is not subject to the registration obligation provided for in Article 7 of the Status of IPSS. It is manifest, however, that this constitutes no violation of the principle of equality, as Article 10(2)(b) of the CIRC encompasses not only IPSS, but also legal persons equated thereto, it being clear that the latter are not subject to any registration, without however the application of that regime being prejudiced, by force of Article 40 of the Status. Moreover, what the principle of equality demands is that equal situations be treated equally, it being manifest that the equation of a religious legal person to IPSS, as is the case of the Claimant, must likewise imply an equation of tax treatment, as the law expressly determines.

Nor is there any violation of the principle of legality, as no analogical application of norms establishing tax benefits occurs merely because the law does not define what constitutes an entity legally equated to IPSS. What exists is merely an interpretation, not even an extensive one, of a legal concept provided for in tax law, on the basis of which the legislator determined an IRC exemption. It is incumbent on the interpreter in that case to attribute the tax exemption in conformity with the interpretation of the legal provision, it not being permitted to refuse application of the law on the ground of its obscurity (Article 8, No. 2, of the Civil Code).

In this case, however, the law is even very clear, as the legal equation of religious legal persons results clearly from Article 40 of the Status of IPSS, there occurring no violation of the principle of legality when Article 10(1)(b) of the CIRC is considered applicable to them.

It is thus manifest that no violation of these constitutional principles occurs in the decision under review.

The Request for Indemnitory Interest

Subparagraph b) of No. 1 of Article 24 of the RJAT provides that the arbitration decision on the merit of the claim from which no appeal or challenge may be made binds the tax authority from the end of the deadline for appeal or challenge, with this authority – in the exact terms of the granting of the arbitration decision in favor of the taxpayer and until the end of the deadline for voluntary execution of sentences of tax judicial tribunals – to restore the situation that would have existed if the tax act object of the arbitration decision had not been made, adopting the necessary acts and operations for that purpose. Such provision is in harmony with the provision in Article 100 of the General Tax Law (LGT), applicable to the case by force of the provision in subparagraph a) of No. 1 of Article 29 of the RJAT, in which it is established that: "The tax authority is obliged, in the event of full or partial allowance of gracious complaints or administrative appeals, or judicial proceedings in favor of the taxpayer, to immediately and fully restore the situation that would have existed if the illegality had not been committed, including the payment of indemnitory interest, under the terms and conditions provided by law."

Article 43, No. 1, of the General Tax Law provides in turn that "indemnitory interest is owed when it is determined, in gracious complaint or judicial challenge, that there was error attributable to the services from which results payment of the tax debt in an amount greater than legally due."

Now, as seen, the Claimant self-assessed and paid IRC that was not due.

Therefore, given the provision in Article 61 of the CPPT and considering that the requirements for the right to indemnitory interest are met, that is, there is verified the existence of error attributable to the services from which results payment of the tax debt in an amount greater than legally due, as provided for in No. 1 of Article 43 of the General Tax Law (LGT), the Claimant is entitled to indemnitory interest at the legal rate, calculated on the amount paid of €231,333.96, from the date on which the payment was made until its full reimbursement.

III – DECISION

On these terms, and with the grounds stated, this Arbitration Tribunal decides:

a) To find the preliminary question raised by the Respondent not admissible, as seen;

b) To find the question of unconstitutionality raised by the Respondent not admissible, as stated;

c) To find the request for arbitration pronouncement wholly admissible, with the declaration of illegality, for the reasons stated, of the IRC assessments for the year 2009 and compensatory interest, object of these proceedings, with the consequent annulment of those assessments for suffering from the defect of violation of law, due to error regarding both factual and legal assumptions;

d) To condemn the Respondent to reimburse the Claimant the entire amount paid, in the value of €231,333.96, plus indemnitory interest at the legal rate until complete payment; and

e) To condemn the Respondent to payment of the costs of the present proceedings.

Value of Proceedings

The value of the proceedings is set at €231,333.96, under the terms of Article 32 of the Code of Administrative Procedure and Procedure (CPTA) and Article 97-A of the CPPT, applicable by force of the provision in Article 29, No. 1, subparagraphs a) and b), of the RJAT, and Article 3, No. 2, of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).

Costs

Costs to be borne by the Respondent, in the amount of €4,284.00, under the terms of Table I of the RCPAT, and in compliance with Articles 12, No. 2, and 22, No. 4, both of the RJAT, and the provision in Article 4, No. 4, of the cited Regulation.

Let it be notified.

Lisbon, 15 October 2019

The Collective Arbitration Tribunal,

José Poças Falcão (President)
Luís Menezes Leitão (Member)
Diogo Feio (Member)