Stamp duty exemption in Portugal: Defining the scope of a financial institution
Miguel Pimentel and Ana Carrilho Ribeiro of Morais Leitão consider conflicting judicial decisions and address the scope of a stamp duty exemption applicable to financial institutions.
.Two conflicting decisions of the Portuguese Court of the Administrative Arbitration Center (CAAD or Arbitration Court) have cast doubt on whether Portuguese holding companies formed as Sociedade Gestora de Participações Sociais (SGPS) companies borrowing funds from credit institutions, financial companies and financial institutions, could be entitled to a stamp duty (SD) exemption.
In general, the law restricts the admissible legal purpose of SGPS companies to the management of shareholdings in other companies as an indirect form of undertaking a commercial activity. A shareholding will be considered an indirect form of undertaking a commercial activity, provided that it is not occasional (one-year holding period) and represents at least 10% of an entity’s vote and capital, either directly or indirectly. Exception rules allow the acquisition of shareholdings below this threshold without tainting the SGPS status. After the corporate income tax (CIT) reform, SGPS no longer have a special CIT status. Also, it is important to relevant that the SD code was amended in order to extend a specific exemption to companies in general and not just to SGPSs.
For those less familiar with the tax rules applicable to lending and related activities in Portugal, it is important to mention that SD is often a major issue, as the amount of tax involved may not be immaterial.
The utilisation of credit, in the form of funds (liquidity), goods and other values arising from the concession of credit of any kind, except as determined in the SD code, including credit assignments, factoring, and treasury operations which represent a financing of any kind to the assignee, or debtor is subject to SD, based on its respective value and applicable rate (see below); for these purposes, the extension of the contractual term should be considered a new financing.
The following rates should apply:
(i) Credit with a term shorter than one year, 0.04% for each month or fraction thereof;
(ii) Credit with a term of one year or more (and less than five years), 0.50%;
(iii) Credit with a term of five years or more, 0.60%;
(iv) If the contract qualifies as a revolving credit facility or any other form of credit with an undetermined or undeterminable term, the applicable rate should be equal to 0.04%.
In this case, the rate applies on the average amount utilised monthly, determined by adding-up the balance due for each day of a specific month, divided by 30.
Likewise, guarantees, regardless of their nature and form, including (but not limited to) personal guarantees, mortgages, pledges, security deposits and bank guarantees are subject to SD, on their respective value at the applicable rates, depending on the relevant term, unless such guarantees are substantially ancillary to other contracts subject to SD and offered simultaneously with the guaranteed obligation (albeit in a different contract instrument or title):
(i) Term shorter than one year, 0.04% for each month or fraction thereof;
(ii) Term equal to or greater than one year but shorter than five years, 0.5%;
(iii) Term equal to or greater than five years and guarantees with no term, 0.6%.
An extension to the term of the contract is, in general, considered a new taxable fact for SD purposes. Transactions entered or intermediated by credit institutions, financial companies or other entities assimilated to them as well as other financial institutions, including, inter alia, commissions, interest and other consideration derived from financial services, are subject to SD at a 4% rate on the amount charged.
Article 7(1)(e) establishes an exemption that applies to the utilisation of credit, as well as interest paid, security granted and fees charged thereto when credit is granted by credit institutions, financial companies and financial institutions to venture capital companies, as well as to companies or entities the form and purpose of which fulfil the definition of credit institutions, financial companies and financial institutions as set forth in European Union (EU) law. It is required that both lender and borrower are established in a EU member state, or in any other state which is not deemed to be a privileged tax territory, as this concept is defined in a Decree of the Minister of Finance.
In a decision released on October 28 2020, in Case 911/2019-T, the CAAD considered that SGPS should be considered ‘financial institutions’ for purposes of the exemption set forth in Article 7(1)(e).
Hence, the court considered that Portuguese SGPS borrowing funds from qualifying financial entities should be exempt of stamp duty, as they should be considered financial institutions under EU law – specifically under subsection 22 of section 1 of Article 3 of the Directive 2013/36/EU and subsection 26 of section 1 of Article 4 of the EU Regulation 575/2013.
For this purpose, it was considered irrelevant that Portuguese legislation transposing the directive has apparently restricted the definition of holding companies to SGPS that are subject to the supervision of the Bank of Portugal (Banco de Portugal or BdP) (see subsection i) of section z) of Article 2-A of the Legal Framework of Credit Institutions and Financial Companies - Regime Jurídico das Instituições de Crédito e Sociedades Financeiras or RJICSF ).
Nonetheless, the CAAD released a contradictory decision in Case 856/2019-T only a few days later (November 2 2020). In this case, the court considered that an SGPS cannot be considered a financial institution for purposes of the aforementioned provision if it is not under the regulatory supervision of the BdP, thus following exclusively the definition included in Portuguese law.
Under Portuguese procedure law, these conflicting decisions may now be subject to review by the Portuguese superior courts. In this regard, we believe that the following comments may become relevant in the context of future cases.
(1) From the perspective of the history, as well as the foreseeable intent underlying these provisions, the outcome of Case 1 could be surprising. Nonetheless, considering the application of current EU law, as well as the language of the provision, it seems hard to contest that Article 7(1)(e) refers to EU law concepts rather than Portuguese legislation.
(2) Some may argue that using a wider definition of qualifying financial institution, beyond what has been the traditional scope of this definition under Portuguese law, lacks a clear legislative purpose. What would be the interest to encompass under the relevant definition entities holding shares in other entities which do not, even remotely, carry out a financial activity?
(3) It is interesting to note that the Banking Activity Code (Código da Atividade Bancária or CAB), subject to public consultation, and which is intended to repeal and replace the RJICSF, apparently aligns the domestic definition with EU law. Hence, we anticipate that one issue to be discussed going forward is not only how the reference in the SD code should operate but also whether the RJICSF is EU law compliant.
(4) Since this exemption is applicable also to outbound transactions, i.e. situations where Portuguese financial entities engage in the financing of foreign entities or activities, it may be relevant to understand what the position could be with regard to the financing of entities resident in the EU and/or treaty countries whose purpose and activities is comparable to that of an SGPS.
(5) It is also important to consider whether this rule could also have an impact on other taxes, including CIT, which use the concept of ‘financial institution’, namely once CAB enters into force.
(6) Finally, it will be crucial to stay tuned on policy developments in this area, as it may happen that the government, in light of the relevant impact of SD to the state budget, may prefer to close the gap via a legislative amendment. To this extent it may either amend Article 7(1)(e) or, more drastically, finally repeal what is left from the SGPS status, following the CIT reform.
 Decree-law 298/92, of December 31, as amended.
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Ana Carrilho Ribeiro
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