Ensuring equitable treatment: Portuguese stamp duty exemption on certain guarantees

A fundamental flaw at the core of Portugal's financial regulations is the tension between the formal letter of the law and the practical realities of modern financial operations. This is evident when two financially identical transactions are taxed differently, solely based on the legal identity of the guarantor.

This article argues for a substantive interpretation of the stamp duty exemption for guarantees provided by financial institutions, credit institutions, or similar entities to other entities of an identical nature. The central question addressed is whether the exemption should apply strictly to entities formally recognised as such, or whether it should extend to others acting in their interest.

This discussion, while seemingly focused on a specific technical detail, reveals a broader conflict within tax law: the challenge of balancing a rigid, formalistic approach with a more substantive analysis that accurately reflects the economic intricacies of today's complex financial transactions.

The authors will first examine the general provisions of the stamp duty on guarantees, then delve into the specific exemption, and, finally, advocate for a more substantive interpretation.

Portuguese stamp duty is broadly applicable to acts, documents, and transactions deemed to take place within Portuguese territory, including the granting of credit and guarantees. Typically, all guarantees, regardless of their nature or form, are subject to stamp duty, calculated based on the guarantee’s maturity, unless they are ancillary to an already-taxed contract and formed concurrently with the underlying obligation.

From a tax perspective, the concept of a guarantee subject to stamp duty is broader than the traditional civil law definition. As interpreted by the Portuguese tax authorities and several relevant academics, the concept of a taxable guarantee for stamp duty purposes includes any legal instrument able to safeguard one of the parties in an agreement, provided it leads to a reduction in the guarantor's assets. This includes several instruments that, while not legally guarantees, are taxed as such. With regard to the Portuguese tax authorities’ standpoint, Binding Ruling No. 2014003373 – IVE 9461, of May 22 2015, states: “As derived from the provision under heading 10, by subjecting all guarantees to tax, ‘regardless of their nature or form’, it prioritises substance over form, dispensing with an exhaustive enumeration of legal constructs that may demonstrate the economic effect of a guarantee. What matters is not the source of the guarantee but rather the effects that the guaranteed party seeks to achieve with it.”

Regarding the stamp duty’s subjective incidence, Article 2(1)(b) of the Portuguese Stamp Duty Code generally establishes that the guarantor is the taxpayer. However, when guarantors are domiciled abroad, the determination of who is liable for the stamp duty varies based on several factors:

• If the guarantor resides outside Portugal and the transaction is conducted through a Portuguese credit institution, the intermediary credit institution assumes the responsibility for stamp duty (Article 2(1)(c));

• If the guarantor is based abroad, the transaction is not mediated by a Portuguese credit institution, and the guarantor does not operate in Portugal under the freedom to provide services, the beneficiary of the guarantee is liable for the stamp duty (Article 2(1)(d)); or

• If the guarantor resides abroad and the transaction is unmediated by a Portuguese credit institution, but the guarantor operates in Portugal under the freedom to provide services, the legally designated representative in Portugal is responsible for the stamp duty (Article 2(1)(j)).

Additionally, Article 2(1)(a) of the Stamp Duty Code specifies that certain entities involved in taxable transactions, such as the execution of security agreements, may also be recognised as taxpayers. This includes professionals such as notaries and lawyers.

Article 3(1) of the Stamp Duty Code designates the "holders of the economic interest" as those responsible for the economic burden of the tax. Specifically for guarantees, this burden typically falls on the entities required to present the guarantee (i.e., those in whose favour the guarantees are issued), as they are considered the primary beneficiaries. Standard security agreements commonly reflect that any costs associated with the guarantee are borne by the debtor. This debtor is the entity mandated to present the guarantee, whether or not they are also the guarantor.

However, it is essential to differentiate between the taxpayer and the taxable person. While the taxpayer bears the financial burden of the tax, the taxable person is simply tasked with carrying out a tax obligation, as per the law. In other words, while the taxpayer is “the holder of the manifestation of contributive capacity targeted by the law and who, therefore, bears the financial burden caused by the tax”, the taxable person is merely “any individual or legal entity to whom the law imposes the duty to perform a tax obligation”.

Thus, in the context of stamp duty, the taxable persons listed in the code do not inherently align with the holders of the contributive capacity that the legislator seeks to tax (the Portuguese tax authorities have stated that stamp duty is intended "to tax the contributive capacity of the entity obliged to provide the guarantee").

Several authors have suggested that the effective provider of the guarantee is irrelevant as long as the guarantee benefits the entity required to constitute it. Within the Stamp Duty Code, those listed as taxable persons often function as facilitators in tax collection, akin to withholding agents in corporate income tax, rather than as the primary targets of the tax. This clarification further reinforces the authors’ position that the focus of analysis must be on the holders of the economic interest.

Portuguese legislation offers, among other exemptions, a stamp duty exemption for interest, commissions, guarantees, and credit used when provided by credit institutions, financial companies, and financial institutions to venture capital entities, as well as to companies or entities whose form and purpose align with the types of credit institutions, financial companies, and financial institutions that conform to the types envisioned by EU legislation, such as collective investment companies (for example, real estate investment companies).

To qualify, these entities must be domiciled within EU member states or other non-blacklisted jurisdictions, as outlined in Ministerial Order No. 150/2004, February 13, approving the list of countries, territories, and regions with clearly more favourable privileged tax regimes (as amended).

This exemption is designed to facilitate operations within the financial sector and to alleviate administrative burdens and costs. However, it also introduces interpretative challenges, particularly when guarantees are included in a security package agreement. These guarantees are not always provided solely by the debtor, which may be a qualified credit institution, financial company, or similar entity. Often, they also involve guarantees from related entities, such as a parent company.

The core issue is whether this exemption applies to guarantees from entities that are not directly these institutions but act on their behalf. The applicability of the exemption therefore significantly hinges on the interpretation of which entities fall within the regime’s scope. This raises a critical question: can the exemption extend to guarantees provided by entities that – although not technically credit institutions, financial companies, or similar entities – act on behalf of, and in the interest of, such entities? This is particularly relevant when these entities have a genuine stake in the issuance of the guarantee.

One interpretation strictly applies the exemption to transactions involving parties formally recognised as credit institutions, financial companies, or similar entities. Under this formalist approach, guarantees provided by entities outside these categories are excluded, even if they act in the interest of qualifying entities.

Conversely, a more expansive line of reasoning, favoured by the authors, advocates for extending the exemption to include scenarios where the guarantor, such as a parent company, does not formally qualify as a credit institution, financial company, or similar entity. This interpretation broadens the exemption’s applicability to entities that, while not technically fitting the specified categories, functionally support the activities of qualifying entities.

The legislative intent behind the provision introduced by the Portuguese legislator in 2003 (Law No. 107-B/2003, December 31, approving the State Budget for 2024), along with a holistic interpretation of the Stamp Duty Code, should guide our analysis.

The legislators sought to reduce the financial burden on these entities, promoting participation and strengthening Portugal's financial market. The narrower interpretation fails to acknowledge the legislative aim of exempting principal operations subject to stamp duty among financial entities, which was intended to promote participation and strengthen Portugal's financial and investment market.

The provision's spirit appears to cover exemptions for operations where guarantees are provided, directly or indirectly, by these entities, so long as the benefit accrues to an entity recognised as a credit institution, financial company, or similar. Applying stamp duty to guarantees from entities such as parent companies or specialised guarantors would counteract this legislative objective, particularly when such guarantees are designed to address regulatory, legal, or asset deficiencies encountered by qualifying entities. These other guarantors, which often charge a fee for their services, act merely to complement the efforts of the qualifying entities and ensure the fulfilment of their obligations.

The complementary line of reasoning, which the authors believe strengthens the argument, is also grounded in the Stamp Duty Code itself. It states that the tax burden in the case of guarantees falls on the entities obligated to provide them. This seemingly formalistic rule reveals a deeper, more substantive approach embraced by the legislator: by focusing on the entity required to provide the guarantee, the legislator acknowledged that the economic burden – and not simply the formal identity of the guarantor – is paramount.

This indicates a legislative intent that, regardless of the entity formally issuing the guarantee, the critical factor is the entity ultimately benefiting from it. Therefore, the emphasis on economic substance, rather than the formal identity of the guarantor, reinforces the principle that the exemption should depend on the beneficiary of the guarantee.

Although, at first glance, this approach may appear to depart from the traditional formalistic concepts associated with Portuguese stamp duty, it is important to recognise the substantive equivalence between guarantees provided directly by qualifying credit institutions, financial companies, or similar entities and those issued by another entity solely for the benefit of these qualifying entities (whether or not a fee is charged for this service).

In this regard, it has been argued that the entity bearing the economic burden of stamp duty has standing to act in litigation, as the party experiencing the economic ‘depletion’. This is based on a combined interpretation of articles 9(1) of the Tax Procedure and Process Code, 18(3) of the General Tax Law, and 30 of the Civil Procedure Code. The economic effect and ultimate purpose – to secure the debtor’s obligations – remain identical.

When viewed through the lens of legislative intent, it seems illogical that the legislator aimed to exempt stamp duty on guarantees issued by qualifying entities, only to impose it on similar transactions from different entities, especially when the financial burden ultimately impacts the same qualifying entity. Such a disparate treatment would not only be questionable but also disproportionate and discriminatory, fundamentally undermining the principle of equal treatment.

This scenario, of identical economic transactions being taxed differently, highlights the inequitable result of a narrow interpretation. Consider a case where a guarantee provided by a qualifying entity such as a credit institution is exempt from stamp duty, while a guarantee from the debtor’s parent company, which does not qualify, incurs a tax liability. Despite these transactions being materially identical in terms of the economic burden – falling on the same entity – the differing tax outcomes highlight the need for a more consistent and equitable application of the tax law. This approach ensures fairness and aligns with the true economic realities of financial transactions, avoiding artificially constructed disparities.

Across both scenarios, whether the guarantee is provided by a directly qualifying entity or an indirect one, the core purpose remains: to secure the debtor’s obligations. This reinforces the stance that tax policy should focus on the economic realities rather than the formal identity of the guarantor.

In this context, the authors’ interpretation aligns with the realities and demands of modern financial operations. It would be challenging, and arguably impractical, to justify to national and international investors why they would be exempt from stamp duty when providing a guarantee directly (assuming they meet the exemption criteria) yet face tax liabilities if the guarantee is provided by another entity. This holds irrespective of whether the secondary entity specialises in such activities or merely participates for remuneration. Implementing such a policy would not only complicate compliance but also compromise the fairness and predictability that are vital to the integrity of financial regulations.

This approach reinforces the need for a tax system that recognises the economic substance over formalistic distinctions, ensuring that tax obligations are equitable and reflect the true nature of financial transactions.

In conclusion, the Portuguese stamp duty exemption for guarantees, when applied to financial institutions and similar entities, must prioritise the substantive economic reality over formalistic interpretations. Upholding the exemption only for guarantees directly provided by qualifying entities, and denying it to those acting in their interest, fundamentally undermines the principles of fairness, proportionality, and equal treatment.

The legislative intent behind the stamp duty exemption should be, and it must be interpreted in such a way, to facilitate transactions within the financial sector and reduce undue financial burden. A narrow, formalistic interpretation that confines the exemption to guarantees provided only by qualifying entities directly contradicts this aim. In the context of complex modern financial operations, where parent companies and specialised guarantors routinely act as extensions of qualifying entities, the exemption must be extended to encompass such scenarios.

Therefore, to ensure alignment with legislative intent and reflect the realities of contemporary finance, a substantive approach, focused on the beneficiary of the guarantee, is not just preferable but essential for a just and efficient application of the tax law. To maintain integrity and promote a stable financial market, the exemption must extend to these materially equivalent transactions, ensuring that the economic burden of the guarantee, and not merely the identity of the guarantor, is the decisive factor. By prioritising the substantive reality, rather than the formal identities, Portugal can ensure an equitable and effective stamp duty regime.