In recent years, it has become increasingly common for various municipalities to demand payment of the license tax—commonly referred to as the “Commercial License” – from companies engaged in primary activities such as agriculture, livestock, mining, and others.
These claims are usually processed through administrative proceedings that subsequently lead to administrative litigation, or directly through enforcement actions initiated on the basis of debt certificates issued by the Municipality itself and processed before the Civil and Commercial Courts of First Instance.
The choice between one route or another—administrative or judicial—depends largely on the taxpayer’s procedural conduct during the initial stage of the proceedings. In general terms, The procedure adopted by the municipalities follows this outline:
- First, the taxpayer is notified by an official notice specifying the amounts allegedly owed and the tax years involved, along with a tax assessment. In this notice, the taxpayer is required to settle the alleged debt within a a period of eight (8) business days.
- If the taxpayer does not file an objection within the specified period but also fails to make payment, the Municipality issues a certificate of debt that serves as an enforceable title. The Municipality then enforces the judgment through summary enforcement proceedings, usually accompanied by an order to attach sufficient assets of the taxpayer to cover the claimed amount and the estimated court costs (generally around 10% of the claimed amount).
- If the taxpayer files an objection, the municipality orders the initiation of administrative proceedings before the Municipal Court of Infractions. In practice, these proceedings almost invariably result in a ruling ordering the taxpayer to pay the originally assessed tax along with a fine for a municipal violation. Afterward, the taxpayer may seek judicial review before the administrative courts.
With regard to the substantive issue, over the past decade, the Criminal Chamber of the Supreme Court of Justice (the “Criminal Chamber”), which serves as the court of last resort in matters related to contentious-administrative jurisdiction, has applied differing criteria regarding whether primary activities are subject to the License Tax.
In this regard, it is noted that until approximately 2015, the Criminal Chamber held that such activities were not subject to the tax, on the grounds that the performance of these activities does not involve commercial acts—one of the taxable events under the tax.
However, beginning that year, the Criminal Chamber changed its interpretation and subsequently held that primary activities are commercial in nature when carried out by companies governed by the provisions of the Civil Code (corporations, limited liability companies, etc.), by virtue of a presumption established in Law No. 1034/83 “On Merchants.”.
Thus, the—at the very least debatable—criterion remains in effect, whereby an activity is considered commercial and therefore subject to the License Tax depending on the legal status of the taxpayer carrying out the activity. In other words, under this reasoning, the activity would be considered commercial for some, but not for others.
Beyond the discussion of the substantive issue—on which I expressly reserve my position, as I do not agree with the Criminal Chamber’s current interpretation—another issue arises that has been omitted in all similar cases analyzed within the administrative-litigation jurisdiction but which is just as important as the substantive issue: tax assessment.
According to the teachings of Villegas, tax assessment is the “an act or set of acts intended to determine, in each specific case, whether a tax debt exists (‘an debeatur’); if so, who is obligated to pay the tax to the treasury (the taxpayer) and what the amount of the debt is (‘quantum debeatur’)”.
Likewise, García Vizcaíno explains that although the tax liability arises when the taxable event occurs, “[E]This does not mean that tax assessment is unnecessary, since it is a prerequisite for the Treasury to effectively claim the tax credit.”… He further concludes that “[T]A tax assessment establishes certainty regarding the existence and scope of the preexisting tax liability”.
Consequently, according to these authors—with whom I agree—tax assessment is just as important as the occurrence of the taxable event. Although the tax obligation becomes enforceable from the moment the taxable event occurs, it cannot be enforced until the tax assessment is carried out.
In this regard, Article 209 of Law No. 125/91 (the “Tax Code”) provides that a tax assessment is “…the administrative act that establishes the existence and amount of the tax liability, and is binding and mandatory on the parties”. Likewise, pursuant to Article 210 of the same statute, it provides, among other cases, “… b) when tax returns have not been filed”.
That said, it should be noted that Article 5 of Law No. 620/76 (the “Municipal Tax Law”) provides that the License Tax must be calculated “based on the value of the assets located in the respective municipality; for this purpose, the value of assets located in other municipalities shall be deducted from the assets”.
In this regard, Article 3 of the Municipal Tax Law provides that, for this purpose, merchants—including companies engaged in primary activities as interpreted by the Criminal Chamber—must submit “a copy of the balance sheet for the previous fiscal year approved by the Income Tax Directorate or, in the case of banks and financial institutions, by the Superintendence of Banks, or a sworn statement”.
Logically, when a company does not acknowledge that it is subject to the License Tax because, in its view, it has not incurred the taxable event, it does not submit the documentation required by law for calculating the tax. In such cases, Article 3 provides that “The Executive Department shall estimate the value of the assets on its own initiative”.
This is where the Municipality’s misunderstanding lies, and where we also find a striking omission on the part of the Court of Accounts and the Criminal Chamber in the cases they have addressed, since these bodies apparently view such authority to assess matters ex officio as an exclusively discretionary prerogative of the authority, even though it is not.
On the contrary, far from being entirely discretionary, Article 3 itself establishes that, in the case of an ex officio assessment, it must be determined by ordinance “the method for determining assets based on: […] b) if the elements mentioned in the preceding paragraph are not available, consideration of assets of similar businesses based on the type of operations, their location, and number of employees, as well as any documentation deemed necessary”.
However, we are not aware of any municipality in the country that has regulated this procedure through a municipal ordinance. Likewise, in none of the cases analyzed have we observed municipalities justifying the amounts claimed from taxpayers based on the objective criteria established in the final part of Article 3 of the Municipal Tax Law.
Therefore, under these circumstances, it is clear that the ex officio assessments conducted by municipalities to determine the amount of the allegedly owed license tax are irregular, since they are not carried out in accordance with the provisions of the Municipal Tax Law. They are also arbitrary, since they are not supported by factual criteria.
Ultimately, These are amounts set unilaterally by the municipalities, lacking any valid and legitimate justification, which likely stem solely from their revenue-collection interests.
Thus, given that administrative litigation reviews the legality and validity of administrative acts, when courts order the payment of amounts that have not been determined in accordance with legal guidelines, such acts should be revoked, regardless of the debate over whether primary activities are subject to the License Tax.
It must be remembered that it is the duty of the administration—the municipalities—to ensure that their actions comply with the law, in accordance with the principle of legality in administrative law. In the absence of this essential requirement, their unlawful actions should not be able to produce legal effects against those to whom they are directed.
For the same reasons, enforcement proceedings initiated on the basis of the unilateral issuance of debt certificates should also fail. A tax assessment is the prior administrative act that establishes the existence and amount of the tax liability. Therefore, a debt certificate issued without following that procedure would serve as the basis for a debt that is neither liquidated nor enforceable.
In light of the foregoing, It is essential that taxpayers not limit their defense solely to challenging the existence of the taxable event – that is, whether the primary activity is subject to the License Tax – but also rigorously examine whether the Municipality has complied with all legal and procedural rules relating to tax assessment.
Consequently, in any municipal tax claim, The defense strategy must include a critical review of the administrative acts supporting the amount claimed., in order to identify irregularities or omissions that could allow for an effective challenge to the assessment decision and the reversal of a possible adverse decision or judgment.
Senior Associate
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