Process: 133/2016-T

Date: September 12, 2016

Tax Type: IMT Selo

Source: Original CAAD Decision

Summary

This arbitration decision (Process 133/2016-T) concerns IMT and Stamp Tax assessments totaling €19,335.75 imposed on a Real Estate Investment Fund for Residential Rental (FIIAH). The fund acquired property in November 2013 with IMT exemption under Article 8(7) of Law 64-A/2008, which exempted acquisitions of properties intended exclusively for permanent residential rental. The property was sold in December 2015. The Tax Authority assessed IMT and Stamp Tax pursuant to Article 236 of the State Budget for 2014, which retroactively introduced requirements that properties be rented within three years of acquisition or lose the exemption. The Claimant challenged the assessments as unconstitutional, arguing Article 236 violated Article 103(3) of the Portuguese Constitution prohibiting retroactive taxation, and sought nullity under Article 133(2)(d) of the Administrative Procedure Code for violating fundamental rights. The Tax Authority defended that assessments resulted from the property receiving a different use than justified the exemption, not from legislative changes, and that the Portuguese legal system applies annulability rather than nullity to acts based on illegal provisions for legal certainty reasons. The Tax Authority also argued the tribunal lacked competence to declare unconstitutionality. The tribunal established it had competence to assess the legality of the provision's application without formally declaring unconstitutionality. The decision addresses critical issues including retroactive application of tax benefits revocation, the distinction between nullity and annulability of administrative acts, and whether retroactive elimination of tax exemptions violates constitutional protections against retroactive taxation and fundamental property rights.

Full Decision

ARBITRATION DECISION

The Arbitrator Dr. Maria Antónia Torres, appointed by the Ethics Council of the Administrative Arbitration Centre ("CAAD") to constitute a Single Arbitral Tribunal, constituted on 19 May 2016, hereby decides as follows:

1. REPORT

1.1 A…, S.A., taxpayer no.…, in its capacity as managing company of the fund B… – Real Estate Investment Fund Closed for Residential Rental, taxpayer no.…, with registered office at Avenue…, no.…, Lisbon, hereinafter referred to as the "Claimant", has requested the constitution of an arbitral tribunal, pursuant to Article 2(1)(a) and Article 10, both of Decree-Law no. 10/2011 of 20 January (hereinafter "RJAT"[1]).

1.2 The request for arbitral decision concerns the declaration of nullity of tax assessment acts for Municipal Tax on Onerous Transfer of Real Estate (IMT) and Corporate Income Tax (IS), in the total amount of €19,335.75 (nineteen thousand three hundred and thirty-five euros and seventy-five cents), better identified in the initial petition filed by the Claimant, and which are hereby deemed articulated and reproduced for all legal purposes, relating to urban property owned by the Claimant, located at Avenue…, no.…, … …/… and Street…, no.…, … …/…, Block…, … apt., registered in the urban property registry with no.…, fraction "…", of the Parish of …, Lisbon.

The Claimant further requests that the Respondent be ordered to refund the amounts unduly paid and that it be recognised that the Claimant is entitled to compensatory interest on all amounts paid until their respective reimbursement.

1.3 In support of its request, the Claimant alleges that the assessments in question are unlawful as it considers to be unconstitutional, by virtue of violation of Article 103(3) of the Constitution of the Portuguese Republic, Article 236 of Law 83-C/2013 of 31 December, which approved the State Budget for 2014.

The Claimant further considers that the challenged assessments are null pursuant to Article 133(2)(d) of the Administrative Procedure Code (CPA) because they violate the essential content of a fundamental right, and are therefore challengeable at any time.

1.4 The Respondent argues that the assessments now challenged were based on the fact that the property was given a different use than that which gave rise to the attribution of the tax benefit, and not on the legislative amendment to the Regime of Real Estate Investment Funds for Residential Rental (FIIAH) introduced by Article 236 of the Law that approved the State Budget for 2014. Accordingly, it makes no sense to allege the unconstitutionality of this provision.

The Tax Authority further defends itself by stating that in the Portuguese legal-administrative system, the general regime of invalidity of acts is, for reasons of legal certainty, mere annullability, including for acts performed on the basis of illegal or unconstitutional deliberations, with the Supreme Administrative Court having pronounced itself in this same sense.

The Respondent states that the declaration of nullity appears to be reserved for those acts that violate the essential content of a fundamental right, conflicting with the rights, freedoms and guarantees of citizens, but not those that conflict with the principle of legality, as is the case in the present proceedings.

The Respondent further adds, in its defence by exception, that the Arbitral Tribunal lacks competence to assess or declare the constitutionality or unconstitutionality of Article 236 of Law 83-C/2013 of 31 December, as is essentially sought by the Claimant.

Accordingly, the Respondent considers that the present petition should be declared unfounded.

1.5 The parties agreed to dispense with the arbitral tribunal meeting provided for in Article 18 of the RJAT.

2. PRELIMINARY PROCEDURAL MATTERS

The Tribunal was regularly constituted and is competent ratione materiae, in accordance with Article 2 of the RJAT.

The parties have legal personality and capacity, demonstrate standing, and are regularly represented (cf. Articles 4 and 10(2) of the RJAT and Article 1 of Order no. 112-A/2011 of 22 March).

No procedural nullities were identified.

3. FINDINGS OF FACT

With relevance to the decision on the merits, the Tribunal considers the following facts to be proven:

  1. The fund B… – Real Estate Investment Fund Closed for Residential Rental was, on the date of the assessments sub judice, owner of the urban property subject to those same assessments, better identified above.

  2. The property was acquired by the fund on 19 November 2013, benefiting from IMT exemption pursuant to Article 8(7)(a) of the legal regime of FIIAH, and was sold on 10 December 2015.

  3. In accordance with what is mentioned in the initial petition and in the response provided by the Respondent, assessments for IMT and IS were made, in the total amount of €19,335.75 (nineteen thousand three hundred and thirty-five euros and seventy-five cents), which were paid by the Claimant.

  4. Such assessments were made pursuant to Article 236 of Law 83-C/2013 of 31 December (State Budget for 2014).

Unproven Facts

No essential facts with relevance to the assessment of the merits of the case were identified that were not proven.

Basis for the Findings of Fact

The conviction regarding the facts deemed proven was based on documentary evidence submitted by the Claimant, whose authenticity and correspondence with reality were not contested by the Respondent.

4. ISSUES FOR DECISION

The principal issue to be decided in the present proceedings is to determine whether the IMT and IS assessments sub judice made pursuant to Article 236 of Law 83-C/2013 of 31 December (State Budget for 2014) are legal or not.

The Respondent defends itself by exception, stating that, as the Claimant alleges the unconstitutionality of the provision applied in the assessments sub judice, the Tribunal is not competent to decide on the constitutionality or unconstitutionality of the provisions.

Now, the Tribunal will obviously not declare the (un)constitutionality of the provision sub judice, but shall only pronounce upon its concrete application to the concrete facts, assessing the legality or otherwise of such application. The Tribunal is thus, in this respect, materially competent.

5. ON THE LEGALITY OF THE IMT AND IS ASSESSMENTS

It is therefore necessary to decide on the merits of the request for arbitral decision regarding the IMT and IS assessments sub judice.

Let us now examine. Law no. 64-A/2008 of 31 December approved the special regime applicable to real estate investment funds for residential rental (hereinafter "FIIAH"). This regime provided in Article 8(7) that exemption from IMT was granted to:

"a) Acquisitions of urban properties or autonomous fractions of urban properties intended exclusively for rental for permanent residence, by the investment funds referred to in no. 1;

b) Acquisitions of urban properties or autonomous fractions of urban properties intended for own permanent residence, as a result of the exercise of the purchase option referred to in Article 5(3) by the tenants of the properties that comprise the assets of the investment funds referred to in no. 1."

The State Budget for 2014 introduced an additional 3 paragraphs to the said Article 8, as follows:

"14 – For the purposes of the provisions of nos. 6 to 8, urban properties shall be considered as intended for rental for permanent residence whenever they are subject to a rental contract for permanent residence within a period of three years from the moment they became part of the assets of the fund, the taxpayer being required to communicate and provide proof to the Tax Authority of the effective rental within 30 days following the end of the said period.

15 – When the properties have not been subject to a rental contract within the three-year period provided for in the previous number, the exemptions provided for in nos. 6 to 8 shall cease to have effect, and in such case the taxpayer shall request from the Tax Authority, within 30 days following the end of the said period, the assessment of the respective tax.

16 – Should the properties be sold, with the exception of the cases provided for in Article 5 [i.e. purchase option], or should the FIIAH be subject to liquidation, before the period provided for in no. 14 has elapsed, the taxpayer shall similarly request from the Tax Authority, prior to the sale of the property or the liquidation of the FIIAH, the assessment of the tax due in accordance with the previous number."

It is therefore necessary to assess the legality of the IMT and IS assessments sub judice.

As mentioned above, the property subject to assessment was acquired by the Claimant in 2013, benefiting from the said exemptions pursuant to Article 8(7)(a) and Article 8(8) of the legal regime of FIIAH. Both provisions require that the property be intended for rental for permanent residence in order to benefit from the exemptions.

Now, the requirement that the property be intended for residential rental is not a requirement of the amendments introduced by the State Budget for 2014, but rather a requirement of the FIIAH fiscal regime ab initio, a natural consequence of the motivations that led to the creation of these funds.

The State Budget for 2014 does, it is true, establish a new requirement for exemption: should the allocation to rental for permanent residence not occur within the period of 3 years after the property enters the fund, the fund must request the assessment of the IMT that was not assessed ab initio.

However, this was not the case in question, contrary to what appears to follow from the Claimant's argument. The assessment of IMT and IS made with respect to the property described above was not based on its retention in the fund for a period equal to or greater than 3 years without allocation to rental for permanent residence. Indeed, as follows from the documentation attached to the proceedings, the property was in the fund for a shorter period.

The assessment in question, as indeed follows from the assessment notices attached to the proceedings, was based on the fact that the property was given "a use different from that on which the benefit was based". Now, with regard to this statement made by the Tax Authority that the property was given a different use, that is, that it was not allocated to rental for permanent residence, the Claimant provides no response, whereas this is the essential requirement for the application of the exemption.

Accordingly, we consider that the issue is not whether the provision is retroactive or not, which would be the case if, by way of example, the property had remained in the fund for a period of 3 years without yet being allocated to rental for permanent residence and, for that reason, there was an assessment of IMT and IS.

In the present case this is not what is at issue. The property in question is sold without having fulfilled its intended use – allocation to permanent residential rental. It is not a matter of time period. Once sold, that intended use can no longer be fulfilled, and therefore the requirement established for the exemption from IMT and IS to be applicable has not been met.

For compliance with Article 8(7)(a), a merely declared intention at the time of acquisition of the property is not sufficient, but an actual allocation to rental for permanent residence is required. Now, the Claimant provides no proof whatsoever in these proceedings of the fulfilment of this requirement.

We therefore consider that the issue is not whether the law is retroactive or not, nor is there injury to expectations of the Claimant or aggravation of its tax position. The rationale for the attribution of a tax benefit in the context of IMT and IS to FIIAH was established clearly from the outset – "Acquisitions of urban properties or autonomous fractions of urban properties intended exclusively for rental for permanent residence, by the investment funds…";

We accordingly consider that the assessment of IMT and IS in question is legal pursuant to Article 8(7)(a) and Article 8(8). Let us now examine the rationale for the assessment of IMT pursuant to Article 236(16) of Law 83/2013 of 31 December.

To recall, no. 16 provides:

"16 – Should the properties be sold, with the exception of the cases provided for in Article 5 [i.e. purchase option], or should the FIIAH be subject to liquidation, before the period provided for in no. 14 has elapsed, the taxpayer shall similarly request from the Tax Authority, prior to the sale of the property or the liquidation of the FIIAH, the assessment of the tax due in accordance with the previous number."

And in the previous number it is provided:

"15 – When the properties have not been subject to a rental contract within the three-year period provided for in the previous number, the exemptions provided for in nos. 6 to 8 shall cease to have effect, and in such case the taxpayer shall request from the Tax Authority, within 30 days following the end of the said period, the assessment of the respective tax."

In the present case – sale of properties that were never allocated to rental for permanent residence by the fund – this no. 16, read together with no. 15, does not alter the substance or requirements of the exemption established by Article 8(7)(a) but has a more procedural/operative nature – it being understood that should there be sale of properties that have not been subject to a rental contract, the exemptions cease (namely that of Article 8(7)(a)), and the taxpayer must request the assessment of the respective tax.

In conclusion, we maintain that the issue is not whether the law is retroactive or not, nor is there injury to expectations of the Claimant or aggravation of its tax position, and we therefore consider that the assessment of IMT and IS in question is legal.

6. AWARD

In light of the foregoing, it is hereby decided to declare:

· The request for arbitral decision unfounded, with the consequent dismissal, relating to the tax assessment acts for IMT and IS better identified in the proceedings, in the total amount of €19,335.75 (nineteen thousand three hundred and thirty-five euros and seventy-five cents).

The value of the proceedings is fixed at €19,335.75 (nineteen thousand three hundred and thirty-five euros and seventy-five cents), in accordance with the provisions of Articles 3(2) of the Costs Regulation for Tax Arbitration Proceedings (RCPAT), 97-A(1)(a) of the Tax Procedural Code (CPPT) and 306 of the Civil Procedure Code (CPC).

The amount of costs is fixed at €1,224 (one thousand two hundred and twenty-four euros) pursuant to Article 22(4) of the RJAT and Table I attached to the RCPAT, to be borne by the Claimant, in accordance with the provisions of Articles 12(2) of the RJAT and 4(4) of the RCPAT.

Let notification be made.

Lisbon, 12 September 2016

The Arbitrator

(Maria Antónia Torres)

Text drawn up by computer, in accordance with Article 131(5) of the Civil Procedure Code, applicable by virtue of Article 29(1)(e) of the RJAT.

The present arbitral decision is written according to the spelling prior to the Orthographic Agreement of 1990.

[1] Acronym for the Legal Regime for Tax Arbitration.

Frequently Asked Questions

Automatically Created

What are the IMT and Stamp Tax implications for FIIAH real estate investment funds under the special regime?
Under the special FIIAH regime established by Law 64-A/2008, real estate investment funds for residential rental benefit from IMT exemption on acquisitions of urban properties intended exclusively for permanent residential rental. The State Budget for 2014 (Article 236) introduced additional conditions requiring properties to be subject to a rental contract for permanent residence within three years of acquisition, with proof submitted to the Tax Authority within 30 days after this period. If properties are not rented within the three-year period, the exemptions are retroactively revoked and IMT and Stamp Tax become due. This creates significant compliance obligations for FIIAH funds to ensure properties are effectively rented within the prescribed timeframe and properly documented to maintain tax benefits.
Is Article 236 of Law 83-C/2013 unconstitutional under Article 103(3) of the Portuguese Constitution regarding retroactive taxation?
The Claimant argued Article 236 of Law 83-C/2013 is unconstitutional under Article 103(3) of the Portuguese Constitution, which prohibits retroactive tax laws. The constitutional issue arises because Article 236 was enacted in 2014 but applied retroactively to properties acquired in 2013 under the previous regime that did not contain the three-year rental requirement. By retroactively imposing new conditions and revoking exemptions already granted, the provision arguably violates the constitutional prohibition against retroactive taxation. However, the Tax Authority defended that the tribunal lacks competence to declare unconstitutionality and that assessments were based on the property's actual use rather than legislative changes. The arbitral tribunal acknowledged competence to assess the legality of the provision's concrete application without formally declaring unconstitutionality, focusing on whether the specific assessments were lawful.
Can IMT and Stamp Tax assessments on FIIAH properties be declared null under Article 133(2)(d) of the CPA for violating fundamental rights?
According to the decision, declaring tax assessments null under Article 133(2)(d) of the Administrative Procedure Code (CPA) is extremely difficult. The Portuguese legal-administrative system applies a general regime of annulability rather than nullity for reasons of legal certainty. The Supreme Administrative Court has established that nullity is reserved exclusively for acts that violate the essential content of a fundamental right. Acts performed based on illegal or unconstitutional provisions are merely annullable, not null. The Tax Authority argued that acts conflicting with the legality principle do not constitute violations of the essential content of fundamental rights sufficient to warrant nullity. Therefore, even if assessments are based on an unconstitutional provision, they would be annullable rather than null, subject to different time limits and procedural requirements for challenge.
What happens when a FIIAH property is given a different destination than the one that originated the tax benefit exemption?
When a FIIAH property is given a different destination than the one that originated the tax benefit exemption, the Tax Authority may assess IMT and Stamp Tax retroactively. The Tax Authority's primary defense in this case was that assessments resulted from the property receiving a different use than what justified the exemption—specifically, failure to rent the property for permanent residence as required. Under Article 236 of the State Budget for 2014, if properties are not subject to rental contracts within the three-year period, exemptions are revoked retroactively. The tax becomes due as if the exemption had never been granted. This mechanism ensures FIIAH funds actually use properties for their intended purpose of providing residential rental housing. The Tax Authority distinguished between assessments based on failure to meet conditions versus assessments based purely on legislative changes.
What is the distinction between nullity and annulability of tax assessments in Portuguese administrative law according to the Supreme Administrative Court?
Portuguese administrative law distinguishes between nullity and annulability of tax assessments based on principles established by the Supreme Administrative Court. The general regime is annulability, applied for reasons of legal certainty even to acts based on illegal or unconstitutional provisions. Nullity is exceptional and reserved exclusively for acts that violate the essential content of a fundamental right, directly conflicting with citizens' rights, freedoms and guarantees. Acts that merely violate the principle of legality are annullable, not null. This distinction has significant practical consequences: null acts can be challenged at any time without time limits, while annullable acts must be challenged within specific statutory deadlines. The distinction reflects a balance between legal certainty (favoring annulability with time limits) and protection of fundamental rights (allowing nullity claims without time restrictions).