Process: 162/2016-T

Date: October 13, 2016

Tax Type: IMT

Source: Original CAAD Decision

Summary

This tax arbitration case (Process 162/2016-T) addresses the constitutional validity of retroactive IMT and Stamp Duty assessments imposed on Real Estate Investment Funds for Residential Rental (FIIAH) following legislative changes introduced by Law 83-C/2013. The applicant, a managing company of a closed FIIAH fund, challenged assessments totaling €683.73 (IMT) and €546.98 (Stamp Duty) before the Administrative Arbitration Centre (CAAD). Originally, Law 64-A/2008 granted FIIAHs unconditional exemptions from IMT and Stamp Duty on acquisitions of urban property intended for residential rental. However, the 2014 State Budget (Law 83-C/2013) introduced new conditions through Article 8(14-16), requiring properties to be actually rented for permanent residence within three years of acquisition. If this condition was not met, previously granted exemptions would cease retroactively, triggering tax payment obligations. Critically, Article 236 established a transitional regime applying these new conditions not only to future acquisitions but also to properties acquired before January 1, 2014, with the three-year period counting from that date. The applicant argued this retroactive application violates Article 103(3) of the Portuguese Constitution, which prohibits retroactive tax legislation. The fund contended that exemptions granted before 2014 were unconditional and created vested rights in the taxpayer's legal sphere, which cannot be retroactively eliminated. The case raises fundamental questions about legal certainty, protection of legitimate expectations, and constitutional limits on retroactive taxation. The applicant sought declaration of nullity or annulment of the assessments, full reimbursement, and compensatory interest under Article 43 of the General Tax Law.

Full Decision

ARBITRATION DECISION

The Arbitrator Raquel Franco, appointed by the Deontological Council of the Administrative Arbitration Centre (CAAD) to form the singular arbitral tribunal constituted on 01 June 2016, decides as follows:

a) REPORT

a) Procedural Progress

On 16.03.2016, the company A..., S.A., Tax ID Number... with registered office at Avenue..., no.... –..., ... – ... Lisbon, in its capacity as managing company of the closed real estate investment fund «B... – CLOSED REAL ESTATE INVESTMENT FUND FOR RESIDENTIAL RENTAL» registered with the Securities Market Commission, with tax identification number... filed a request for constitution of a singular arbitral tribunal, pursuant to and for the purposes of the provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime for Tax Arbitration, hereinafter, "LRTA"), with the Tax Authority and Customs Authority (TA) being required as a party.

The request for constitution of the Arbitral Tribunal was accepted by the Esteemed President of CAAD and automatically notified to the TA on 24.03.2016.

The remaining legal procedures followed, with the tribunal being constituted, pursuant to the provisions of paragraph c) of no. 1 of article 11 of Decree-Law no. 10/2011, of 20 January, in the wording introduced by Law no. 66-B/2012, of 31 December, on 01.06.2016.

b) Subject Matter of the Request for Arbitral Decision

The Applicants request that the Tribunal declare the nullity of the contested assessments, namely the Transfer Tax assessment no...., in the amount of €683.73, and the Stamp Duty assessment no...., in the amount of €546.98, on the basis of their unconstitutionality or, subsidiarily, if this is not accepted, that the same be annulled on the same ground, with the Applicant further being reimbursed the full amount paid as a result of the said assessments plus, pursuant to article 43 of the General Tax Law, the indemnificatory interest due until the date of such reimbursement.

The Applicant substantiates its request, in summary, in the following terms:

Law no. 64-A/2008, of 31 December (State Budget for 2009), approved the special regime applicable to real estate investment funds for residential rental (hereinafter "REIFHR") and to real estate investment companies for residential rental.

In its article 8 (Tax Regime) the tax regime applicable to REIFHRs was established.

With regard to Transfer Tax, the Tax Regime of REIFHRs defined the following in number 7 of the said article 8:

"7 — The following are exempt from Transfer Tax:

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

b) Acquisitions of urban immovable property or of autonomous fractions of urban immovable property intended for permanent own and residential use, as a result of the exercise of the purchase option referred to in no. 3 of article 5 by tenants of the immovable property that forms part of the assets of the investment funds referred to in no. 1."

Law no. 83-C/2013, of 31 December (State Budget for 2014) added to article 8 of the Tax Regime of REIFHRs numbers 14 to 16, with the following text:

"14 - For the purposes of the provisions of nos. 6 to 8, it is considered that urban immovable property is intended for rental for permanent residence whenever it is subject to a rental contract for permanent residence within a period of three years counted from the moment when it became part of the fund's assets, with the taxpayer being required to communicate and provide evidence to the TA of the respective actual rental, within 30 days following the end of the said period.

15 - When immovable property has 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 cease to have effect, and in such case the taxpayer must request from the TA, within 30 days following the end of the said period, the assessment of the respective tax.

16 - If the immovable property is disposed of, except in the cases provided for in article 5, or if the REIFHR is subject to liquidation, before the period provided for in no. 14 has elapsed, the taxpayer must equally request from the TA, before the disposal of the immovable property or the liquidation of the REIFHR, the assessment of the tax due pursuant to the previous number."

Law no. 83-C/2013, of 31 December further established, in article 236 (Transitional Provision within the scope of the special regime applicable to REIFHRs and REISCs) the following transitional regime:

"1 - The provisions of nos. 14 to 16 of article 8 of the special regime applicable to REIFHRs and REISCs, approved by articles 102 to 104 of Law no. 64-A/2008, of 31 December, shall apply to immovable property acquired by REIFHRs from 1 January 2014.

2 - Without prejudice to the provision of the previous number, the provisions of nos. 14 to 16 of article 8 of the special regime applicable to REIFHRs and REISCs, approved by articles 102 to 104 of Law no. 64-A/2008, of 31 December, shall equally apply to immovable property acquired by REIFHRs before 1 January 2014, in which cases the three-year period provided for in no. 14 is to be counted from 1 January 2014."

Based on the provisions cited above, in particular those resulting from the amendments made to the Tax Regime of REIFHRs, the now Applicant requested from the Tax Authority the assessment of Transfer Tax and Stamp Duty relating to urban immovable property located at Street..., no...., ..., registered in the urban land registry no...., fraction..., of the Parish of..., ..., and paid the corresponding assessments on 25.12.2015.

Number 14 of article 8 of the Tax Regime of REIFHRs, transcribed above, specified unequivocally, and for the first time, the meaning of the expression "urban immovable property intended for rental for permanent residence".

The introduction of this definition of "urban immovable property intended for rental for permanent residence" was accompanied by the specification of the circumstances in which immovable property forming part of the assets of REIFHRs cease to benefit from the exemption regime provided for in numbers 6 to 8 of the Tax Regime of REIFHRs.

The contested tax acts refer to urban immovable property that formed part of the assets of Fund B... on the date of entry into force of Law no. 83-C/2013, of 31 December (State Budget for 2014), that is, those covered by the aforementioned article 236 (Transitional Provision within the scope of the special regime applicable to REIFHRs and REISCs).

The Applicant considers that the said assessments suffer from unconstitutionality due to violation of the provisions of article 103, no. 3, of the Constitution.

The exemptions from Transfer Tax and Stamp Duty contained, respectively, in numbers 7, paragraph a), and 8 of article 8 of the Tax Regime of REIFHRs were recognized at the request of Fund B..., pursuant to article 10 of the Transfer Tax Code, at a moment prior to the entry of the relevant immovable property into the assets of Fund B....

The exemptions from Transfer Tax and Stamp Duty at issue were not, on the date when they entered the assets of Fund B..., conditioned upon the subsequent verification of any facts or circumstances nor, likewise, subject to any expiry regime.

There were not provided for, at the moment of recognition of the exemption, any facts or circumstances upon which the expiry of the recognized exemption would depend, and consequently the subsequent imposition of such facts or circumstances to exemptions crystallized in the tax legal order of the Applicant (and because, in its view, the recognition of the exemption gave rise, at that moment, to the right to exemption in the legal sphere of its holder), suffers from unconstitutionality, due to violation of the principle of non-retroactivity of tax law, enshrined in article 103, no. 3, of the Constitution.

It further states that the violation of the retroactivity principle invoked takes into account the understanding that has been followed by the Constitutional Court according to which the prohibition of retroactivity, in the field of tax law, is only directed at authentic retroactivity, covering only cases in which the tax event that the new law intends to regulate has already produced all its effects under the old law, which is what occurs in the present case.

It further considers that the defect associated with the contested tax acts due to their unconstitutionality should be that of nullity insofar as the principle of non-retroactivity of tax law has the character of a fundamental right, and therefore its disregard results in the nullity of the act, in this case, of the contested assessments.

Subsidiarily, it admits that the defect of the assessments could result in their voidability (and not nullity), requesting that the same be annulled accordingly, pursuant to articles 10, no. 1, paragraph a), of the LRTA and article 102, no. 1, paragraph a) of the Code of Tax Procedure and Process.

c) In response, the TA alleges, briefly, as follows:

In the first place, it alleges that, pursuant to no. 2 of article 266 of the Constitution and no. 1 of article 3 of the Code of Administrative Procedure, the Administration is obliged to act in compliance with the principle of legality, and therefore the administrative bodies and agents do not have competence to decide on the non-application of norms in relation to which doubts of unconstitutionality are raised.

As to the alleged unconstitutionality of the assessments due to violation of the principle of non-retroactivity of tax law, it responds that, basing the assessments in question on the fact that the immovable property was given "a purpose different from that upon which the benefit was based" then, contrary to what the Applicant contends, not only is the retroactivity of the legal norm not at issue, but also there is no violation of its expectations. In effect,

The taxpayers who wished to benefit from the said exemptions always had, from the beginning of the tax regime applicable to REIFHRs, to comply with the requirement that such immovable property be intended exclusively for rental for permanent residence, and therefore the Applicant is not correct when it states that the exemptions at issue were not conditioned by any facts or circumstances.

Thus, the new wording introduced by Law no. 83-C/2013, of 31 December, merely served to densify the criterion already required, stipulating "that urban immovable property is intended for rental for permanent residence whenever it is subject to a rental contract for permanent residence within a period of three years counted from the moment when it became part of the fund's assets".

In this way, with the amendments introduced, the ratio of the consecrated exemptions was not altered, and it should be emphasized that immediate extinction of the benefit was not determined in the event of the said rental contract not being concluded, as a quite extended period of three years was granted for this purpose, thereby respecting the principle of legal certainty and protection of legitimate expectations.

Furthermore, from the beginning of the regime the tax benefits at issue applicable to REIFHRs depended on the allocation of the immovable property to rental for permanent residence, a legal requirement that the TA, within the scope of its inspection powers, could always ascertain, in order to conclude whether the benefit continued or, instead, whether the system of ordinary taxation should be restored. Thus, where there is at issue the disposal of the immovable property without allocation of the same to rental for permanent residence, this would always result in the expiry of the exemption, under article 14, no. 2, of the Tax Benefits Statute, and article 8, no. 16 of the regime merely served to implement an anti-abuse measure, establishing that immovable property that does not remain in the portfolio with allocation exclusively to residential rental was not acquired for such purpose. In this sense, it further invokes the arbitral decisions delivered in proceedings 398/2015-T, 688/2015-T, 689/2015-T, 705/2015-T, 709/2015-T, 710/2015-T, 717/2015-T, 729/2015-T, 735/2015-T, 62/2016-T and 93/2016-T, all favorable to the TA.

II. PRELIMINARY ASSESSMENT

  1. The Tribunal is competent and is properly constituted, pursuant to articles 2, no. 1, paragraph a), 5 and 6, all of the LRTA.

  2. The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to articles 4 and 10 of the LRTA and article 1 of Order no. 112-A/2011, of 22 March.

  3. The proceedings do not suffer from defects that would render them invalid.

III. FACTUAL MATTERS

III.1. Proven Facts

Before proceeding to assess the questions, it is necessary to present the factual matters relevant for their understanding and decision, which, having examined the documentary evidence and the administrative file (AF) attached to the records and taking into account the facts alleged, is set out as follows:

a) The Applicant company is the managing company of a closed real estate investment fund for residential rental designated as «B... – CLOSED REAL ESTATE INVESTMENT FUND FOR RESIDENTIAL RENTAL» and registered with the Securities Market Commission with Tax ID Number....

b) The "Fund B..." was, at the date of the assessments at issue, the owner of urban immovable property registered under article..., fraction "...", in the land registry of the parish of..., in the municipality of....

c) The said immovable property was acquired on 30.12.2013, benefiting from exemption from Transfer Tax and Stamp Duty under no. 7 paragraph a) and no. 8 of article 8 of the legal regime of REIFHRs.

d) The said immovable property was disposed of on 21.12.2015.

e) The Applicant requested from the TA the assessment of Transfer Tax and Stamp Duty due on the disposal due to expiry of the exemption.

f) The assessments issued were paid on 22.12.2015.

III.2. Unproven Facts

No facts with relevance to the decision of the case were identified that were not proven.

IV. THEMA DECIDENDUM

The main question at issue in the present proceedings is whether the contested Transfer Tax and Stamp Duty assessments are invalid because issued under article 236 of Law 83-C/2013, of 31/12, which the Applicant considers to be unconstitutional due to violation of article 103 of the Constitution of the Portuguese Republic.

V. LEGAL REASONING

The question that needs to be decided in the present proceedings has already been the subject of analysis and decision in previous arbitral proceedings, and no reason is seen to decide differently from what the arbitral tribunals previously constituted have decided.

Thus, and in the first place, the immovable property on which the contested assessments were levied was disposed of in the year 2015 and consequently allocated to a purpose different from that for which the exemptions were granted. In this way, and as stated in the arbitral decision delivered in proceedings 689/2015-T, "the disposal of the immovable property would always result in the expiry of the exemption by application of the provisions of no. 3 of article 14 of the Tax Benefits Statute, and therefore, in the situation sub judice, there is not at issue any retroactive application of a norm that would introduce a new expiry regime for exemptions, nor is there violation of the Applicant's expectations or worsening of its tax position (...)."

The immovable property subject to the contested assessments was acquired by the Applicant in late 2013, benefiting from exemption from Transfer Tax under paragraph a) of no. 7 of article 8 of the legal regime of REIFHRs. This provision requires that the immovable property be intended for rental for permanent residence in order to benefit from such exemption.

The requirement to allocate the immovable property to residential rental is not a requirement of the amendments introduced by the State Budget for 2014, but rather a requirement of the tax regime of REIFHRs from its inception, in line moreover with the spirit that led to its creation.

The State Budget for 2014 established a new temporal requirement for the exemption, determining that allocation to rental for permanent residence would have to occur within a period of 3 years after the immovable property entered the fund. However, it was not the non-compliance with this temporal requirement that resulted in the loss of the exemption in the specific case and consequent assessment of the taxes here at issue. The assessments made were not based on the immovable property remaining in the fund for a period equal to or greater than 3 years without having been allocated to rental for permanent residence. In fact, as appears from the documentation attached to the proceedings, the immovable property was in the fund for only a few months.

The assessments at issue were based on the fact that the immovable property was given "a purpose different from that upon which the benefit was based".

Thus, we understand that the question at issue is not the retroactivity or otherwise of the applied norm, but rather the non-compliance with the requirement established for the exemption to be applicable, and therefore the question of whether the norm contained in article 236 of Law 83-C/2013, of 31/12, is or is not unconstitutional due to violation of article 103, no. 3 of the Constitution of the Portuguese Republic, as well as the question of whether the defect of the assessment act practiced under an unconstitutional norm is that of nullity or of voidability, is prejudiced.

With regard to the request for indemnificatory interest, it naturally also does not succeed since it was not established that there was "error imputable to the services which resulted in payment of the tax debt in an amount greater than that legally due" (cf. article 43, no. 1, of the General Tax Law).

VI. DECISION

In accordance with what is set out above, it is decided:

· To dismiss the requests for declaration of nullity of the contested assessments on the ground of unconstitutionality of the norm contained in article 236 of Law no. 83-C/2013, of 31/12, as well as their annulment on the same ground;

· To dismiss the requests for restitution of the tax paid, as well as that for payment of indemnificatory interest pursuant to article 43 of the General Tax Law.

Value: in accordance with the provisions of article 97-A, no. 1, paragraph a), of the Code of Tax Procedure and Process and article 3, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings, the case value is fixed at €1,230.71.

Costs: pursuant to the provisions of article 22, no. 4, of the LRTA and Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is fixed at €306.00, to be paid by the Applicant in accordance with the provisions of articles 12, no. 2, and 22, no. 4, both of the LRTA, and article 4, no. 4, of the cited Regulation.

Let it be registered and notified.

Lisbon, 13 October 2016

The Arbitrator,

Raquel Franco

Note: text prepared by computer, pursuant to the provision of article 131, no. 5, of the Code of Civil Procedure, applicable ex vi article 29, no. 1, al. e), of the LRTA.

Frequently Asked Questions

Automatically Created

Are Real Estate Investment Funds for Residential Leasing (FIIAH) exempt from IMT on property acquisitions in Portugal?
Yes, FIIAHs are conditionally exempt from IMT on property acquisitions in Portugal. Under Law 64-A/2008, Article 8(7)(a), acquisitions of urban property intended exclusively for rental for permanent residence were exempt from IMT. However, Law 83-C/2013 added Article 8(14-16), requiring that properties be actually subject to a rental contract for permanent residence within three years of acquisition. If this condition is not met, the exemption ceases and the fund must request IMT assessment from the Tax Authority within 30 days after the three-year period expires. The exemption is therefore no longer automatic but contingent upon actual rental within the specified timeframe.
How did Law 83-C/2013 (Article 236) affect the IMT and Stamp Duty exemptions previously granted to FIIAH funds?
Law 83-C/2013, through Article 236, significantly affected previously granted IMT and Stamp Duty exemptions by imposing retroactive conditions. While the new requirements in Article 8(14-16) applied prospectively to properties acquired from January 1, 2014 onwards, Article 236(2) extended them retroactively to properties acquired before that date. For pre-2014 acquisitions, the three-year rental period was counted from January 1, 2014, rather than from the original acquisition date. This meant that FIIAHs holding properties acquired before 2014 with unconditional exemptions suddenly faced new compliance obligations. Failure to rent properties within the recalculated timeframe resulted in retroactive loss of exemptions and liability for previously exempt taxes, triggering the assessments contested in this case.
Can a FIIAH fund challenge retroactive IMT and Stamp Duty assessments through tax arbitration at CAAD?
Yes, FIIAH funds can challenge retroactive IMT and Stamp Duty assessments through tax arbitration at CAAD. This case demonstrates that arbitration requests can be filed under Decree-Law 10/2011 (Legal Regime for Tax Arbitration), which grants CAAD jurisdiction over tax disputes. The fund contested the assessments on grounds of unconstitutionality and illegality, seeking nullity or annulment of the tax acts. The arbitral tribunal was constituted following acceptance of the request, with the Tax Authority cited as respondent. Beyond CAAD, taxpayers can also pursue judicial review in administrative courts. The arbitration procedure offers an alternative dispute resolution mechanism that is typically faster than traditional court litigation, with specialized arbitrators deciding tax matters.
What are the constitutional grounds for contesting the removal of FIIAH tax exemptions under Portuguese law?
The primary constitutional ground for contesting removal of FIIAH tax exemptions is violation of Article 103(3) of the Portuguese Constitution, which enshrines the principle of non-retroactivity of tax law. Taxpayers argue that exemptions granted before Law 83-C/2013 were unconditional and created definitive vested rights in their legal sphere. When properties entered the fund's assets with recognized exemptions, these rights became 'crystallized' in the tax legal order. Retroactively imposing conditions (three-year rental requirement) on previously granted unconditional exemptions violates constitutional protections against retroactive taxation. Additional grounds include violation of the principle of legal certainty and protection of legitimate expectations (Article 2 of the Constitution), as taxpayers structured investments relying on the stability of existing tax benefits. The retroactive application undermines trust in the legal system and the State's commitments.
Is a taxpayer entitled to compensatory interest (juros indemnizatórios) when IMT and Stamp Duty liquidations are annulled by CAAD?
Yes, taxpayers are entitled to compensatory interest (juros indemnizatórios) when IMT and Stamp Duty liquidations are annulled by CAAD, pursuant to Article 43 of the General Tax Law (Lei Geral Tributária). This provision establishes that when tax assessments are declared unlawful or annulled, the State must reimburse amounts paid plus compensatory interest calculated from the payment date until actual reimbursement. Compensatory interest serves to compensate taxpayers for the financial loss resulting from undue deprivation of funds caused by unlawful tax assessments. The interest rate and calculation methodology are defined in Article 43 of the LGT. In this case, the applicant expressly requested reimbursement of all amounts paid as a result of the contested assessments plus compensatory interest until the reimbursement date, demonstrating this is a standard component of relief sought in successful tax arbitration proceedings.