Process: 241/2016-T

Date: December 19, 2016

Tax Type: IMT Selo

Source: Original CAAD Decision

Summary

CAAD Case 241/2016-T examines whether Article 236 of Law 83-C/2013 (2014 State Budget) unconstitutionally applied new tax rules retroactively to closed-end real estate investment funds for residential rental (FIAH). A fund management company challenged IMT and Stamp Tax assessments totaling €3,736.62 on property acquired before January 1, 2014. The claimant argued that tax exemptions under Article 8 of the FIAH regime were definitively crystallized when the property entered the fund and were not subject to any lapsing conditions. Article 236 imposed a new three-year exemption lapsing period counted from January 1, 2014, even for properties acquired earlier. The claimant alleges this violates the constitutional principle of non-retroactivity in Article 103(3) of the Portuguese Constitution, constituting authentic retroactivity since the tax facts had already produced all effects under the old law. The arbitral tribunal was constituted on July 14, 2016, with both parties submitting written arguments after waiving the oral hearing. The claimant petitioned for nullity based on unconstitutionality or, subsidiarily, annulment for illegality, seeking full reimbursement of taxes paid plus compensatory interest. This case has significant implications for real estate investment funds that acquired properties under the prior exemption regime.

Full Decision

ARBITRAL DECISION

Claimant: A... – INVESTMENT FUND MANAGEMENT COMPANY, SA

Respondent: Tax and Customs Authority (AT)

I – REPORT

  1. A... – INVESTMENT FUND MANAGEMENT COMPANY, SA, with registered office in ..., no. ...-... Lisbon, tax identification number ..., hereinafter referred to as the "Claimant", management company of the real estate investment fund "B... – CLOSED REAL ESTATE INVESTMENT FUND FOR RESIDENTIAL RENTAL, registered with the Securities Commission, with the tax identification number ..., filed a request for constitution of an Arbitral Tribunal, pursuant to the provisions of article 2, no. 1, paragraph a), of Decree-Law no. 10/2011, of 20 January, hereinafter referred to as "RJAT" and of Ordinance no. 112-A/2011, of 22 March, for the challenge and declaration of illegality of two tax assessments, respectively, of Municipal Property Transfer Tax (IMT) and Corporate Income Tax (IS), attached to the case file.

  2. The following tax acts are in question, relating to the property registered in the urban property registry with no. ..., corresponding to Fraction B, of the property under condominium ownership regime located at Avenue ..., no. ... and Street ..., no. ..., Ground Floor Left, of the Parish of ..., namely:

  • Assessment of Municipal Property Transfer Tax (IMT), with no. ..., in the amount of €2,570.72;
  • Assessment of Corporate Income Tax (IS), with no. ..., in the amount of €1,165.90.

The assessments, in the total amount of €3,736.62, were paid on 27 January 2016.

  1. The request for constitution of the Arbitral Tribunal, filed by the Claimant on 26-04-2016, was accepted by the Excellent President of CAAD on 28-04-2016 and notified to the Tax and Customs Authority, in accordance with the terms and for the purposes legally provided. The Claimant chose not to designate an arbitrator, wherefore, pursuant to the provisions of no. 1, article 6 of RJAT, the Ethics Council of the Centre for Administrative Arbitration, on 29-06-2016, designated the undersigned as arbitrator. Thus, in conformity with the provisions of paragraph c), no. 1, article 11, of RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Single Arbitral Tribunal was constituted on 14-07-2016.

On 15-07-2016 an arbitral order was issued to the Tax and Customs Authority (AT) to submit a reply within the legal time period, in accordance with the terms and for the purposes of the provisions in nos. 1 and 2 of article 17 of RJAT.

On 28-09-2016, the Respondent submitted its reply to the case file, which is hereby fully reproduced. It did not submit the administrative file, as the case was not preceded by any administrative procedure, therefore there is no administrative file. Simultaneously, it presented a request in which it asks for a waiver of the holding of the meeting provided for in article 18 of RJAT, given that the matter at issue in the case is exclusively of law, with no evidence to be produced, and the case may proceed to arguments and final decision.

On 26-10-2016 an arbitral order was issued waiving the holding of the meeting provided for in article 18 of RJAT, which also set an equal and consecutive time period of 10 days for arguments from the parties. A date was set for the pronouncement of the arbitral award, until 20-12-2016, with the claimant required to pay the subsequent arbitration fee up to 10 days before the date set for the decision.

The parties submitted their arguments, respectively, on 08-11-2016 the Claimant and on 18-11-2016 the Respondent. The Claimant attached to its arguments a document (Request addressed to the [Finance Service] for assessment of IMT and IS relating to the exchange of a property located in the Parish of ..., Parish ...), an opinion prepared by Excellent Professors Doctors C... and D..., on the question of the retroactivity of the provisions of article 236 of Law no. 83-C/2013 of 31 December and Arbitral Decision, rendered in case 683/2015, of 20/05/2016.

B) THE CLAIM FORMULATED BY THE CLAIMANT:

  1. The Claimant formulates the present request for arbitral pronouncement to ascertain whether article 236 (Transitional Provision within the scope of the Special Regime Applicable to FIIAH and SIIAH) provided for by Law no. 83-C/2013, of 31 December - insofar as it determines the application of the current Tax Regime for FIIAH "to properties that have been acquired by FIIAH before 1 January 2014, with the three-year period provided for in no. 14 being counted from 1 January 2014" - constitutes a new regime for the lapsing of the exemptions provided for in no. 7, paragraph a) and no. 8 of article 8 (Tax Regime) of the Tax Regime for FIIAH, revealing a flagrant and unequivocal violation of the principle of non-retroactivity of tax law, embodied in article 103 (Tax System), no. 3, of the Constitution of the Portuguese Republic."

  2. From the Claimant's perspective, the tax assessments (IMT and IS) in question are illegal, by nullity or, should that not be accepted, by annulability. The main ground invoked, from which it concludes that the assessments are null, rests on the unconstitutionality of the challenged acts, since they derive from the application of the provisions of article 236 (Transitional Provision within the scope of the Special Regime Applicable to FIIAH and SIIAH) provided for by Law no. 83-C/2013, of 31 December (State Budget Law for 2014). Insofar as this provision determines the application of the current Tax Regime for FIIAH "to properties that have been acquired by FIIAH before 1 January 2014, with the three-year period provided for in no. 14 being counted from 1 January 2014" - it constitutes a new regime for the lapsing of the exemptions provided for in no. 7, paragraph a) and no. 8 of article 8 (Tax Regime) of the Tax Regime for FIIAH, revealing a flagrant and unequivocal violation of the principle of non-retroactivity of tax law, embodied in article 103 (Tax System), no. 3, of the Constitution of the Portuguese Republic. The Claimant understands that the violation of this constitutional principle constitutes the violation of a fundamental guarantee of taxpayers (fundamental right), whose violation generates nullity of the tax acts performed.

The Claimant further understands that at the moment when the property entered the Fund's assets, the exemptions from IMT and Stamp Duty (IS), taxes of sole obligation, were definitively crystallized in the legal order, and that on the date the properties entered the respective real estate fund, the exemptions were not conditioned to the verification of any fact or circumstance, nor were they subject to any lapsing regime. Thus, the subsequent imposition of these facts or circumstances on exemptions crystallized in the legal sphere of the Claimant suffers from unconstitutionality by violation of the principle of non-retroactivity of tax law. It further alleges that this is authentic retroactivity, insofar as the tax facts that the new law intends to regulate have already produced all their effects under the old law. Even if the Tribunal were to understand that this is not nullity as alleged, it would still have to annul the challenged assessments, due to a defect of illegality, generating annulability, and the arbitral claim was filed within the legal time period provided for in article 102 of the Tax Procedure Code (CPPT), applicable in arbitral proceedings.

These are, briefly, the arguments that the Claimant invokes in its claim and which it reinforces in the arguments attached to the case file, which are hereby fully reproduced.

In summary, the Claimant petitions the nullity of the assessments based on their unconstitutionality, and, subsidiarily, should that not be accepted, the annulment of the assessments for illegality. It further requests reimbursement of the totality of tax assessed and paid and of the compensatory interest that may be due until the date of such reimbursement.

C – THE RESPONDENT'S REPLY

  1. The Respondent AT, duly notified for that purpose, timely submitted its reply in which, by way of challenge, it alleged, in summary, that the tax acts in question did not violate any legal or constitutional provision and that the assessments are a consequence of the use given to the property having been other than rental. This consequence already resulted from the version of the law of 2008, which introduced into the system the legal regime applicable to these Funds, providing for the tax benefits of exemption from IMT and IS conditioned to the use of the property being rental and not other. Should the Fund give the property another use, it would always be subject to tax assessments, wherefore the assessments challenged here are legal and must be maintained. Nevertheless, the AT understands that the transitional provision contained in the aforesaid article 236 of Law 83-C/2013 of 31 December does not suffer from unconstitutionality. In any event, the AT emphasizes that it cannot disapply the legal provision in question, on the grounds of its unconstitutionality, as it is subject to the principle of legality, as results from the provisions of articles 266, no. 2 of the CRP, 3, no. 1 of the CPA and 55 of the LGT. This question is properly addressed and treated by doctrine and jurisprudence of the higher courts.

According to the AT, there is also no violation of article 103, no. 3 of the CRP, first and foremost because from the outset, that is, from the beginning of the tax regime applicable to FIIAH, it was necessary to comply with the requirement that such properties be destined exclusively for rental for permanent housing. They were always conditioned to this requirement, wherefore Law 83-C/2013, of 31 December, merely served to specify the criterion already required. It develops abundant arguments around the regime applicable to tax benefits and the verification or inspection of the conditions that determine it. Wherefore, the tax exemptions may always cease, through inspection that concludes the non-verification of the respective requirements.

It concludes that the assessments are legal and that the request for annulment and condemnation to pay compensatory interest is without merit. It also invokes some recent arbitral decisions, rendered in cases identical to those of the present file, which it attached to its arguments.

II - PROCEDURAL REQUIREMENTS

  1. The Arbitral Tribunal is regularly constituted. It is materially competent, pursuant to article 2, no. 1, paragraph a) of RJAT, as results from the exact terms of the claim filed.

  2. The Parties have legal personality and capacity, are legitimate and are legally represented (cf. articles 4 and 10, no. 2 of RJAT and article 1 of Ordinance no. 112/2011, of 22 March).

The case does not suffer from defects that would invalidate it.

  1. Taking into account the documentary evidence attached to the case file, and the allegations of the parties in the case, it is necessary to establish the facts relevant for understanding the decision, which are established as follows.

III – Facts

A) Proven Facts

  1. As relevant facts, this tribunal establishes the following facts as proven:

a) The Claimant company, designated as A... – Investment Fund Management Company, SA is the management company of the real estate fund B... – CLOSED REAL ESTATE INVESTMENT FUND FOR RESIDENTIAL RENTAL, registered with the Securities and Exchange Commission, with tax number ...;

b) In the course of its activity, the Claimant acquired on 30-12-2013, for Fund B..., the urban property, located at property U-...-P, located on Avenue ..., no. ... and Street ..., no. ..., ..., of the Parish of ..., ..., benefiting Cascais and Estoril, under the special regime established by Law no. 64-A/2008, of 31 December, with the benefit of exemption from IMT and IS pursuant to no. 7 paragraph a) and no. 8 of article 8 of the legal regime of FIIAH;

c) This property was disposed of in 2016, according to a statement of the Claimant, of 26-01-2016, which requested the AT to issue the respective assessments of IMT and IS, with the following motivation:

d) As a consequence, the following assessments were issued:

  • Assessment of IMT no. ..., in the amount of €2,570.72;
  • Assessment of IS no. ..., in the amount of €1,165.90;

e) The assessments were paid on 27 January 2016;

f) As a consequence of the disposal of the property, the property was given a use different from rental for permanent housing, as stipulated at the time of its acquisition by Real Estate Fund B....

B) FACTS NOT PROVEN

  1. With relevance for the decision, there are no relevant facts that should be considered as not proven.

C) SUBSTANTIATION OF THE PROVEN FACTS

  1. The facts described above were proven based on the documentary evidence that the Claimant submitted to the case file, confirmed by the AT, which attests from the outset that the facts described above are true. Thus, taking into account the positions assumed by the parties and the documentary evidence attached to the case file, the facts listed above were considered proven, with relevance for the decision, moreover unanimously recognized and accepted by the parties.

IV – LAW: substantiation of the merit decision

  1. Having established, as mentioned above, the facts, it is necessary to address the legal question raised by the Claimant, which consists in determining whether the assessments of IMT and IS subject to the arbitral pronouncement request suffer from the alleged illegalities.

It is necessary to decide.

  1. As we have seen above, the Claimant bases its request for annulment of the assessments on their unconstitutionality / illegality, resulting from the application of the provision of article 236 of Law no. 83-C/2013 of 31 December, which it understands to be unconstitutional, which is why the AT should not apply such legal provision.

The Claimant alleges that the tax assessments challenged derive, exclusively, from the provision of article 236 of Law 83-C/2013, and that the application of this provision to the factual situation described in the case file is unconstitutional insofar as it translates the retroactive application of this provision (authentic retroactivity), which violates the provision of no. 3 of article 103 of the CRP.

The argument underlying the arbitral claim is, therefore, that of the unconstitutionality of the application of the provision of article 236 of Law 83-C/2016. At this point, it should be noted that regardless of whether the provision in question is or is not unconstitutional in the terms alleged by the Claimant, this arbitral Tribunal understands that the assessment of IMT and IS challenged in the present case is not a consequence of the application of this provision. Wherefore, regardless of the question of the authentic retroactivity alleged by the Claimant, given the proven factuality and the regime under which the Claimant benefited from the exemption in the acquisition, the disposal of the property under the conditions described would always imply the obligation to assess the taxes in question. Not by force of the provision of article 236 of Law 83-C/2013 (State Budget Law for 2014) but by force of the special regime applicable to FIIAH, introduced by Law 64-A/2008, of 31 December. Wherefore, the Claimant's argument does not prevail on this point, as will be demonstrated.

However, the Claimant alleges that the AT should not have assessed the taxes in question, at the risk of violating the principle of non-retroactivity, which constitutes a violation of a fundamental right, generating nullity of the assessment act.

  1. The jurisprudence of the higher courts has been quite unanimous in recognizing that the administration is subject to the principle of legality and, therefore, cannot disapply a certain legal provision on the ground of unconstitutionality. In a recent decision, the Supreme Administrative Court ruled on this question, in the following terms:

"(...) unless it is a matter of violation of constitutional norms that are directly applicable and binding, such as those relating to rights, freedoms and guarantees (cf. article 18, no. 1, of the CRP), the AT cannot refuse to apply the provision on the grounds of unconstitutionality (Of interest on this question, see the opinions of the Consultative Council of the Office of the Attorney General referred to in the Collection of Opinions of the Office of the Attorney General, volume V, items 10, 3, 3.2 – respectively, with the headings 'Control of Constitutionality', 'Successive Control' and '(Non)application of Unconstitutional Provision (Powers and Duties of the Public Administration)' – whose doctrine we follow.). This is because the Administration in general is subject to the principle of legality, enshrined constitutionally and the AT is subject to it by force of article 55 of the LGT. In our view, the AT should await the declaration of unconstitutionality with binding general effect, to be issued by the Constitutional Court (TC), pursuant to article 281 of the CRP. This is because, as VIEIRA DE ANDRADE says, 'This conflict [between constitutionality and the principle of legality] cannot be resolved through the automatic prevalence of constitutional law over legal law. It is not a question of this, because what is at issue is not the constitutionality of the law, but the judgment that administrative bodies may make about such constitutionality. On the one hand, the Administration is not a body for the control of constitutionality; on the other hand, the Administration's subjection to law is intended not only to protect the rights of individuals, but also the defense and pursuit of public interests [...]. The grant to administrative power of unlimited powers to control the unconstitutionality of the laws to be applied would lead to administrative anarchy, would invert the Law-Administration relationship and would directly assault the principle of separation of powers, as it is enshrined in our Constitution' (Constitutional Law, Almedina, 1977, p. 270.). In the same sense, JOÃO CAUPERS states that 'the Administration does not have, in principle, competence to decide not to apply provisions whose constitutionality raises doubts for it, in contrast to courts, to whom falls the task of diffuse and concrete control of constitutional compliance, as shown by the differences between articles 207 [now 204] and 266, no. 2, of the Constitution. While the former prevents courts from applying unconstitutional norms, the latter provides for the subordination of administrative bodies and agents to the Constitution and law.

It appears clear that the essential difference between the two provisions results exactly from the fact that it was not intended to entrust the Administration with the task of controlling the constitutionality of laws. The performance of such a function by the latter must be seen as exceptional' (The Fundamental Rights of Workers and the Constitution, Almedina, 1985, p. 157.).

We conclude, therefore, that in Portuguese Constitutional Law there is no possibility for the Administration to refuse to obey a provision that it considers unconstitutional, substituting itself for the organs of constitutional control, unless it is a matter of violation of rights, freedoms and guarantees constitutionally enshrined, which is not manifestly the case when what is at issue is the application of a provision that may violate the principle of non-retroactivity of tax law...", cf. among others, the recent decisions dated 26/02/2014, appeal no. 0481/13 and 12/03/2014, appeal no. 01916/13." [1]

The Respondent's allegation therefore proceeds when it invokes its subordination to law and, by force thereof, the impossibility of disapplying a provision based on the interpretation it makes about its unconstitutionality. However, the question that truly matters is whether what is at issue in the present case is or is not the assessment of IMT and IS by force of the application of the provision of article 236 of the State Budget Law for 2014, or rather the application of a legal consequence already provided for in the special regime introduced in 2008, which established the tax benefit granted to these Funds.

  1. It results from the application of the tax legal regime applicable to FIAH, introduced by Law 64-A/2008, that the exemptions from IMT and IS provided for therein and applicable to FIIAH, were subject to one sole and exclusive condition: that the properties acquired by the Funds be destined for rental for permanent housing.

Accordingly, regardless of the regime introduced by article 236 of the State Budget Law for 2014, the Claimant, by disposing of the property in question, would always be obligated to pay the taxes in question, if and when it gave the property a use different from that provided for in law. This is exactly what occurred in the present case.

The legal regime applicable to real estate investment funds for residential rental (FIIAH) and real estate investment companies for residential rental (SIIAH), clearly defines the requirements or conditions for being able to benefit from the exemptions provided for therein. It was established by Law no. 64-A/2008, of 31 December (State Budget for 2009), in no. 7 of its article 8, the following:

Article 8
(Tax Regime)
(…)

"7 – Exempted from IMT:

a) The acquisitions of urban properties or autonomous fractions of urban properties destined exclusively for rental for permanent housing, by the investment funds referred to in no. 1;

b) The acquisitions of urban properties or autonomous fractions of urban properties destined for own and permanent housing, as a result of the exercise of the purchase option referred to in no. 3 of article 5 by the lessees of the properties that form part of the assets of the investment funds referred to in no. 1." (underlined)

The conditions for benefiting from the exemption were clear since 2008 and depended on the use of the property for the purposes contemplated in law: rental for own permanent housing or sale to the lessee who exercises his purchase option. The non-fulfillment of these conditions would always imply the payment of the taxes.

  1. Law no. 83-C/2013, of 31 December (State Budget Law for 2014) added to this article 8 the numbers 14 to 16, which provide as follows:

"14 - For the purposes of the provisions in nos. 6 to 8, urban properties shall be considered destined for rental for permanent housing whenever they are subject to a rental contract for permanent housing within the period of three years counted from the moment they entered the Fund's assets, and the taxpayer must notify and provide proof to the AT of the respective actual rental, within 30 days following the end of 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 cease to have effect, and in such case the taxpayer must request from the AT, within 30 days following the end of said period, the assessment of the respective tax.

16 - Should the properties be disposed of, with the exception of the cases provided for in article 5, or should the FIIAH be subject to liquidation, before the period provided for in no. 14 has elapsed, the taxpayer must equally request from the AT, prior to the disposal of the property or the liquidation of the FIIAH, the assessment of the tax due in accordance with the previous number."

Law no. 83-C/2013, of 31 December (State Budget Law for 2014) further established in its article 236 a transitional regime within the scope of the special regime applicable to FIIAH and SIIAH as follows:

"1 - The provision of nos. 14 to 16 of article 8 of the special regime applicable to FIIAH and SIIAH, approved by articles 102 to 104 of Law no. 64-A/2008, of 31 December, is applicable to properties that have been acquired by FIIAH from 1 January 2014.

2 - Notwithstanding the provision in the previous number, the provision of nos. 14 to 16 of article 8 of the special regime applicable to FIIAH and SIIAH, approved by articles 102 to 104 of Law no. 64-A/2008, of 31 December, is equally applicable to properties that have been acquired by FIIAH before 1 January 2014, with the three-year period provided for in no. 14 being counted from 1 January 2014."

  1. The special regime applicable to FIIAH and SIIAH, contained in Law no. 64-A/2008 of 31 December (State Budget Law for 2009) which approved the special regime applicable to these investment funds and companies, provided that this regime "is applicable to FIIAH or SIIAH constituted during the five years following the entry into force of this law and to the properties acquired by them in the same period", that is, between 1 January and 31 December 2013. The constitution and operation of FIIAH are governed by the provisions of the Legal Regime of Real Estate Investment Funds, approved by Decree-Law no. 60/2002 of 20 March.

Thus, it results from this special regime that the borrowers of housing credit contracts who proceed to dispose of the property subject to the contract to a FIIAH may enter into a rental contract with the fund management entity, and prior to the conclusion of the property transmission contract with the FIIAH, information must be provided about the essential elements of the transaction.

It further results from this legal regime that the rental constitutes the lessee in a purchase option right over the property from the fund, capable of being exercised until 31-12-2020, which is only transferable by death of the holder.

  1. It is, therefore, clear that the objective of the legislator with this regime was to provide alternative solutions for mortgage lenders, in times of acute economic crisis, encouraging the disposal of properties and the conclusion of a rental contract with a purchase option at the end of the contract.

However, the legislator did not grant this exemption unconditionally. The exemption presupposed, in the original version of the Law (2008), a specific use of the property: rental for housing, under the conditions legally provided. Therefore, any other subsequent use, different from that provided for in law, had to have as a consequence the generation of the respective tax assessments. In fact, if this were not the case, the legislator would have granted an unconditional tax benefit, capable of being used, perhaps, abusively and unjustly by the inequalities it would generate compared to all situations in which the same business transactions were and are subject to these taxes.

  1. Thus, the legislator granted some tax exemptions to this type of real estate funds, as a measure to encourage rental for permanent housing, and the rental contract may have a purchase option clause in favor of the lessee. The exemptions granted are as follows:

a) exemption from Corporate Income Tax (IRC), as to the income of FIIAH (of any nature) constituted between 1 January 2009 and 31 December 2013;

b) exemption from Personal Income Tax (IRS) and Corporate Income Tax (IRC) as to income relating to participation units;

c) exemption from Personal Income Tax (IRS) on capital gains resulting from the transfer of properties destined for own housing in favor of investment funds that occurs by force of the conversion of the right of ownership of these properties into a rental contract;

d) exemption from Municipal Property Tax (IMI) on properties destined for rental for permanent housing, as long as they remain in the ownership of the FIIAH;

e) exemption from Municipal Property Transfer Tax (IMT) for the acquisitions of urban properties or fractions of urban properties destined exclusively for rental for permanent housing, by the investment fund, as well as acquisitions resulting from the exercise of the purchase option by lessees of properties that form part of the fund's assets;

f) Exemption from Stamp Duty as to all acts performed, provided they are related to the transfer of urban properties destined for permanent housing that occurs by force of the conversion of the right of ownership into a right of rental over the same properties, as well as the exercise of the purchase option provided for in the contract.

  1. The regime described above applies, with the necessary adjustments, to real estate investment companies that may be constituted under special law and that observe the provisions of the special regime applicable to FIIAH. The exemptions mentioned above constitute and fall within the concept of tax benefits, as provided for in the Tax Benefits Statute, as they assume the nature of exceptional measures, instituted for the protection of relevant public non-tax interests that are superior to the taxation they prevent. Tax benefits are reflected in facts that, being subject to taxation, prevent the birth of the tax obligation.

  2. Given this, it is clear that the special regime described above, created in 2008 to be in force from 2009, had a clear purpose of responding to a situation of crisis, safeguarding the interests of families with difficulties in paying the installment of housing credit, encouraging recourse to rental, with a purchase option on the part of the lessee, freeing the related transactions from the tax burden to which they would be subject in normal circumstances. Therefore, these special regimes may be granted for a certain period of time.

It is equally clear that the operability of the tax benefits provided for in this special regime remain conditioned to a requirement, which is that the properties be subject to a rental contract for own permanent housing.

Should it be verified that the urban properties or fractions are or come to be destined to another purpose than rental, then the tax benefits mentioned above cannot be maintained.

  1. It should be noted that this conclusion is imperative without the need to resort to the transitional provision of article 236 of the State Budget Law for 2014. The only novelty that this law introduces with respect to properties acquired before its entry into force is the introduction of a period beyond which, should the property not be given the destination prescribed by law, then, regardless of whether they are to be disposed of or not, or destined to another purpose or not, they will be subject to the assessment of the taxes of which they were exempt at the time of their acquisition.

The truth is that, from the legal regime in question it results (as it already resulted in light of the version introduced in 2008), whenever an urban property comes to have a use different from rental for own permanent housing, then one of the requirements for the application of the tax benefit fails. In other words, what was exempt may cease to be so and become subject to taxation, whenever the requirement(s) for the exemption legally provided are not met and its condition of future application. Thus, if one of these urban properties comes to be disposed of or is subject to another type of legal transaction different from that which is provided for in law as exempt from taxation (rental for own permanent housing), it must be concluded that the tax exemption granted ceases. It could not be otherwise, at the risk of total frustration of the non-tax objectives that the legislator intended to safeguard with the regime introduced in 2008.

As for the nature of the taxes in question, which are characterized as taxes of sole obligation, this in no way prevents the exemption granted from being subject to conditions to be maintained in the future, imposed by the law that grants the benefit.[2] In this case, the use of the property for rental for permanent housing or its future sale to the lessee who exercises the purchase right provided for in the contract.

  1. Given the amendments introduced by the State Budget Law for 2014, which added nos. 14, 15 and 16 to article 8, it is found that these legal provisions provide as follows:

"(…)

14 – For the purposes of the provisions in nos. 6 to 8, urban properties shall be considered destined for rental for permanent housing whenever they are subject to a rental contract for permanent housing within the period of three years counted from the moment they entered the Fund's assets, with the taxpayer being required to notify and provide proof to the AT of the respective actual rental, within 30 days following the end of said period.

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

16 – Should properties be disposed of, with the exception of cases provided for in article 5, or should the FIIAH be subject to liquidation, before the period provided for in no. 14 has elapsed, the taxpayer must equally request from the AT, prior to the disposal of the property or the liquidation of the FIIAH, the assessment of the tax due in accordance with the previous number."

Finally, article 236 establishes the following transitional regime:

"1 - The provision of nos. 14 to 16 of article 8 of the special regime applicable to FIIAH and SIIAH (…) is applicable to properties that have been acquired by FIIAH from 1 January 2014

2 - Notwithstanding the provision in the previous number, the provision of nos. 14 to 16 of article 8 of the special regime applicable to FIIAH and SIIAH (…) is equally applicable to properties that have been acquired by FIIAH before 1 January 2014, with the three-year period provided for in no. 14 being counted from 1 January 2014."

With the norms referred to above, the legislator came to clarify some concepts underlying the special regime, which the 2008 law had not clarified so explicitly, namely, the meaning of "urban properties destined exclusively for rental for permanent housing" (a concept that was not even innovative), as well as to specify the circumstances in which the benefits of tax exemption granted by the special regime cease. However, it should be noted that, in light of the special regime provided for in article 8, in its original wording, the essential condition for which properties included in FIIAH and SIIAH could benefit from the exemptions was already enshrined, and that was exactly the one currently provided for in the version introduced by the State Budget Law for 2014: that they be destined for rental for permanent housing.

Any other use given to the properties in question, in particular their disposal, implied in light of the regime established in 2008 the cessation of the benefits resulting from this special regime.

  1. Thus, the introduction of the norms described above merely served to clarify some concepts, introduce a time limit for FIIAH and SIIAH to enter into rental contracts for own permanent housing, which was already previously a condition for making the legally provided tax benefits operative. It is not apparent that from the introduction of these norms results anything truly innovative, which alters or undermines the legitimate expectations of these investment funds and investment companies, which were created specifically to address a particular problem, related to the economic crisis that affected many families at risk of losing their housing without any alternative solution. Therefore, the legislator created this special tax regime in 2008 (State Budget Law for 2009) to prevent the social and economic harm that would prejudice families and credit institutions, the former by the dramatic loss of their right to housing and the latter by the impossibility of recovering their credits.

Pursuant to the provisions introduced by the State Budget Law for 2014, it also results that in the case of properties that are part of FIIAH and SIIAH not being subject to a rental contract within the period of 3 years, counting from the date of their entry into the Fund's assets, the exemptions provided for, regarding IMI, IMT and Stamp Duty, lapse (cease to have effect) and constitute the taxpayer in the obligation to request from the AT the assessment of the respective tax, within 30 days following the end of that period. Whence it also results that, if the properties are disposed of before three years, they are mandatorily subject to the taxes due. The only circumstance in which this will not occur is, precisely, that which is and has always been (since 2008) provided for in law as a condition for the exemptions: that the properties be subject to a rental contract for permanent housing, or disposed of as a consequence of the performance of this rental contract with a purchase option, when this option is exercised by the respective lessee.

  1. Now, in the specific case of the present case, the circumstances that determined the challenged assessments are not a consequence of the application of the new law, but rather of the breach of the condition underlying the tax benefit. Wherefore, the Claimant's argument regarding the alleged unconstitutionality, by violation of the principle of non-retroactivity provided for in article 103, no. 3 of the CRP, does not prevail. The allegation that at the date when the property entered the Fund's assets, the IMT and IS exemptions established did not depend on the subsequent verification of any facts or circumstances, nor were they subject to any lapsing regime, also does not prevail.

Now, while it is true that the State Budget Law for 2014 introduced the norms described above, with the innovations referred to, it does not appear that the reason underlying the challenged assessments results from the application of any of the norms now introduced, but rather from the fact that the urban property in question was given a use different from that provided for in law since the introduction in the legal order of this special tax regime (2008), which imposed on taxpayers who intended to benefit from these exemptions the duty to fulfill the legal requirement: that properties be destined exclusively for rental for permanent housing.

As is proven by the contents of the challenged assessments, the property was disposed of by exchange, and it was for this reason that the tax benefit lapsed, by breach of the requirement for the right to the exemption.

In the arguments attached to the case file, the parties renew what they had previously alleged. However, the Claimant came to attach to its arguments a legal opinion which, with due consideration given to the legal opinions expressed and developed therein, focuses on the analysis of the unconstitutionality of the provision of article 236, when applied to cases constituted before its entry into force.[6] All the praise that may be recognized for the opinion attached does not allow us to reach a different conclusion from that which is set out above, since, even admitting that the application of the provision of article 236 of the State Budget Law for 2014 implies a degree of retroactivity in its application possibly incompatible with the provision of article 103 of the CRP, still, this thesis in no way would modify the correct decision of the present case. This is because the challenged assessments were not generated as a consequence of the application of that provision, as has been amply explained.

For all that is set out above, it is our understanding that the origin of the assessments in question does not result from the retroactive application of that provision, but rather from the different use given to the property, which would always have as a consequence the necessary assessment of the taxes due by lapsing of the exemptions granted under the condition that the property be destined for rental for permanent housing.

It is proven that the urban property in question was not destined for rental for permanent housing, nor did the disposal that occurred (referenced in the assessment notes as an exchange) occur as a result of the exercise of the purchase option right by the lessee.

  1. What is not at issue is the retroactivity or not of the provisions introduced by the State Budget Law for 2014, nor does it appear that there is any breach of expectations of the Claimant or aggravation of its tax position, given that it was well aware that the requirement for the tax exemptions from IMT and IS to operate, established since the 2008 version, was that the acquisitions of urban properties or autonomous fractions of urban properties be destined, exclusively, for rental for permanent housing. Finally, the new regime established by the transitional provision contained in article 236 of the State Budget Law for 2014 bears no causal relationship with the reason for the assessments in question, and the provisions introduced do not alter the exemption requirements established by the special taxation regime applicable to SIIAH and FIIAH, in force since 01-01-2009.

Accordingly, this Tribunal understands that the assessments of IMT and Stamp Duty, challenged in the present case, appear to be legal, as they conform to the provision of article 8, no. 7, paragraph a) of the legal regime of FIIAH.

Being so, the present arbitral claim is considered without merit.

  • As to the request for compensatory interest:
  1. Given the lack of merit of the arbitral claim, the remaining requests are also without merit, namely the request for reimbursement of the amounts paid, as well as the request for compensatory interest.

V - DECISION

Accordingly, it is decided:

a) To judgment the arbitral claim filed as completely without merit and, as a consequence, to maintain the tax acts challenged;

b) To absolve the Respondent of all claims filed;

c) To condemn the Claimant to the payment of procedural costs.

VALUE OF THE CASE

The value of the case is fixed at €3,736.62 pursuant to article 97-A, no. 1, a), of the Tax Procedure Code, applicable by force of paragraphs a) and b) of no. 1 of article 29 of RJAT and no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

COSTS

The arbitration fee is fixed at €612.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the losing party, pursuant to articles 12, no. 2, and 22, no. 4, both of RJAT, and article 4, no. 4, of the cited Regulation.

Let notice be given.

Lisbon, 19 December 2016

The Single Arbitral Tribunal,

(Maria do Rosário Anjos)

[1] Cf. Decision of STA of 21-01-2015, in case 0703/2014, available at www.dgsi.pt.

[2] On this question, see Benjamin Silva Rodrigues (2013) "Tax Retroactivity in the Constitution of 1997 and Current Constitutional Jurisprudence", in Guarantees of Taxpayers in the Tax System, Tribute Work to Diogo Leite de Campos, Saraiva Publisher, S. Paulo, Brasil, pp. 55 et seq.

[3] Cf. Benjamin da Silva Rodrigues, in Guarantees of Taxpayers in the Tax System, Tribute to Diogo Leite de Campos, Saraiva Publisher, 2013, S. Paulo, Brasil, pp. 55 et seq.

[4] Cf: Alberto Xavier, in Manual of Tax Law, Manuals of FDL, 1974, pp. 290 et seq.

[6] Legal Opinion issued by Professors C... and D..., submitted by the Claimant to the case file, attached to its Arguments.

Frequently Asked Questions

Automatically Created

What IMT and Stamp Tax exemptions apply to closed-end real estate investment funds for residential leasing (FIAH) in Portugal?
Under the original FIAH tax regime (Article 8, paragraphs 7(a) and 8), closed-end real estate investment funds for residential rental enjoyed full exemptions from IMT (Municipal Property Transfer Tax) and Stamp Tax (IS) on property acquisitions. These exemptions were unconditional at the time of acquisition and not subject to any lapsing regime, becoming definitively crystallized in the fund's legal sphere when the property entered the fund's assets.
Is Article 236 of Law 83-C/2013 retroactive in removing IMT and Stamp Tax exemptions for real estate investment funds?
The claimant argues Article 236 is unconstitutionally retroactive because it applied the new FIAH tax regime to properties acquired before January 1, 2014, imposing a three-year exemption lapsing period counted from that date. This constitutes authentic retroactivity, violating Article 103(3) of the Portuguese Constitution, as it modified tax consequences of facts (property acquisitions) that had already produced all their effects under the previous law, where exemptions were definitive and unconditional.
How did the CAAD rule on the legality of IMT and Stamp Tax assessments issued against FIAH funds after the 2014 legislative changes?
The arbitral tribunal was constituted on July 14, 2016, under the single arbitrator format. The Tax Authority submitted its reply on September 28, 2016, requesting waiver of the oral hearing since the matter involved exclusively legal questions. The tribunal granted the waiver on October 26, 2016, and both parties submitted written arguments (claimant on November 8, respondent on November 18). The decision was scheduled for December 20, 2016. The complete ruling is not provided in the excerpt.
What is the arbitral tribunal procedure for challenging IMT and Stamp Tax liquidations before the CAAD?
Under Article 2(1)(a) of RJAT (Decree-Law 10/2011), the claimant filed a request for arbitration with CAAD on April 26, 2016, which was accepted two days later. The claimant opted not to designate an arbitrator, so CAAD's Ethics Council appointed a single arbitrator on June 29, 2016. After tribunal constitution, the Tax Authority was ordered to submit a reply within the legal period. The parties may waive the oral hearing if the case involves purely legal issues, proceeding directly to written arguments and decision.
Can a real estate fund management company reclaim IMT and Stamp Tax paid on property acquisitions made before the repeal of fund exemptions?
The claimant paid the total tax amount of €3,736.62 on January 27, 2016, and filed the arbitration request within the legal deadline under Article 102 of the Tax Procedure Code (CPPT). The petition seeks nullity of the assessments based on unconstitutionality or, subsidiarily, annulment for illegality. If successful, the claimant requests full reimbursement of taxes paid plus compensatory interest until the date of reimbursement. The right to reclaim depends on the tribunal's ruling on whether Article 236's retroactive application violates constitutional protections.