Summary
Full Decision
ARBITRAL DECISION
The arbitrator Pedro Miguel Bastos Rosado, appointed by the Deontological Council of the Administrative Arbitration Centre to form the Single Arbitral Tribunal, decides as follows:
I. Report
1. A... LDA, Legal Entity No...., with registered office at ..., No...., ..., ..., hereinafter referred to as the Claimant, submitted, on 18 June 2018, a request for arbitral decision seeking the annulment of the despatch issued by the Head of the Finance Service of ..., through which he rejected the administrative review petition No. ...2018..., filed against the assessment of Additional Municipal Property Tax ("AIMI") No. 2017... for the year 2017, in the total amount of € 4,286.08 (four thousand, two hundred and eighty-six euros and eight cents), as well as the annulment of this assessment, with the Respondent being the TAX AUTHORITY AND CUSTOMS AUTHORITY, hereinafter referred to as the Respondent or TA.
2. The purpose of the request for arbitral decision consists of the declaration of illegality and consequent annulment of the TA's decision rejecting the administrative review petition filed by the Claimant, determining the annulment of the AIMI assessment.
3. The request for constitution of the arbitral tribunal was accepted by the President of the Administrative Arbitration Centre (CAAD), on 19 June 2018, and subsequently notified to the TA.
4. The Claimant did not appoint an arbitrator, therefore, pursuant to article 6(1) and article 11(1)(a) of the RJAT, the President of the Deontological Council of CAAD appointed the undersigned as arbitrator of the single arbitral tribunal, who communicated acceptance of the appointment within the legal period.
5. On 6 August 2018, the parties were notified of the appointment of the arbitrator, neither raising any objection.
6. In accordance with article 11(1)(c) of the RJAT, the single arbitral tribunal was constituted on 28 August 2018.
7. Notified in accordance with article 17 of the RJAT, the Respondent submitted its response and forwarded the "administrative file" (hereinafter referred to simply as AF).
8. In its Response, the TA defended itself by raising an exception (untimeliness of the request) and by means of an objection argued that the claims were unfounded.
9. Notified of the TA's Response, the Claimant, on 11 October 2018, exercised the right of reply regarding the matter of the exception.
10. By despatch of 4 January 2019, the meeting provided for in article 18 of the RJAT was dispensed with, it was determined that the matter of exception would be decided upon the issuance of the arbitral decision, and it was determined that, as the controversy was limited to questions of law, in accordance with article 113(1) of the CPPT, further submissions appeared unnecessary, and accordingly their production was dispensed with.
11. In the same despatch of 4 January 2019, it was indicated that the final decision would be issued by the deadline fixed in article 21(1) of the RJAT, with the Claimant being required, up to 10 days before the end of such deadline, to deposit the subsequent arbitral fee, in accordance with article 4(3) of the Regulation on Costs in Tax Arbitration Proceedings, and to communicate the payment to CAAD.
II. Preliminary Matters
1. The arbitral tribunal was regularly constituted, in accordance with article 2(1)(a) and article 10(1) of Decree-Law No. 10/2011 of 20 January.
2. The parties are properly represented, enjoy legal personality and capacity and have standing (articles 4 and 10(2) of the same decree and article 1 of Ordinance No. 112-A/2011 of 22 March).
3. The proceedings are not affected by nullities.
4. The Tribunal is competent.
III. Matters of Fact
1. Proven Facts
The following facts with potential relevance to the decision are deemed proven:
- The Claimant is a commercial company that develops its activity in the real estate sector.
- The Claimant's purpose is the construction and sale of real estate, being classified under "CAE" 41100 – "Real estate promotion (development of building projects)".
- In the year 2017, the Claimant was owner of four real properties whose registration numbers are indicated in the AIMI assessment No. 2017 ..., which appears as document No. 3 attached with the request for arbitral decision and in the administrative file (AF), in particular the administrative review petition, whose contents are reproduced hereinafter:
- Urban property No. ... (land for construction);
- Urban property No. ... fraction AD (intended for housing);
- Urban property No. ... fraction AJ (intended for housing);
- Urban property No. ... fraction AK (intended for housing); all in the Union of the parishes of ..., ..., ..., ..., ... and ..., in the Municipality of Porto.
- The Claimant was notified of the respective AIMI assessment referred to, dated 30 June 2017, relating to 2017, in the amount of € 4,286.08, determined on the basis of the taxable basis of € 1,071,520.00 (document No. 3 and AF);
- On 29 September 2017, the Claimant paid the amount assessed (document No. 3);
- On 29 January 2018, the Claimant filed an administrative review petition with the Finance Directorate of ... against the assessment referred to, which was processed in the Finance Service of ... under No. ...2018... (see document No. 1 attached with the request for arbitral decision and the AF, whose contents are reproduced hereinafter);
- The administrative review petition was rejected by despatch of 22 February 2018, issued by the Head of the Finance Service of ... (document No. 1 and the AF);
- The decision rejecting the administrative review petition was notified to the Claimant by letter dated 19 March 2018 and via postal service (document No. 1 and the AF);
- The decision rejecting the administrative review petition refers to the reasoning of the proposed decision that appears in document No. 1 and the AF, in which the following is stated, among other things:
III. ANALYSIS OF THE PETITION
The administrative review procedure aims at the total or partial annulment of tax acts, at the initiative of the taxpayer, in accordance with article 68 of the CPPT, acts that comprise only acts of assessment of taxes or of determination of the taxable basis, and may be filed on the grounds provided for judicial objection, in accordance with articles 99 and 102 of the CPPT. That is, on the grounds of any illegality, in particular erroneous characterization and quantification of income, profits, property values and other tax facts, incompetence, absence or defect in the legally required reasoning and failure to observe other legal formalities.
The TA – Tax Authority and Customs Authority is, in accordance with article 55 of the General Tax Law (LGT) and following article 266(2) of the Constitution of the Portuguese Republic (CRP), bound by the principle of legality, and therefore cannot fail to give full compliance to the norms created by the ordinary legislator and in force in the legal system. Being unable to refrain from applying a norm on the grounds of unconstitutionality, unless the Constitutional Court has already declared its unconstitutionality with binding force in general in accordance with article 281 of the CRP, which has not occurred with the norm at issue by the petitioner.
Pursuant to article 135-A(1) of the CIMI, the passive subjects of AIMI are natural or legal persons who are owners, usufructuaries or holders of surface rights over urban real property situated in Portuguese territory.
AIMI, in accordance with article 135-B(1) of the CIMI, is levied on the sum of the taxable property values of urban real properties situated in Portuguese territory of which the passive subject is the holder. Being excluded from AIMI are urban real properties classified as "commercial, industrial or for services" and "others" in accordance with items b) and d) of article 6(1) of the same legal instrument.
Also in accordance with article 135-C(1) of the CIMI, the taxable value of AIMI corresponds to the sum of the taxable property values, as at 1 January of the year to which the AIMI relates, of the properties listed in the land registers under the ownership of the passive subject, applying the rate provided for in article 135-F of the CIMI.
In view of the above, in the case under analysis, the assessment of AIMI is legally made, in accordance with the norms provided for in articles 135, 135-C and 135-F all of the CIMI.
IV. CONCLUSION
In view of the questions of fact and law, it appears to me that the petitioner is not right, and therefore the petition should be rejected.
I further propose that the right to prior hearing provided for in item b) of article 60(1) of the LGT be dispensed with, in accordance with item a) of point 3 of Circular 13, of 8 July 1999 of the Tax Justice Services Directorate, which states that the hearing of interested parties may be dispensed with when the TA – Tax Authority and Customs Authority merely evaluates the facts provided to it by the taxpayer, limiting itself in its decision to interpreting the legal norms applicable to the case. This situation applies to all decisions on petitions, requests, administrative review petitions and appeals in which the administration limits itself to concluding, in view of the facts and arguments invoked by the taxpayer and the applicable law, that the taxpayer's claim is unfounded.
For superior consideration."
J) On 18 June 2018, the Claimant submitted the request for arbitral decision that gave rise to the present proceedings.
2. Reasoning of the Matters of Fact Deemed Proven
The proven facts are based on documents 1 and 3 attached by the Claimant with the request for arbitral decision and in the administrative file, whose authenticity was not challenged.
3. Facts Not Proven
It was not proven that the Claimant was owner of land for construction intended for the exercise of the referred economic activity, registered in the urban land register under No..., as per document No. 2 attached with the request for arbitral decision, and that this property was subject to AIMI assessment in the name of the Claimant, as it is evident that the property there registered belongs to another passive subject, nor is even the registration number of the same the one alleged in article 2 of the request for arbitral decision (the description number was referred to instead), and this property is situated in a parish and municipality different from the four properties subject to AIMI.
It was not proven that the land for construction whose taxable property value was considered in the assessment had potential use that coincided with "commercial, industrial or services" purposes. On this point, nothing was concretely alleged by the Claimant, and the latter attached as document number 2 a land register of land for construction that does not correspond to the land for construction subject to the AIMI assessment.
There are no other facts with relevance to the arbitral decision that have not been deemed proven.
IV. Matters of Law
1. The Exception – Untimeliness of the Request
The Respondent, duly notified for this purpose, submitted its response defending itself by raising an exception and by means of an objection.
In the context of the defense by exception, it raises the exception of untimeliness of the request.
With reference to the exception, the Respondent understands, in summary, that the true and only request for arbitral decision formulated by the Claimant was for the annulment of the tax acts of the AIMI assessment. In other words, the Claimant never requested the annulment of the act rejecting the administrative review petition.
Thus, with the attack directed exclusively at the tax act of assessment, the 90-day period legally defined for its objection, in arbitration proceedings, is clearly exceeded, counted from the day following the end of the period for voluntary payment of the tax obligation, in accordance with article 10 of the RJAT, in conjunction with articles 102(1) and (2) of the Code of Tax Procedure and Process ("CPPT").
Therefore, taking into account that the deadline for payment of the tax at issue in the case was 30 September 2017 and that the request for constitution of the Arbitral Tribunal was only submitted on 18 June 2018, it is concluded that the request formulated is untimely and the tribunal cannot hear it.
That is, in the understanding of the Respondent, only allusion was made to the rejection of the administrative review petition in the preamble, without expressly requesting the annulment of the despatch that rejected it.
Furthermore, as the powers of cognition of the Tribunal are limited by the request, the Tribunal is prevented from appreciating and declaring the illegality and consequent annulment of the assessment act, as untimely, and therefore, in these terms, the TA should be absolved of the claim.
On 11 October 2018, the Claimant responded to the exception raised by the TA, arguing the timeliness of submission.
The Claimant argues that it is fallacious to assert that it did not request the annulment of the act rejecting the administrative review petition. Indeed, it considers that it is apparent from the pleadings that, in addition to requesting the illegality of the tax act of assessment, it did not forego contesting the immediate act of rejecting the administrative review petition, with numerous references to the grounds for rejecting the administrative review petition being made throughout the pleadings and, in particular, at the beginning of its request for arbitral decision.
The Tribunal considers that this exception should be found unfounded.
In fact, in the request for constitution of the Arbitral Tribunal, at the beginning of its pleadings, the Claimant states that "having been notified of the despatch issued by the Head of Finance of the Finance Service of ..., through which it proceeded to reject the administrative review petition No. ...2018..., filed against the assessment of Additional Municipal Property Tax ("AIMI") No. 2017... for the year 2017, in the total amount of €4,286.08 (four thousand, two hundred and eighty-six euros and eight cents) - hereinafter attached as document No. 1 - comes against such decision and tax act to lodge OBJECTION (...)".
And throughout the said request for constitution of the Arbitral Tribunal, there are several references to the grounds for rejecting the administrative review petition filed.
That is, it is apparent from this pleading that the Claimant, in disputing the illegality of the tax act of assessment (mediate act), did not forego contesting the immediate act of rejecting the administrative review petition.
As was concluded, among others, in the Judgment of the Supreme Administrative Court ("STA"), of 28 October 2009, delivered in the context of case No. 0595/09,
"[t]he administrative review petition has as its object an act of assessment. In cases where the administrative review petition is expressly rejected, the object of the judicial objection proceedings is, formally and directly, the act of rejection, which maintained the assessment that was the object of the petition, but the real object of the objection, the act whose legality is in question, is the assessment act that was maintained by the act of rejection of the petition".
In the same sense, the Judgment of the STA, of 16 November 2011, delivered in case No. 0723/11 determines that "the judicial objection proceedings instituted following and because of express rejection of an administrative review petition has as its immediate object that same rejection and as its mediate object the assessment act whose annulment is ultimately sought."
See also the Judgment of the Central Administrative Court – South ("TCA/S") dated 17 March 2016, delivered in the context of case No. 08998/15, which even reviews an appeal against a CAAD decision regarding the same exception. In this judgment of the TCA-S, it is mentioned that "the period for objection (the 90-day period that the Appellant had to lodge the request for constitution of arbitration), in situations where there has been an administrative review petition followed by an express decision, is counted from notification of this latter decision and not from the end of the period for voluntary payment of the assessment", adding that "there is a close relationship and interdependence between the mediate and immediate objects and that the appreciation or interpretation of the request in these situations cannot fail to take into account these circumstances of fact and law" and stressing that "as is also recognized in the appealed judgment, the question of the existence of the petition, even if not expressly reflected in the formulation of the request [which was not even the case for the Claimant], was not olympically ignored by the Appellant".
Counselor Jorge Lopes de Sousa states in this regard that "when there is an express rejection or tacit rejection of the administrative review petition, taxpayers always have a 90-day period for the purpose of submitting the request for arbitral decision." (JORGE LOPES DE SOUSA, Guide to Tax Arbitration – Commentary on the Legal Regime of Tax Arbitration, Coimbra: Almedina, 2017, p. 163).
The arbitral decision of CAAD delivered in case No. 592/2016-T, of 11 May 2017, also addressed the question of: "[w]hat happens if the taxpayer, having filed an administrative review petition against the act of assessment, and seen that petition rejected, comes, taking advantage of the period counted from that rejection, to object to the assessment, without simultaneously requesting the annulment of the act of rejection? (...) For the TA, as seen, the result is the lapse of the right of action. Not the right of action against the decision rejecting the administrative review petition – this would be timely – but the right of action against the assessment act. The AT's correct argument is alluring, but it does not appear to us to lead to the appropriate solution. As seen, mere objection to the act rejecting the administrative review petition would be entirely inconsequential, as it would not result in the erasure of the assessment act. Both acts should therefore, strictly speaking, be objected to – immediately, the rejection; mediately, the assessment. But what the tribunal would appreciate would be, before all else, the grounds opposed to the assessment, for without this, for the reasons stated, no effective judicial protection would be given to the rights of the objector. The act of rejection of the petition, having done nothing more than to maintain, administratively, that of assessment, would fall by itself, as the defects of the assessment are transmitted to it – as a secondary act, it will be illegal for not having recognized, as it should, the illegality of the assessment. From all this it follows that the relevance of the act of rejection of the administrative review petition has to do, more than with its (il)legality, with the fixing of the period for objection to the assessment. Consequently, the petition in which only the declaration of illegality of the assessment is requested, without formulating an identical request regarding the rejection of the petition (despite, in the case, having broadly referred to it and expounded the grounds for its illegality), suffers only from an imperfection which, moreover, the tribunal could have invited to correct, under article 18(c) of the RJAT."
This is the position of the Tribunal. The petition in question suffers only from an imperfection which the tribunal could have invited to correct, under article 18(c) of the RJAT, and which it did not do for considering it unnecessary.
Thus, taking into account the date of notification of the decision rejecting the administrative review petition, it is considered that the present request for constitution of the Arbitral Tribunal, submitted on 18 June 2018, is not untimely in light of article 10(1)(a) of the RJAT, and therefore the exception of untimeliness is unfounded, proceeding to the appreciation of the legality of the AIMI assessment and the decision rejecting the administrative review petition.
2. On the Legality of the AIMI Assessment and the Decision Rejecting the Administrative Review Petition
2.1 Positions of the Parties
The Claimant argues, in summary:
- AIMI "replaced the previous method of taxation of 'luxury real estate', whose rate was provided for in Item 28 of the General Table of Stamp Tax as amended by Law No. 55-A/2012 and Law No. 83-C/2013";
- "Although AIMI was designed to continue taxation on luxury real properties and, likewise, to remedy many of the shortcomings that had been pointed out to Item 28 of Stamp Tax, its outlines present several divergences from the initial regime.";
- AIMI "suffers from the same defects as its predecessor – especially because, with respect to real properties essential in obtaining income in the context of economic activity, it lacks identical substantive support in the tax plan".
- There is "violation of the principle of equality, materialized in its aspect of contributory capacity, in accordance with what has already been advocated by case law and legal scholarship when discussing Item 28, duly adapted to the characteristics of the current AIMI";
- the tax act in question materializes "the violation of the most basic canons of equality, proportionality and contributory capacity";
- AIMI is "contrary to the Constitution of the Portuguese Republic ("CRP"), and particularly to the principle of equality";
- "the principle of equality does not prohibit the establishment of distinctions; rather it prohibits the establishment of distinctions devoid of objective and rational justification – as is the case in this case";
- "taking into account the spirit underlying the Bill for the State Budget for 2017, it is to be concluded that the aim was to tax the holding of rights over luxury homes, as it reveals superior contributory capacity of those who hold them, thus materializing the principle of fair distribution and contributory capacity";
- the real properties and land for construction held by it are "essential for obtaining income in the context of its economic activity";
- "property over real properties and land for construction consists, in the case of commercial companies of this type, in the property substrate of their economic activity, and in the materialization of a true means essential to the pursuit of their economic activity generating income";
- therefore "the assumption that property over such real properties can constitute a manifestation of (or an increased) contributory capacity that, by itself, should be subject to deprivation by means of taxation, completely fails";
- "there is thus created, without any factual basis, a glaring inequality in the material plan between companies that have decided to pursue an economic activity that presupposes the holding of real properties (including land for construction), in relation to other companies whose activity does not result from the holding of real properties";
- and "more than that, legally created are the conditions for the constitution of manifest situations of material inequality between the Claimant and companies that, holding real property, pursue therein a commercial, industrial or service provision activity";
- "the configuration of the tax fact that operates the distinction between various uses and purposes of properties, as a function of the corresponding economic activity of its holder – namely by consideration of those that are subject to AIMI taxation – is not in any way justified in the light of the purpose of the fiscal measure adopted";
- "no factual, legal, fiscal, economic or other basis can be discerned capable of justifying that taxation is levied only on companies that have in their current assets real properties intended for the exercise of their economic activity, and excludes from taxation real properties used in other economic activities";
- with AIMI "companies that own real properties intended for the exercise of an economic activity are treated unequally, without any material basis of support, compared to companies that, for the same reason, are owners of real properties classified as 'commercial, industrial or for services' – which are exempt from AIMI";
- there is no "contributory capacity that can be reached with the taxation in AIMI of the real properties in question";
- "with the negative, uncritical, arbitrary and random differentiation between, on the one hand, real properties held by companies that use them in the pursuit of their activity and, on the other hand, real properties held by companies that use them in industry, commerce and services, a different treatment is conferred on situations that, from a material point of view, are entirely similar";
- the taxation in question constitutes "a violation of the principles of contributory capacity, equality and proportionality – in that the fact that the Claimant has in its inventory real properties for construction or sale, in no way externalizes a relevant contributory capacity worthy of being (differently and independently) taxed";
- "which is all the more evident when it is noted that other companies holding real properties of identical or superior taxable value, likewise intended for their activity, are not subject to similar taxation";
- "the norms in question will be clearly unconstitutional, by violation of the principle of contributory capacity, as the taxpayers will not be taxed in accordance with their economic capacity, nor because of the facts for which the tax is justified";
- "contributory capacity that is not in any way safeguarded by the tax act in question, in that the holding of real properties for the pursuit of an economic activity is not comparable, nor can be configured as, a holding of luxury property assets";
- "the unconstitutionality of this normative provision is especially serious with regard to land for construction, so that, if it is not understood that the AIMI assessment object of the present request for arbitral decision should be annulled in its entirety, which is merely hypothetically admitted, it should be declared illegal, for suffering from unconstitutionality, insofar as it refers to land for construction".
- "by applying to the property of real properties intended for the exercise of an economic activity, and insofar as it is completely devoid of any sufficient basis, article 135-B, paragraph 1 of the CIMI should be dis-applied as unconstitutional, in that it violates the principle of tax equality enshrined in articles 13 and 104(3) of the CRP";
- therefore, "the decision and assessment impugned here should be declared illegal, in that, as abundantly set forth, they do not take into account the different contributory capacity of the owners of the properties on which they apply, striking indiscriminately taxpayers with and without the contributory force necessary to bear the tax";
- "the assessment now under consideration violates the principle of tax equality provided for in article 13 of the CRP and the principle of contributory capacity provided for in article 104 of the CRP, in that: - it is based on a norm that treats taxpayers in entirely different ways when they are in identical situations, the measure of the difference not being assessed by their actual contributory capacity; - it is based on an arbitrary norm devoid of perceptible or rational material foundation";
- "In light of the stated purpose of the norm, particularly when it points to the configuration of a tax complementary to the IMI with the aim of taxing 'the accumulation of residential real estate property of very high value', through 'a tax that applies to holders of larger real estate assets, reinforcing the overall progressivity of the system', it is evident that the principle of proportionality is violated";
- "it being certain that, under the Fundamental Law, there is a binding between prohibition of excess, proportionality, rule of law and justice";
- "the legal norm in question is manifestly unbalanced, non-conforming and inadequate for the pursuit of the legal purpose, it is materially unconstitutional by violation of the principle of proportionality";
- in conclusion, "we are faced with the violation of two basic principles of the Portuguese Constitution, with article 135-B, paragraph 1 of the CIMI suffering from unconstitutionality by violation of the principle of equality, in its aspect of contributory capacity, as well as by violation of the principle of proportionality";
- "article 135-B, paragraph 1 of the CIMI should be dis-applied by the Tribunal, given its material unconstitutionality with the aforementioned grounds, insofar as it applies to real properties with housing use and land for construction held by companies pursuing a real estate activity – determining the annulment of the decision and the assessment impugned";
- And "even if this were not understood, particularly if material unconstitutionality with the aforementioned scope were not envisaged – which is not conceded and only admitted as a hypothesis of reasoning – there would still be clear and unavoidable, at least, material unconstitutionality of the referred provision, under the same assumptions and with the same grounds, to the extent that it applied to land for construction – all determining the partial annulment of the assessment impugned";
The Tax Authority and Customs Authority argues the following, in summary:
- AIMI has the nature of a real tax and not a personal tax;
- the legislator excluded from the scope of taxation urban real properties classified as "industrial, commercial or for services" and "others" but expressly chose to maintain other real properties that also form part of companies' assets, such as those classified as residential or land for construction, by not including them in the negative delimitation enshrined, and therefore did not exclude from taxation all real properties used in economic activities;
- the restriction was made by reference to the classification of real properties and not to their connection with a particular economic activity;
- the Claimant seeks an abrogating interpretation of the norm, introducing a meaning not enshrined by the legislator in the letter of the law, even if only imperfectly expressed, thus expanding the scope of the exclusion from taxation to encompass all real properties held by the Claimant;
- as to the legislative intent, AIMI aims to affect a portion of the assets of the passive subjects of the tax, applying to real property constitutive of assets, recognizable in law as capital of a given entity (singular or collective), but paragraph 2 of article 135-B opted for a negative delimitation of the scope of taxation, excluding from AIMI real properties that, by their potential use, can be economically recognized as factors of production, as capital, that is, as intermediate goods that, combined with the other factors of production, produce new utilities – economic goods that satisfy needs;
- in this delimitation of the real scope of taxation it is apparent that the criterion adopted intends to be universally objective, inducing greater uniformity and equality in the treatment of real properties subject to taxation, to the detriment of other criteria that would call for case-by-case verifications about the actual destination given to the real properties;
- in the scope of its legislative discretion, the legislator excluded from the scope of the tax real properties intended for purposes other than residential ones;
- the criterion chosen by the legislator – the classification of urban real properties as industrial, commercial or for services and others – was adopted in preference to others that would call for case-by-case verifications about the actual destination given to real properties;
- the intention of ensuring the absence of impact on economic activity did not, however, lead to the exclusion from the scope of taxation of commercial companies and other equivalent entities that, because they pursue economic activities, would be affected to a greater or lesser degree by the burden of the tax;
- the negative delimitation of scope was enshrined in the objective scope of taxation and not in the subjective scope;
- the assets in question, and especially land for construction, are not merely instrumental to the exercise of the Claimant's activity, they form part of the very core of the economic activity, are the object of trade or industry, as they are intended for resale or, in the case of land for construction, also for transformation in the event of buildings being erected for subsequent sale;
- the real properties excluded from subjection to AIMI, under article 135-B(2) of the CIMI, are those that perform an instrumental function to industrial, commercial or service provision economic activities, in that they constitute buildings that serve as support to the functioning of the referred activities, and are not themselves generators of income;
- the Claimant's interpretation is clearly an abrogating interpretation of the law, transposed from a legislative impulse, and if accepted, violates the constitutional principle of separation and interdependence of powers, enshrined in articles 2 and 111 of the CRP, constituting the same as a reference and limit to the powers of cognition of the courts in the exercise of their function within the rule of law (cf. articles 202 and 203 of the CRP);
- there is no unconstitutionality by violation of the principles of equality, contributory capacity and proportionality;
- the Tax Authority and Customs Authority cannot fail to apply the law on the grounds of unconstitutionality, as it is subject to the principle of legality;
2.2 Appreciation of the Issues Raised by the Claimant
As stated in part in the arbitral decision relating to case number 686/2017, of 7 May 2018, in the context of which the undersigned participated as an arbitrator of the collective arbitral tribunal, as well as in another part in the arbitral decision relating to case number 420/2018, of 15 January 2019, whose position is hereby adopted:
'Law No. 42/2016, of 28 December (State Budget for 2017), added to the CIMI Chapter XV, with articles 135-A to 135-K, of which includes the regime of the Additional Municipal Property Tax (AIMI).
In the Report of that Budget, it is stated:
Revenue-raising measures, in addition to the 3% updating of IECs and ISV, focus on the introduction of two new forms of taxation: a progressive surcharge on the IMI and an expansion of the IABA base to soft drinks. The two measures together represent only about 0.5% of total tax revenue. In both cases the revenue is earmarked.
The earmarking of the progressive taxation of real estate property to the Financial Stabilization Fund of Social Security corresponds to the objective of the government programme of broadening the basis of financing for Social Security, while at the same time introducing a tax that applies to holders of larger real estate assets, reinforcing the overall progressivity of the system.
(...)
Progressive taxation of real estate property
The surcharge on municipal property tax introduces into the taxation of real estate property a progressive element on a personal basis, taxing at higher rates larger asset holdings, with a marginal rate of 0.3% applied to holdings exceeding €600,000 per passive subject.
To avoid the impact of this tax on economic activity, rural property, mixed property, industrial and tourism-related property are excluded from the scope of taxation, and companies are also allowed to deduct from taxation property used in their productive activity up to €600,000. The possibility of deducting the amount of tax paid from the income tax collection relating to property income provides an additional incentive to leasing and productive use of property assets.
This tax replaces the previous 1% stamp tax on the value of real property above 1 million euros. With a much lower rate (0.3%), it is also fairer as it takes into account the overall value of the real estate asset and not, individually, the value of each property.
Article 135-A defines the subjective scope of this tax, establishing that 'the passive subjects of the surcharge on municipal property tax are natural or legal persons who are owners, usufructuaries or holders of surface rights over urban real properties situated in Portuguese territory', being 'equivalent to legal persons any structures or centers of collective interest without legal personality that appear in the registers as passive subjects of the municipal property tax'.
Article 135-B defines the objective scope of this additional tax, establishing the following:
Article 135-B
Objective scope
1 - The surcharge on municipal property tax applies to the sum of the taxable property values of urban real properties situated in Portuguese territory of which the passive subject is the holder.
2 - Excluded from the surcharge on municipal property tax are urban real properties classified as 'commercial, industrial or for services' and 'others' under items b) and d) of article 6(1) of this Code.
In the wording contained in the Budget proposal, this paragraph 2 had the following wording:
2 - Excluded from the surcharge on municipal property tax are urban real properties classified as 'industrial', as well as urban real properties licensed for tourism activity, the latter provided that duly declared and proven their destination.
Article 6 of the CIMI establishes the following:
1 - Urban real properties are divided into:
a) Residential;
b) Commercial, industrial or for services;
c) Land for construction;
d) Others.
2 - Residential, commercial, industrial or for services are buildings or constructions licensed for such purposes or, in the absence of a license, which have as their normal purpose each of these uses.
3 - Land for construction is considered to be land situated within or outside an urban agglomeration, for which a license or authorization has been granted, admitted a prior notice or issued favorable prior information for a subdivision or construction operation, and also those declared as such in the acquisition title, with the exception of land where the competent entities prohibit any of those operations, namely those located in green areas, protected areas or which, in accordance with municipal land use plans, are used for public spaces, infrastructure or facilities.
4 - Item d) of paragraph 1 encompasses land situated within an urban agglomeration that are not land for construction nor covered by paragraph 2 of article 3 and also buildings and constructions licensed or, in the absence of a license, which have as their normal purpose purposes other than those referred to in paragraph 2 and also those of the exception in paragraph 3.
The wording of article 135-B of the CIMI that came to be approved does not exclude the application of AIMI to real properties used for housing and land for construction used by legal persons in the context of their economic activity.
The legislative concern to 'avoid the impact of this tax on economic activity' was announced in the Bill for the State Budget for 2017 and was materialized, to some extent, through the exclusion from the scope of taxation of 'urban real properties classified as industrial, as well as urban real properties licensed for tourism activity, the latter provided that duly declared and proven their destination' and the deduction from the taxable value of the amount of '€600,000.00, when the passive subject is a legal person with agricultural, industrial or commercial activity, for real properties directly used in its operation'.
However, the exclusion from the scope of taxation was not defined on the basis of the activity to which the real properties are used, since in the wording that came to be approved, the non-application was defined solely on the basis of the types of properties indicated in article 6 of the CIMI, without any reference to the use in the operation of legal persons.
The concepts of use of a real property, which presupposes a utilization, and the purpose to which it is intended, the 'normal purpose', underlying the classifications of real properties, referred to in paragraph 2 of article 6 of the CIMI, are distinct.
If the legislative intent of excluding from the scope of taxation real properties directly used in the operation of legal persons had been maintained in the final wording of the Budget, it would certainly have been maintained the reference to this use that appeared in the proposal and that clearly expressed this legislative choice.
Thus, as this reference to the use of real properties has been suppressed, there is no legal support to conclude that residential real properties and land for construction used in the activity of legal persons are not relevant to the scope of AIMI taxation.
Therefore, it is to be concluded that the use of real properties in the economic activities of legal persons does not exclude taxation in AIMI (outside cases where it is real property that previously was exempt or not subject to taxation in IMI, which are not accounted for for purposes of AIMI, under article 135-B(3) of the CIMI).
The holding of real estate property of high value, regardless of whether or not it is used in economic activity, is tendentially indicative of high contributory capacity, superior to that which is to be presumed to exist when real estate of low value is held or when it does not exist, and therefore, in principle, the limitation of taxation to the first situations is justified.
However, the reasons that may underlie the distinction, for purposes of AIMI taxation, between the taxable property values of real properties classified as residential or land for construction (regardless of their actual use for such purposes) and those of urban real properties having other classifications, in light of article 6 of the CIMI, are not explicitly apparent from the Report of the 2017 Budget nor from its parliamentary discussion.
With respect to real properties that have the classification of 'others' in light of article 6(2)(d) and (4) of the CIMI, a reason for distinction may be seen in the fact that these are essentially real properties that do not have the purpose of activities generating income, in particular land situated in urban agglomerations that do not meet the necessary requirements for their classification as land for construction nor are being used for agricultural or forestry purposes, and buildings intended for public spaces, infrastructure or facilities.
With respect to the exclusion from taxation of real properties intended for commerce, industry or services, an explanation may be discerned in the purpose invoked for the creation of this new taxation, which is the financing of Social Security, ensured through the earmarking of revenues from AIMI to the Financial Stabilization Fund of Social Security, provided for in article 1(2) of the CIMI, in the wording of Law No. 42/2016, of 28 December.
The intention is not to burden the taxation of luxury real properties, as was primarily aimed at with item 28.1 of the General Table of Stamp Tax, since real estate property of high value may be constituted by a plurality of real properties of small value, but rather to create another avenue for subsidizing the social security system, which is one of the constitutional duties of the State, provided for in article 63(2) of the CRP.
The sustainability and stability of Social Security, always in doubt, is a permanent concern that has justified numerous initiatives, well evidenced in the Major Policy Options for 2017 (Law No. 41/2016, of 28 December) and 2018 (Law No. 113/2017, of 29 December), among which is included the diversification of sources of financing, which constitutes a principle long adopted in the Framework Laws on Social Security (article 78 of Law No. 17/2000, of 8 August, article 107 of Law No. 32/2002, of 20 December, and article 88 of Law No. 4/2007, of 16 January).
The essence of the principle of diversification of sources of financing of Social Security consists in the expansion of the bases for obtaining financial resources, with a view, in particular, to the reduction of non-wage costs of labor (article 79 of Law No. 17/2000, article 108 of Law No. 32/2002, and article 88 of Law No. 4/2007, of 16 January), which may explain that the new AIMI taxation is not applied to legal persons holding real properties intended for commercial, industrial and service activities, as the holding of real properties of those types by legal persons is normally associated with the exercise of those activities, with the corresponding payment of contributions to Social Security as employing entities [article 92(b) of Law No. 4/2007, and articles 3(a) and 14(a) of Decree-Law No. 367/2007, of 2 November].
From this perspective, in which the legislator, lacking financing for Social Security, privileges the role of tax collector to the concern with the balance of taxation of companies, some basis may be discerned for distinguishing between the holding of real estate property by persons who, presumably, will develop activities connected with the financing of Social Security (who will already contribute to that financing) and the holding of real properties not intended for those activities, whose holders, tendentially, will not be associated in the same way with that financing, at least not with the same intensity.
Article 13 of the Constitution of the Portuguese Republic proclaims the principle of equality of citizens before the law. As has been uniformly understood by the Constitutional Court, the principle of equality, as a limit to legislative discretion, does not require the equal treatment of all situations, but rather implies that those in equal situations are treated equally and those in unequal situations are treated unequally, in such a manner as not to create arbitrary and unreasonable discriminations, because they lack sufficient material basis. The principle of equality does not prohibit the establishment of distinctions, but rather arbitrary distinctions, devoid of objective and rational justification.
Therefore, based on what was stated, the creation of special taxation of high-value property intended to ensure the financing of Social Security limited to real estate property that will not already tendentially be connected with that financing will not be completely devoid of objective and rational explanation.
On the other hand, the creation of AIMI as a complementary tax on real estate property, which aimed to introduce into taxation "a progressive element on a personal basis, taxing at higher rates larger asset holdings" (Report of the 2017 Budget, page 60), is consistent with the objective that taxation of property should contribute to equality among citizens, stated in article 104(3) of the CRP, as progressivity tends, as a corollary, to impose greater taxation on those with greater contributory capacity.
The contributory capacity of business legal persons, relevant to assessing the application of the principle of tax equality, is not evidenced solely by income, in particular by the results of the activity for which the real properties are used. In fact, "property provides its holder with special contributory capacity, advantages which by their nature escape personal income tax: thus, ownership of property facilitates the procurement of credit, strengthens the negotiating position of its holder in the conclusion of various contracts, makes it easier to multiply wealth allowing him to take risks where in principle he would not. In this light, property tax is seen as something more than an extension of personal income tax - it is not a matter of overloading income that is already subject to it but of reaching manifestations of contributory capacity that it actually escapes" (...) "Taxes on property would be justified by allowing resources to be transferred for the benefit of the working class, instituting a 'qualitative progressivity' complementary to the progressivity in quantity of personal income taxes." (5)
On the other hand, while it is true that the different purposes of real properties do not necessarily imply distinction in the level of contributory capacity, the exclusion from taxation of real properties especially intended for productive activity, in particular 'commercial, industrial or for services' real properties, will find another justification (in addition to the already mentioned presumed greater contribution of these activities to Social Security through contributions), as it ultimately reconducts to favoring these activities, which is consistent (and therefore will have constitutionally acceptable basis) with the obligation of the State to promote the increase of economic well-being, which presupposes proper functioning of wealth-creating activities and constitutes one of its priority duties in the economic sphere [article 81(a) of the CRP]. This being a constitutionally considered priority duty, the first listed in this norm, it will certainly not be incompatible with the CRP to give it preferential protection when confronted with the constitutional duties of the State regarding housing indicated in article 65 of the CRP, which, obviously, are also protected through the proper functioning of wealth-creating activities.
Thus, while it is certain that the AIMI regime creates situations of discrimination in the taxation of companies with the same contributory capacity evidenced by property, on the assumption that there is a need for money and new forms must be found to collect it (as stated in the Report of the 2017 Budget), there will be some justification for taxation to be imposed on some companies and not on others with the same or greater contributory capacity inherent in property, especially in light of the majority constitutional case law cited by the Tax Authority and Customs Authority, which reveals that it is constitutionally tolerable that the interests of the State as tax collector (in this case, the sustainability of Social Security, demanded by the principles of trust and security) override strict compliance with the principle of equality.
On the other hand, as the legislative objective is not to tax luxury housing but rather to obtain one more means of financing Social Security, in line with the choice of diversification policy, through "a tax that applies to holders of larger real estate assets, reinforcing the overall progressivity of the system" (page 57 of the Report of the State Budget for 2017), it is in light of these objectives that it is necessary to assess whether there is a violation of the principle of proportionality.
From this perspective, it appears that this new taxation is not incompatible with the principle of proportionality, as it is adequate to the purpose in view (it encourages the increase in revenues that is intended to be obtained), is necessary (in light of the legislative choice to increase Social Security revenues with diversification of sources) and does not exceed a reasonable measure, in particular with respect to legal persons, as the rates of the new tax are not high (and are lower for legal persons than for natural persons, under article 135-F), the tax paid is deductible from the taxable basis for corporate income tax (article 135-J), considerable amounts are deducted from the taxable value (article 135-C), and it is not demonstrated, nor is there reason to believe, that the amounts collected exceed what is necessary for the purpose of reinforcing the sustainability and stability of Social Security.
Therefore, it appears that it is not demonstrated that there is also a violation of the principle of proportionality.'
Consequently, AIMI taxation is not incompatible with the principles of equality, proportionality and contributory capacity, invoked by the Claimant, based on articles 13, 18 and 104(3) of the CRP, whether with respect to real properties intended for housing, or with respect to land for construction.
In light of the above, and without need for further consideration, it is necessary to conclude that the AIMI assessment does not violate the Constitution, nor is it illegal, and should be maintained.
The Claimant, despite having paid the tax, does not lodge a request for restitution of the amounts collected by the Tax Authority and Customs Authority, as well as the payment of indemnity interest, limiting itself to requesting that "the AIMI assessment impugned here be annulled, in whole or in part, with the legal consequences thereof".
As the request for arbitral decision is not to be found procedurally sound, it cannot be concluded that there are indebted payments.
V. Decision
In light of the above, the Arbitral Tribunal decides:
a) To find the exception of untimeliness raised by the Respondent unfounded;
b) To find the request for arbitral decision unfounded;
c) To absolve the Tax Authority and Customs Authority of the claims.
VI. Value of the Case
In accordance with articles 306(2) and 297(2) of the Code of Civil Procedure, article 97-A(1)(a) of the Code of Tax Procedure and Process, and article 3(2) of the Regulation on Costs in Tax Arbitration Proceedings, the case is valued at € 4,286.08.
VII. Costs
In accordance with articles 22(4) and 12(2) of the RJAT, article 2, paragraph 1 of article 3, and paragraphs 1 to 4 of article 4 of the Regulation of Costs in Tax Arbitration Proceedings, as well as Schedule I attached to this instrument, the total costs are fixed at € 612.00, to be borne by the Claimant.
VIII. Notification to the Public Prosecutor's Office
The Tax Authority and Customs Authority requests notification of this arbitral decision to the Public Prosecutor's Office.
As the Public Prosecutor's Office does not have special representation before the arbitral tribunals functioning at CAAD (article 4(1) of the Statute of the Public Prosecutor's Office), this decision shall be communicated to the Office of the Attorney General, for such purposes as it deems appropriate.
Lisbon, 28 February 2019
The Arbitrator,
Pedro Miguel Bastos Rosado
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