CAAD 40/2018-T: IMT Retroactivity and Legitimate Expectations in Real Estate Investment Fund Taxation

Arbitral Decision

I – Report

1. On 31.01.2018, the Claimant, A..., lda (hereinafter abbreviated as "Claimant"), holder of the tax identification number..., with registered office at Rua..., n.º..., ..., Lisbon, requested the CAAD to constitute an arbitral tribunal, pursuant to article 10 of Decree-Law n.º 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to only as "LFATM"), in which the Tax and Customs Authority is the Respondent, with a view to declaring the illegality of the dismissal orders of the ex officio review request submitted by the Claimant, issued by the Tax and Customs Authority ("TCA"), within the scope of proceedings n.os ...2017..., ...2017..., ...2017..., ...2017..., ...2017..., ...2017..., ...2017... and ...2017..., and, consequently, to pronounce on the illegality and declaration of annulment of the tax acts of assessment of Municipal Tax on Onerous Transfers of Real Estate ("IMT") n.os..., ..., ..., ..., ..., ..., ... and ..., in the total amount of € 9,514.06.

The Claimant, alleging to have paid the taxes in question, further petitions for their refund, plus indemnity interest.

1. The request to constitute the arbitral tribunal was accepted by the Honourable President of the CAAD and notified to the Tax and Customs Authority.

Pursuant to the provisions of article 6, n.º 1, of the LFATM, by decision of the President of the Ethics Board, duly communicated to the parties within the legally applicable time limits, the undersigned was appointed as arbitrator, who communicated his acceptance of the mandate to the Ethics Board and to the Centre for Administrative Arbitration within the regularly applicable time limit.

The Arbitral Tribunal was constituted on 11 April 2018.

1. The grounds presented by the Claimant in support of its claim were, in summary, the following:

• The dismissal orders of the ex officio review request sub judice concern IMT assessments whose passive subject was B... – Closed Real Estate Investment Fund for Residential Rental (hereinafter abbreviated as "Fund").

• The Fund was a collective investment undertaking, specifically, a closed real estate investment fund for residential rental ("FIIAH") of private subscription.

• Nevertheless, on 6 April 2017, the Fund was dissolved and liquidated, and the proceeds resulting from this operation were delivered in full to the Claimant herein, in its capacity as the sole participant of the Fund at the date of the operation.

• In the context of its activity, the management company of the Fund – C... – Investment Fund Management Company, S.A. (hereinafter designated "C...") – acquired, in 2013, a portfolio of real estate with a view to integrating them into the patrimony of the Fund.

• In the context of these operations, the Fund benefited from the IMT exemption legally established, at that time, for operations of acquisition of urban real estate or autonomous fractions, intended exclusively for rental for permanent housing, when carried out by a FIIAH.

• However, given that the aforementioned real estate was not subject to a contract under the conditions required by n.º 14 of article 8 of the Special Regime for FIIAHs, the TCA understood that the IMT exemption had lapsed, arguing that the Fund had assigned to the real estate a "different purpose" from that attributed at the time of acquisition of the same.

• Following the above, the TCA proceeded to issue additional IMT assessments and corresponding compensatory interest sub judice, and although the Fund proceeded to make payment, the Claimant cannot agree with the same and, consequently, with the understanding conveyed by the TCA in this regard.

• The legislator introduced in the Portuguese legal system the figure of FIIAHs with the establishment of the special regime applicable to them, through articles 102 and following of Law n.º 64-4/2008, of 31 December – Budget Law of the State for 2009, having in tax matters granted to FIIAHs a panoply of tax benefits relating to real estate integrated in the sphere of the same.

• In this context, reference should be made to the IMT exemption provided in n.º 7 of article 8 of the aforementioned regime, according to which, namely, the exemption in this tax was established for acquisitions of urban real estate or fractions of urban real estate "intended exclusively for rental for permanent housing", by investment funds.

• Nevertheless, the Budget Law of the State for 2014 (Law n.º 83-C/2013, of 31 December) introduced relevant amendments to the tax regime applicable to FIIAHs, establishing, namely, new conditions for the granting of tax benefits to operations carried out by this type of real estate investment fund.

• In this context, it is important to cite n.º 14 added to the aforementioned article 8, which came to determine that, for purposes of application of the IMT exemption mentioned above, "it is considered that urban real estate intended for rental for permanent housing is so whenever it is subject to a permanent housing rental contract within three years from the moment they became part of the fund's patrimony (…)" – a provision added by article 235 of Law n.º 83-C/2013.

• Additionally, article 235 of Law n.º 83-C/2013 added n.º 16 to the aforementioned article 8, which establishes "If the real estate is alienated, with the exception of the cases provided for in article 5, or if the FIIAH is subject to liquidation, before the period provided for in n.º 14 has elapsed, the passive subject must also request from the TCA, before the alienation of the real estate or the liquidation of the FIIAH, the assessment of the tax due according to the previous number".

• In the context of these amendments, the legislator also provided a provision of a transitional character, establishing that the new rules, in addition to being applicable to urban real estate acquired by investment funds from 1 January 2014, should also be applicable to "(…) real estate that has been acquired by FIIAH before 1 January 2014, in which cases the three-year period provided for in n.º 14 shall be counted from 1 January 2014" – see article 236 of Law n.º 83-C/2013.

• Now, this normative provision, as well as the tax benefits established in this special regime, do not exclude the possibility of application, to these collective investment undertakings, of the exemption established by Decree-Law n.º 1/87, of 3 January, which established in its article 1 that "acquisitions of real estate carried out for a real estate investment fund by its respective management company are exempt from Sisa", and subsequently, Decree-Law n.º 287/2003, of 12 November, determined in n.º 2 of article 28 of the aforementioned Decree-Law n.º 287/2003 that "All legal texts that mention Code of the Municipal Tax on Sisa and the Tax on Successions and Donations, municipal tax on sisa or tax on successions and donations are deemed to refer to the Code of the Municipal Tax on Onerous Transfers of Real Estate (CIMT), to the Stamp Duty Code, to the municipal tax on onerous transfers of real estate (IMT) and to stamp duty, respectively" and that the same Decree-Law established in n.º 6 of its article 31 that "The tax benefits relating to local authority contribution, now relating to IMI, as well as those relating to municipal sisa tax established in legislation outside the Code approved by Decree-Law n.º 41969, of 24 November 1958, and in the Tax Benefits Statute, which now relate to IMT, remain in force".

• With no doubt that the exemption in question was never revoked, it must be concluded that acquisitions of real estate carried out by a management company with the purpose of integrating them into the patrimony of real estate investment funds managed by the same are exempt from IMT – regardless of the structural nature of these funds.

• Notwithstanding the exemption applied in the present case – contained in subparagraph a) of n.º 7 of article 8 of the special regime applicable to FIIAHs – it must be borne in mind that the IMT exemption established in article 1 of Decree-Law n.º 1/87, of 3 January, was at all times applicable to acquisitions of real estate carried out by C..., insofar as both are structurally distinct from each other and exempt different factual situations.

• In fact, while the first exemption has its own useful effect, aimed at transactions involving real estate intended exclusively for permanent housing rental contracts, integrated in FIIAHs, the useful effect of the second exemption rests on a vast scope of application, aimed at operations of acquisition of real estate intended to be integrated into real estate investment funds in general – which would always be applicable in the present case and consequently, the operation in question would always benefit from the IMT exemption.

• Therefore, as these assessments appear to be manifestly illegal according to the above, the Claimant, in its capacity as legal successor of the Fund, as demonstrated, must be fully compensated for the amounts of IMT assessed on the basis of the same, since they are not due, in the total amount of € 9,514.06, and additionally, indemnity interest should be paid for the delay in receipt of the requested refunds, pursuant to the provisions of articles 43 and 100 of the General Tax Law.

1. The TCA – Tax and Customs Administration, called upon to make a statement, contested the Claimant's claim, defending itself by impugnation, in summary, with the following grounds:

• On 12.09.2013, the Fund acquired from Bank D..., S.A., a set of real estate identified in the attached PA, located in the parish and municipality of ... and intended for housing.

• The Fund benefited from IMT exemption provided for in article 8, nos 7 and 8 of the special legal regime applicable to Real Estate Investment Funds for Residential Rental (FIIAH), approved by article 104 of Law no. 64-A/2008, of 31 December (Budget Law of 2009).

• Between 2015 and 2016, and before the three-year deadline introduced by Law no. 83-C/2013, 12.09.2016, the Fund alienated the aforementioned real estate and requested from the Finance Office the assessment of IMT, as per the attached PA.

• Between 20.01.2016 and 05.05.2016, additional IMT assessments were issued for each of the real estate acquired by the Fund, based on model 1 declarations delivered following the respective sale and because the presuppositions of the lapse of exemption provided for in n.16 of article 8 of the legal regime of the FIIAH, added by article 235 of Law n.º 83-C/2013, of 31 December (Budget Law of 2014) were met.

• On 11.08.2017, the Management Company of the Fund requested the ex officio review of IMT assessments, under the terms of n.º1 of article 78 of the General Tax Law.

• On 2.11.2017, the Director of Finance of Faro, in the exercise of subdelegated powers, dismissed the ex officio review requests in question, with the grounds that are considered fully reproduced herein.

• However, the legal grounds of the arbitral claim rest almost exclusively, that is to say, on articles 54 to 92, and with the exception of a brief reference to the FIIAH regime in articles 46 to 53, on the alleged illegality of the IMT assessments by reason of the acquisition of real estate, in 2013, by the Fund, being also covered by the IMT exemption provided for in article 1 of DL 1/87, of 3 January, for real estate investment funds in general.

• In fact, the Claimant does not question, rather the contrary, the legality of the dismissal orders of the ex officio review whose annulment the Claimant requests in the present arbitral action, but, by way of said orders, comes to challenge the legality of the IMT assessments on a completely different basis – violation of article 1 of DL 1/87, of 3 January.

• The defect that the Claimant now attributes to the IMT assessments - violation of article 1 of DL 1/87, of 3 January - was never invoked in ex officio review proceedings nor did the administration have the opportunity to pronounce on the same.

• Nevertheless, the acquisitions of real estate by the Fund would never benefit from the IMT exemption provided for in article 1 of DL 1/87, of 3 January, independently of the question of its validity, by virtue of that decree not applying to FIIAHs.

• In effect, the legal regime applicable to real estate investment funds for residential rental (FIIAH) was approved by article 102 of Law 64-A/2008, of 31 December, being a legal regime that is autonomous, transitional and special.

• Consequently, n.º1 of article 104 encompasses only the constitution, operation and commercialization of FIIAHs, which refers to the general regime of Real Estate Investment Funds.

• It does not refer to the tax regime of Real Estate Investment Funds, and the tax provisions of the Funds are not applicable to FIIAHs.

• Thus it is that the legislator, when defining in article 8 a special and exclusive tax regime for FIIAHs, unequivocally excluded this type of fund from the tax regime of Real Estate Investment Funds.

• The tax regime of FIIAHs is regulated autonomously by article 8 of the respective Legal Regime, and in what relates to the case in question, the provisions of subparagraph a) of n.º7 provide that "acquisitions of urban real estate or autonomous fractions of urban real estate intended exclusively for permanent own and residential housing, by the investment funds referred to in n.º1, are exempt from IMT".

• No element exists in the provision of subparagraph a) of article 7 that would allow inferring any reference to the tax regime of the Funds or to DL 1/87, of 3 January, contrary to what the Claimant proposes.

• In effect, if article 1 of DL 1/87 were to be applied, which refers to "acquisitions of real estate carried out for a real estate investment fund by its respective management company are exempt from sisa (IMT)", it would not be necessary, would in fact be superfluous, the IMT exemption regime provided for by the legislator in n.º 7 of article 8 of the Legal Regime of FIIAHs.

• Contrary to what the Claimant intends, two IMT exemptions do not apply indiscriminately – that of article 8, n.º7 of the Legal Regime of FIIAHs and/or that of article 1 of DL 1/87, of 3 January.

• To FIIAHs only the IMT exemption provided for in subparagraph a), n.º7 of article 8 of the Legal Regime of FIIAHs applies, insofar as the legislator expressly excluded the general regime of IMT exemption of real estate investment funds to which the provision of article 1 of DL 1/87 refers.

1. By arbitral order of 28.08.2018, on the grounds of its futility and in light of the principles of expedition, simplification and procedural informality, the holding of the meeting provided for in article 18 of the LFATM was dispensed with.

The following was also determined:

"II – In judgment n.º 175/2018, of 5.04.2018[1], the Constitutional Court decided to "Judge unconstitutional, by violation of the principle of protection of legitimate expectations, arising from article 2 of the Constitution, the provision resulting from n.º 2 of article 236 of Law n.º 83-C/2013, of 31 December, in conjunction with n.º 16 of article 8 of the Legal regime applicable to FIIAHs and to SIIAHs, in the version resulting from the amendments carried out by the aforementioned Law, according to which the exemptions in IMT and Stamp Duty provided for in nos 7, subparagraph a), and 8, of that article 8 lapse if the acquired real estate is alienated within the three-year period, counted from 1 January 2014", judging the appeals filed by the TAX AND CUSTOMS AUTHORITY and the PUBLIC PROSECUTOR'S OFFICE to be without merit.

For its part, in the arbitral decisions rendered in proceedings 683/2015-T, 64/2016-T, 275/2016-T and 48/2017-T[2], the application of the same provision had been refused on the grounds of material unconstitutionality, with the consequent success of the annulment claims, on the grounds of violation of the principle of prohibition of retroactivity of tax legislation.

The Claimant in its initial petition did not invoke the unconstitutionality of the provision mentioned above, which constituted the legal ground for the assessment object of the present proceedings.

However, the Supreme Administrative Court decided in the Judgment of the Plenary of 3-06-2015, proceedings n.º 0793/14[3]:

"in the judicial impugnation following the decision of the TCA that concerns a gracious complaint or request for ex officio review of the tax act, the judicial bodies may, and must, have knowledge of all substantial illegalities affecting the tax act in question, whether or not such illegalities have been raised in the gracious phase of the dispute, imposing upon them an increased duty when they are matters of ex officio knowledge, as in the present case."

This was a case of an appeal from an arbitral decision in which one of the matters of ex officio knowledge was the unconstitutionality of a provision, in a request for arbitral pronouncement presented following the dismissal of an ex officio review request.

For the reasons set forth in the learned judgment of the plenary of the Supreme Administrative Court, it is seen as possible that the tribunal may have knowledge of the constitutionality of n.º 2 of article 236 of Law 83-C/2013, of 31 December, in conjunction with n.º 16 of article 8 of Law no. 64-A/2008, of 31 December, in the wording of Law 83-C/2013, and it is also equitable that the tribunal, in light of the arbitral and/or constitutional jurisprudence referred to, as a consequence, may come to refuse the application of the provision in question and, as a consequence of such refusal, may judge the request for arbitral pronouncement to be well-founded.

Thus, in obedience to the principle of contradiction (article 16, subparagraph a) of the LFATM) in the aspect of the prohibition of surprise decisions, the parties shall be notified to, if they wish, make pronouncements on these issues, within a period of 10 days.

Within the same period, the parties may present written submissions, if they so wish. In this case, the pronouncement on the mentioned issues may be exercised within this procedural document."

The parties did not pronounce on the issue raised by the Tribunal, nor did they present submissions.

It can be read in the aforementioned Judgment of the plenary of the Supreme Administrative Court of 3-06-2015, rendered in proceedings n.º 0793/14, already referred to, the following:

"the real object of the impugnation is the assessment act and not the act that decided the complaint, so it is the defects of the former and not this order that are truly in question (in the same sense, among others, the judgment of this Supreme Court dated 18/06/2014, appeal n.º 01942/13), nor does it make any sense here that the scope of judicial impugnation of the act that decides the ex officio review request be limited by the decision of the ex officio review itself, rather it is necessary that this judicial impugnation may be based on any substantial illegality (in the present case only this type of illegality is in question) of the tax act, see judgment of this Supreme Court dated 08/07/2009, appeal n.º 0306/09 [What is at issue, then, mediately, is the legality of the tax assessment act: to assess the appealed act - to know whether the appellant's claim, that such act be reviewed, deserved, or not, to be dismissed (albeit presumptively) - implies investigating the legality of the assessment].

And not only may it be based on such type of illegality, when invoked by the interested party, but also other illegalities of the same type may be known, when the same are matters of ex officio knowledge by the judge, or come to be raised by the Public Prosecutor's Office at the appropriate procedural moment that the legislator reserved for its intervention in the judicial tax proceedings, see article 121 of the Code of Tax Procedure.

Thus, opening the decision of the ex officio review request the door to judicial discussion of the assessment (self-assessment) act and such act being deemed as not yet stabilized in the legal order, it would make no sense to limit the scope of knowledge in the judicial impugnation proceedings to the illegalities previously raised.

(…)

in the case of the present proceedings, in which the issues that the CAAD refused to resolve are matters of mandatory ex officio knowledge and raised by the party, violation of Portuguese constitutional law and violation of Union law.

It has been uniform jurisprudence of this Supreme Court that issues concerning violation of constitutional principles and parameters must be mandatory known by the judge as soon as there is notice of them in the proceedings, whether the same are brought to the case by the parties in the initial phase of the proceedings, initial petition, or in the final phase, prior arguments to judgment, see, among others, judgments dated 14/05/2014, 04/12/2012 and 04/10/2000, in appeals, respectively, 0195/13, 01476/02, 045986.

And this is not prevented by the fact that it is not legally permitted to the tax administration the knowledge of such issues in the context of gracious impugnations and complaints, thus excluding the application of the Law that is in force at the time, see judgment dated 04/03/2015, appeal n.º 01529/14.

Such limitation of knowledge on the part of the TCA, which is subject to the principle of legality, as we have already seen, does not apply to courts, or to judicial bodies such as the CAAD, see judgment of the CJEU, n.º C-377/13, whose competencies are much broader, being incumbent upon them to assess the legality of the acts of the administration in its various aspects, where naturally is included that of the constitutional conformity of the ordinary norms on which those same acts are based, see article 204 of the Constitution of the Portuguese Republic.

(…)

Without further ado, we can thus conclude that in the judicial impugnation following the decision of the TCA that concerns a gracious complaint or request for ex officio review of the tax act, the judicial bodies may, and must, have knowledge of all substantial illegalities affecting the tax act in question, whether or not such illegalities have been raised in the gracious phase of the dispute, imposing upon them an increased duty when they are matters of ex officio knowledge, as in the present case."

Following this jurisprudence, it is understood that nothing prevents the examination of the grounds invoked by the Claimant (moreover alleged in ex officio review proceedings contrary to what the Respondent alleges), nor the examination of the constitutional conformity of Law 83-C/2013, of 31 December, insofar as it concerns the transitional regime enshrined in its article 236, n.º 2.

1. The tribunal is materially competent and is regularly constituted pursuant to the LFATM.

The parties have legal personality and capacity, are legitimate and are legally represented.

The proceedings do not suffer from defects that would invalidate it.

The proceedings do not suffer from defects that would invalidate it.

1. It is necessary to resolve the following issues:

a) Illegality of the assessment acts object of the present proceedings.

In the event of a declaration of illegality of the assessment acts,

b) The Claimant's right to refund of the tax paid.

and,

c) The Claimant's right to indemnity interest.

II – The material facts relevant

1. The following facts are deemed proven:

• The Respondent proceeded to issue the following additional IMT assessments and corresponding compensatory interest, whose passive subject was B... – Closed Real Estate Investment Fund for Residential Rental, with reference to acquisitions that occurred on 12.09.2013, of the urban real estate, which are indicated:

• The Fund proceeded to make full and timely payment of the mentioned assessments, in a total amount of € 9,514.06.

• The Fund was a collective investment undertaking, specifically a closed real estate investment fund for residential rental ("FIIAH") of private subscription.

• On 6 April 2017, the Fund was dissolved and liquidated, and the proceeds resulting from this operation were delivered in full to the Claimant herein, in its capacity as the sole participant of the Fund at the date of the operation.

• In the context of its activity, the management company of the Fund – C... – Investment Fund Management Company, S.A. (hereinafter designated "C...") – acquired the real estate referred to in the assessments object of the present proceedings, with a view to integrating them into the patrimony of the Fund.

• The aforementioned real estate are located in the parish and municipality of Olhão, and are all allocated to housing.

• In the context of these operations, the Fund benefited from the IMT exemption legally established, at that time, for operations of acquisition of urban real estate or autonomous fractions, intended exclusively for rental for permanent housing, when carried out by a FIIAH in accordance with the Special Regime applicable to real estate investment funds for residential rental, approved by Law n.º 64-A/2008, of 31 December ("Special Regime of FIIAHs").

• Given that the aforementioned real estate were alienated before the period provided for in the regime of the Special Regime of FIIAHs, resulting from Law 83-C/2013, of 31 December, had elapsed, the Respondent understood that the lapse of the aforementioned IMT exemption had occurred, arguing that the Fund had assigned to the real estate a "different purpose" from that attributed at the time of acquisition of the same.

• Ex officio review requests were presented, by C..., against the tax acts of IMT assessment in question, on the grounds that the assessments suffer from illegality because the exemption established in article 1 of Decree-Law n.º 1/87, of 3 January, should have been applied.

• Subsequently, on 2 November 2017, the TCA issued the orders dismissing those ex officio review requests now in dispute, in the context of which it decided not to grant the IMT exemption to the operations sub judice.

• These orders contain, in particular, the following:

"44. According to the above, the Special regime applicable to FIIAHs and SIIAHs created a new reality, in the case of exemption from taxation. The amendments introduced by Law n.º 83-C/2013 did not create in themselves a new reality, only extending in time the validity both of benefits and of the conditions necessary for maintaining the exemptions introduced.

1. This tax benefit is delimited in time and is therefore temporary, but was conditioned on the verification of secondary presuppositions in a resolutive manner, whose non-fulfillment determines the lapse of its attribution. Given that the tax benefit of exemption from taxation is an exception to the general rule, the alteration of the conditions underlying its attribution implies the automatic restoration of that same taxation rule.

2. According to the elements presented, all the fractions on which the official IMT assessments were made entered the sphere of the claimant on 2013-09-12, being alienated between 2015 and 2016, but before the three-year period introduced by Law n.º 83-C/2013 ended on 2016-09-12.

3. In pursuit of its mission and in compliance with its obligations, the TCA applied the applicable legislation by issuing the appropriate official assessments due to the non-fulfillment of the presuppositions to which the initial granting of the exemption was conditioned. Namely, the transmission of the ownership of the real estate identified above without it being demonstrated that the condition of such transmission was the result of the exercise of the purchase option referred to in n.º 3 of article 5 by the tenants of the real estate.

4. Given that the legality of the official assessments in question is verified, it is finally confirmed that the same were issued timeously as the deadline for the right to assessment had not been exceeded."

With interest for the decision of the case, there are no unproven facts.

1. The Tribunal's conviction regarding the decision of the material facts was based on the documents contained in the file presented by the parties and contained in the administrative proceedings, which were not impugned by either party, as well as the arguments presented, it being noted that there is no controversy between the parties regarding the facts deemed proven.

III – The Applicable Law

1. The first issue to be resolved is whether, according to what the Claimant alleges, the tax assessment acts object of the present proceedings are illegal by non-consideration of the tax exemption provided for in article 1 of Decree-Law n.º 1/87, of 3 January.

To resolve the issue, it is necessary to ascertain whether such a provision is in force and, if so, whether it is applicable to real estate investment funds for residential rental, created by article 1 of Law no. 64-A/2008, of 31 December.

As was considered in the arbitral decision rendered in proceedings 544/2016-T[4], whose understanding is followed:

"(…) there is no doubt that the Sisa exemption provided for in article 1 of Decree-Law n.º 1/87, of 3 January, which became applicable to IMT, pursuant to articles 28 and 31 of Decree-Law n.º 287/2003, of 12 November, which approved the CIMT, is still in force, so that acquisitions of real estate carried out for a real estate investment fund by its respective management company are exempt from IMT, that is to say, carried out with the purpose of them becoming part of the fund itself."

It is concluded, for the reasons mentioned in this ruling, to which we refer, that the exemption in question is in force.

It now remains to ascertain whether it applies to real estate investment funds for residential rental.

The answer to this question cannot but be negative.

As Paulo Câmara writes[5]:

"The established regime provides that FIIAHs and SIIAHs constituted between 1 January 2009 and 31 December 2013, as well as the real estate acquired by them during this period, may benefit from a special regime in tax matters"

(…)

In order to encourage the constitution of FIIAHs, a more favorable tax regime was created, based on a broad series of tax benefits. This tax regime shall remain in force until 31 December 2020, from which date the general regime for real estate investment funds shall apply.[6]

In fact, as established in article 102 of Law 64-A/2008, of 31 December:

"The special regime applicable to real estate investment funds for residential rental (FIIAH) and real estate investment companies for residential rental (SIIAH) is hereby approved, which is an integral part of the present law, and which is contained in the following articles."

On the other hand, article 8 of the special tax regime of these funds, in its original wording, provides as follows:

"1 – Real estate investment funds (FIIAH) constituted between 1 January 2009 and 31 December 2015, which operate in accordance with national legislation and in observance of the conditions provided for in the preceding articles, are exempt from corporate income tax (IRC).

2 – Income relating to participation units in the investment funds referred to in the preceding number is exempt from personal income tax (IRS) and IRC, paid or made available to their respective holders, either by distribution or reimbursement, excluding the balance between gains and losses resulting from the transfer of participation units.

3 – Gains resulting from the transfer of real estate intended for own housing to the benefit of the investment funds referred to in n.º 1, which occurs as a result of the conversion of the right of ownership of such real estate into a right to rent, are exempt from IRS.

4 – The gains referred to in the preceding number are taxed under general terms if the passive subject ceases the rental contract or does not exercise the option right provided for in n.º 3 of article 5, with the periods of limitation and extinction being suspended for purposes of IRS assessment and collection, until the end of the contractual relationship.

5 – The amounts borne by the tenants of the real estate of the investment funds referred to in n.º 1 as a result of the conversion of a right of ownership of a real estate into a rental right are deductible from the personal income tax calculation, under the terms and limits contained in subparagraph c) of n.º 1 of article 85 of the Personal Income Tax Code.

6 – Urban real estate intended for rental for permanent housing that form part of the patrimony of the investment funds referred to in n.º 1 are exempt from IMI, whilst they remain in the portfolio of the FIIAH.

7 – Exemptions from IMT:

a) Acquisitions of urban real estate or autonomous fractions of urban real estate intended exclusively for rental for permanent housing, by the investment funds referred to in n.º 1;

b) Acquisitions of urban real estate or autonomous fractions of urban real estate intended for own and permanent housing, as a result of the exercise of the purchase option referred to in n.º 3 of article 5 by the tenants of the real estate that form part of the patrimony of the investment funds referred to in n.º 1.

8 – All acts executed, provided they are connected with the transfer of urban real estate intended for permanent housing that occurs as a result of the conversion of the right of ownership of such real estate into a right to rent on the same, as well as with the exercise of the purchase option provided for in n.º 3 of article 5, are exempt from stamp duty.

9 – Management entities of FIIAHs are exempt from supervision fees exclusively with respect to the management of funds of this nature.

10 – Entities that are residents in a country, territory or region subject to a clearly more favorable tax regime, contained in a list approved by order of the Minister of Finance, are excluded from the exemptions contained in this article.

11 – The obligations provided for in article 119 and in n.º 1 of article 125 of the Personal Income Tax Code must be complied with by the management or recording entities.

12 – If the requirements referred to in n.º 1 cease to be met, the application of the regime provided for in this article ceases, the regime provided for in article 22 of the Tax Benefits Statute, approved by Decree-Law n.º 215/89, of 1 July, becoming applicable, and the income of the investment funds referred to in n.º 1 that, at that date, has not yet been paid or made available to their respective holders must be taxed at the rates provided for in article 22-A of the said legislation, with the corresponding compensatory interest being added.

13 – The management entities of the investment funds referred to in n.º 1 are jointly and severally liable for the tax debts of the funds whose management is their responsibility."

Thus, in the case of acquisitions of urban real estate or autonomous fractions of urban real estate, the same are exempt provided they are "intended exclusively for rental for permanent housing", which constitutes a special provision in relation to the exemption provided for in article 1 of Decree-Law n.º 1/87, of 3 January, which is thus inapplicable to the case at hand, and the Claimant's argument is therefore without merit.

1. Let us now examine the issue of the constitutionality of Law 83-C/2013, of 31 December, insofar as it concerns the transitional regime enshrined in its article 236, n.º 2.

Law no. 64-A/2008, of 31 December, approved the special regime applicable to real estate investment funds for residential rental and to real estate investment companies for residential rental.

In its article 8, the tax regime applicable to real estate investment funds was established. With regard to the Municipal Tax on Onerous Transfers of Real Estate, it was established in n.º 7 of the mentioned article 8, as follows:

"7 – Exemptions from IMT:

a) Acquisitions of urban real estate or autonomous fractions of urban real estate intended exclusively for rental for permanent housing, by the investment funds referred to in n.º 1;

b) Acquisitions of urban real estate or autonomous fractions of urban real estate intended for own and permanent housing, as a result of the exercise of the purchase option referred to in n.º 3 of article 5 by the tenants of the real estate that form part of the patrimony of the investment funds referred to in n.º 1."

For its part, Law 83-C/2013, of 31 December, added to the said article 8 the numbers 14 to 16 with the following wording:

"14 – For purposes of the provisions of nos 6 to 8, it is considered that urban real estate is intended for rental for permanent housing whenever it is subject to a permanent housing rental contract within three years from the moment they became part of the fund's patrimony, and the passive subject must communicate and provide evidence to the TCA of the respective effective rental, within 30 days following the end of the said period.

15 – When the real estate has not been subject to a rental contract within the three-year period provided for in the preceding number, the exemptions provided for in nos 6 to 8 are rendered ineffective, and in that case the passive subject must request from the TCA, within 30 days following the end of the said period, the assessment of the respective tax.

16 – If the real estate is alienated, with the exception of the cases provided for in article 5, or if the FIIAH is subject to liquidation, before the period provided for in n.º 14 has elapsed, the passive subject must equally request from the TCA, before the alienation of the real estate or the liquidation of the FIIAH, the assessment of the tax due according to the preceding number."

Law 83-C/2013, of 31 December, further established in its article 236, the following transitional regime:

"1 – The provisions of nos 14 to 16 of article 8 of the special regime applicable to FIIAHs and SIIAHs, approved by articles 102 to 104 of Law n.º 64-A/2008, of 31 December, apply to real estate that has been acquired by FIIAHs from 1 January 2014.

2 – Without prejudice to the provision in the preceding number, the provisions of nos 14 to 16 of article 8 of the special regime applicable to FIIAHs and SIIAHs, approved by articles 102 to 104 of Law n.º 64-A/2008, of 31 December, are equally applicable to real estate that has been acquired by FIIAHs before 1 January 2014, with the three-year period provided for in n.º 14 being counted from 1 January 2014 in those cases."

1. In light of this legislative framework, the legal issue that must be resolved is whether, under n.º 2 of article 236 of Law 83-C/2013, of 31 December and nos 14, 15 and 16 of Law no. 64-A/2008, of 31 December, in the wording given by that legislation, the acquisition of the real estate in question, which occurred before 1 January 2014, can be subject to taxation because the real estate was sold before the three-year period counted from 1 January 2014 had elapsed, and on the other hand, if so, whether such legal solution is consistent with article 103, n.º 3, of the Constitution of the Portuguese Republic, which provides that "No one can be required to pay taxes (…) that have a retroactive nature (…)"

2. It is undeniable that, in light of the ordinary norms transcribed, a real estate investment fund for residential rental that, from 1.01.2014, sells a real estate acquired in a previous year, which benefited from exemption because the real estate was destined for rental for permanent housing, and that sells it before three years have elapsed after 1.01.2014, becomes subject to tax by virtue of Law 83-C/2013, of 31 December.

In our understanding, in the case sub judice, the taxable event in question (the acquisition of ownership by the Claimant) occurred entirely under the old law.[7]

It is also undeniable that the taxable event in question is subject to taxation under Law 83-C/2013, of 31 December, but it was not under Law no. 64-A/2008, of 31 December, in its original wording.

1. In legal doctrine, Ana Paula Dourado tells us that "In cases of taxes of single obligation (for example, the purchase and sale of a real estate property, subject to IMT) the prohibition of retroactivity implies the respect for past taxable events, that is to say, the non-application of the new law to those events, since the tax obligation was born and is concluded."[8]

It can also be read in judgment no. 617/2012, of 19 December 2012, Proceedings no. 150/12, of the Constitutional Court:

"In fact, the event giving rise to the tax obligation (….)undoubtedly occurs before the publication of the new law, it being impossible to understand that we are dealing with a complex legal-tax event of successive formation.

The application of the new law to this event that occurred prior to its approval thus involves authentic retroactivity.

What is relevant, in light of the constitutional principles enunciated, is not the moment of assessment of a tax, but rather the moment when the act occurs that determines the payment of that tax. It is this act that will give rise to the constitution of a tax obligation, so that it is at that time, in obedience to the principle of legality, in the aspect based on the principle of protection of legitimate expectations, that is required, as a preventive measure, that the law that provides for the creation or increase of that tax is already in force, so that the citizen can consider the tax consequences of his behavior.

(…)

Now, having already occurred the event that gave rise to the tax obligation later increased by new law, the reasons that presided over the establishment of the rule of prohibition of retroactivity in this domain are entirely present, since it is important to prevent the abstract risk that the law published retroactively provoke unreasonable financial increases, by the impossibility in which the affected taxpayers, bound to such events already occurred, found themselves, of foreseeing and providing for the tax consequences determined by future law."

1. According to the above, and in line with the doctrine and jurisprudence cited, in the tribunal's understanding, n.º 2 of article 236 of Law 83-C/2013, of 31 December, in conjunction with n.º 16 of article 8 of Law no. 64-A/2008, of 31 December, in the wording of Law 83-C/2013, establishes a retroactive taxation (authentic retroactivity), violating article 103, n.º 3, of the Constitution of the Portuguese Republic, and therefore the tribunal cannot fail to dis-apply the same, in obedience to the norm enshrined in article 204 of the Constitution of the Portuguese Republic.[9]

Should it be considered that we are dealing with a situation of inauthentic retroactivity, as was understood in the referred Judgment of the Constitutional Court n.º 175/2018, of 5 April 2018, in the tribunal's understanding the norm in question would always be unconstitutional for violation of the principle of protection of legitimate expectations, pursuant to that ruling, since as it is sustained there:

"15. The conclusion that the provision contained in n.º 2 of article 236 of Law n.º 83-C/2013 is not, at least with the evidence presupposed by the activation of the prohibition established in n.º 3 of article 103 of the Constitution, authentically retroactive, is not sufficient, however, to conclude for its constitutional conformity.

And this is because, in cases of inauthentic or improper retroactivity – that is, those relating to provisions that provide, in an innovative manner, legal consequences for situations that were constituted before its entry into force, but which remain (or may remain) at that date – has this Court repeatedly emphasized that, also within the tax domain, the mutations of the legal order cannot affect the expectations created under the old law in a manner incompatible with that minimum of certainty and security that people, the community and law must respect, as essential dimensions of the principle of the democratic state governed by the rule of law, enshrined in article 2 of the Constitution.

(…)

Under the regime of the old law, the destination of the real estate acquired for residential rental, through its effective availability for such purpose, constituted a condition simultaneously necessary and sufficient for the attribution of the exemptions granted within the framework of IMT and stamp duty. As noted, and correctly so, by the Court a quo, nothing was provided there about the need for the real estate acquired to be effectively rented and/or to remain in the ownership of the acquiring fund for a certain period, under pain of lapse of the benefit.

Incentivized by the tax regime provided for in Law n.º 64-A/2008, real estate investment funds carried out a set of investments in the acquisition of real estate properties, in the legitimate conviction that the tax benefits associated with such acquisitions would only lapse if the acquired real estate did not come to be made available for residential rental after its acquisition and not also if, despite such availability, no rental contract came to be effectively concluded within a certain period due to reasons inherent to the very functioning of the market and/or the acquired fraction ended up being alienated due to the absence of any other financially viable alternative for its monetization.

The trust placed by the funds in the constancy of the tax regime contemporary with the investments they decided to make, in addition to being worthy of protection, cannot fail to be considered affected by the consequences of the retroactive application of the new presuppositions of the exemption.

By determining the lapse of the tax benefits in the event that the acquired real estate, despite being made available for residential rental, does not come to be effectively rented within a certain period for reasons not attributable to the fund and/or ends up being alienated for that reason in order to contain or mitigate the losses arising from the objective impossibility of its monetization within the scope of the legally prescribed purpose, the new law transfers to the funds the risk inherent to the functioning of the market in terms that not only had no parallel in the domain of the old law but were, in view of what was provided there, by no means foreseeable.

In a completely innovative manner, it came to follow from the regime approved by the new law that, regardless of the reasons that may have made the effective conclusion of the rental contract on the real estate impossible, the tax benefit lapses by the mere fact that such contract does not come to be effectively concluded and/or the acquired real estate has not remained in the ownership of the fund for a certain period, despite the absence of any financially sustainable alternative for its retention. It is from this last point of view – which is what directly matters in the case sub judice – that it follows from the application of the new regime to acquisitions made under the regime of Law n.º 64-A/2008 that the real estate investment fund, even if it has made all efforts to make feasible the conclusion of a rental contract on the acquired real estate, is required, under pain of extinction of the benefit, to maintain the ownership of the real estate, bearing all the respective charges, for the three years following the entry into force of Law n.º 83-C/2013, even in the persistent and durable impossibility of achieving that objective.

By causing the lapse of the tax exemptions provided for within the framework of IMT and stamp duty through the addition of new presuppositions, not contemplated in the law in force at the time of acquisition of the real estate, the retroactive application of the amendments introduced by Law n.º 83-C/2013 frustrates the expectations legitimately created in the investing funds by the tax regime in view (and under incentive) of which such acquisitions were decided to be made, violating that minimum of certainty and security that all intervenients in legal commerce, when planning their action and making their choices, must be able to place in the legal order of a State governed by the rule of law.

Not being discerned any constitutionally protected interest whose safeguarding could justify the harm to the legitimate expectations of real estate investment funds in the maintenance of the tax regime contemporary with the act of acquisition of the real estate, it is to be concluded that there is unconstitutionality, by violation of the principle of protection of legitimate expectations, of the provision contained in n.º 2 of article 236 of Law n.º 83-C/2013, of 31 December, in conjunction with n.º 16 of article 8 of the legal regime applicable to FIIAHs and SIIAHs, in the version resulting from the aforementioned Law n.º 83-C/2013, by reason of the fact that it results therefrom that the real estate acquired under the regime of Law n.º 64-A/2008, of 31 December, must be effectively rented within a fixed period, without being able to be sold in the event that the rental contract does not come to be concluded, under pain of lapse of the exemption."[10]

1. For what is set out above, and in particular by the dis-application of n.º 2 of article 236 of Law 83-C/2013, of 31 December, in conjunction with n.º 16 of article 8 of Law no. 64-A/2008, of 31 December, in the wording of Law 83-C/2013, on the grounds of its unconstitutionality, as required by article 204 of the Constitution of the Portuguese Republic, it is concluded that the tax assessments in question lack legal basis, which has as a consequence the annulment of the same.

2. Request for Refund of Paid Amounts and Indemnity Interest

The Claimant also requested that the Respondent be condemned to refund the amounts wrongfully collected, as well as payment of indemnity interest that may be due, pursuant to article 43 of the General Tax Law.

In the present case, it is manifest that, following the declaration of illegality of the assessment acts, the Claimant's claim for refund is well-founded by virtue of articles 24, n.º 1, subparagraph b), of the LFATM and 100 of the General Tax Law, since this is essential to restore the situation that would exist if the illegality in question had not been committed.

With regard to indemnity interest, it is also necessary to assess this claim in light of article 43 of the General Tax Law.

As was decided in the arbitral decision rendered in proceedings 507/2017-T[11]:

"With regard to indemnity interest, given that they are defects derived only from the application of an unconstitutional norm, it must be understood that the assessments do not suffer from any error attributable to the services of the Tax and Customs Authority, so there is no right to indemnity interest, in view of the provision in article 43, n.º 1, of the General Tax Law, as the Supreme Administrative Court has been deciding uniformly, for the following reasons:

In that case, and unless there is disregard for constitutional norms directly applicable and binding, such as those relating to rights, freedoms and guarantees (see article 18, n.º 1, of the Constitution of the Portuguese Republic), the TCA cannot refuse to apply the norm on the grounds of unconstitutionality (With interest on the question, see the opinions of the Advisory Council of the Office of the Attorney General of the Republic referred to in the Collection of Opinions of the Office of the Attorney General of the Republic, volume V, points 10, 3, 3.2 – respectively, with the titles "Monitoring of constitutionality", "Successive monitoring" and "(In)application of unconstitutional norm (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 TCA is also subject to it by virtue of the provision in article 55 of the General Tax Law.

In our view, the TCA should wait for the declaration of unconstitutionality with binding general force, to be issued by the Constitutional Court (CC), pursuant to article 281 of the Constitution of the Portuguese Republic.

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. This is not what is at issue, because what is in question is not the constitutionality of the law, but the judgment that can be made by administrative bodies on that constitutionality. On one hand, the Administration is not an organ of monitoring of constitutionality; on the other hand, the submission of the Administration to the law is not intended only to protect the rights of individuals, but also the defense and pursuit of public interests […]. The granting to administrative power of unlimited powers to control the unconstitutionality of the laws to be applied would lead to administrative anarchy, would invert the relation Law-Administration and would directly attack the principle of the division of powers, as it is enshrined in our Constitution" (Constitutional Law, Almedina, 1977, page 270.).

In the same sense, JOÃO CAUPERS states that "the Administration does not have, in principle, competence to decide the non-application of norms whose constitutionality raises doubts about it, contrary to courts, to whom falls the task of diffuse and concrete monitoring of constitutional conformity, as demonstrated by the differences between articles 207 [now, 204] and 266, n.º 2, of the Constitution. While the first prevents the courts from applying unconstitutional norms, the second provides for the subordination of administrative organs and agents to the Constitution and the law.

It appears clear that the essential difference between the two provisions arises precisely from the circumstance that it was not intended to entrust the Administration with the task of monitoring the constitutionality of the laws. The performance of such function, by the latter, must be seen as exceptional" (The Fundamental Rights of Workers and the Constitution, Almedina, 1985, page 157.).

We conclude, thus, that in Portuguese Constitutional Law there does not exist the possibility for the Administration to refuse to obey a norm that it considers unconstitutional, substituting itself for the organs of monitoring of constitutionality, except in the case where there is a violation of rights, freedoms and guarantees constitutionally enshrined, which is manifestly not the case when the application of a norm potentially violating the principle of non-retroactivity of tax law is in question."

Following this jurisprudence, the claim for condemnation of the Respondent to payment of indemnity interest is judged to be without merit.

IV – Decision

Thus, the arbitral tribunal decides:

• To judge the claim for arbitral pronouncement to be well-founded and, in consequence, to decree the annulment of the assessments object of the proceedings;

• To judge the claim for refund of the amounts paid by the Claimant corresponding to the assessments to be well-founded and to condemn the Tax and Customs Authority to refund said amount to the Claimant;

• To judge the claim for payment of indemnity interest to be without merit and to absolve the Respondent of this claim.

Communicate to the Office of the Attorney General of the Republic, for the purposes of article 280, n.º 5, of the Constitution of the Portuguese Republic.

Value of the case: € 9,514.06 (nine thousand five hundred and fourteen euros and six cents), pursuant to the provisions of article 306, n.º 2, of the Code of Civil Procedure and 97-A, n.º 1, subparagraph a), of the Code of Tax Procedure and 3, n.º 2, of the Regulation of Costs in Arbitration Proceedings.

Costs by the Respondent, in the amount of € 918.00 (nine hundred and eighteen euros) pursuant to n.º 4 of article 22 of the LFATM.

Notify.

Lisbon, CAAD, 26.09.2018

The Arbitrator

Marcolino Pisão Pedreiro