Process: 420/2018-T

Date: January 15, 2019

Tax Type: IMI

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 420/2018-T) addresses a constitutional challenge to AIMI (Additional Tax on Municipal Property Tax) by a real estate development company. The claimant, a commercial entity operating in the tourism and real estate sector with a significant development project in Portugal, contested an AIMI assessment of €91,615.39 for 2017. The company argued that AIMI violates constitutional principles of equality, contributory capacity, and proportionality when applied to real estate companies holding property inventory for development and commercial purposes. The claimant owned numerous urban properties, construction land, and residential fractions forming part of a large-scale tourism investment project approved by the Portuguese State in 2000. After paying the assessed amount and having an administrative objection dismissed by the Finance Directorate, the company initiated arbitral proceedings at CAAD. The case raises fundamental questions about whether AIMI's taxation regime adequately distinguishes between investment properties held for speculation versus commercial inventory held by real estate developers as trading stock. This distinction is critical for assessing whether the tax respects the constitutional principle of ability to pay, as inventory properties generate costs rather than income until sold. The arbitral tribunal was constituted by three arbitrators and proceeded to analyze whether AIMI's application to corporate real estate holdings violates constitutional guarantees, particularly when the properties are essential business assets rather than passive investments generating wealth.

Full Decision

ARBITRAL DECISION

The arbitrators Cons. Jorge Lopes de Sousa (arbitrator-president), Dr. Rita Guerra Alves and Dr. Alexandre Andrade (arbitrators members), designated by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 13-11-2018, agree as follows:

1. Report

A..., S.A., Legal Entity No. ..., with registered office at ..., ...-..., ... (hereinafter referred to as "Claimant") came, pursuant to section a) of Article 2, paragraph 1, and Articles 10 et seq. of Decree-Law No. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters or "LRAT"), to submit a request for arbitral decision seeking the annulment of the assessment for Additional Municipal Property Tax ("AIMI") No. 2017 ... for the year 2017, in the amount of €91,615.39.

The TAX AUTHORITY AND CUSTOMS AUTHORITY is the respondent.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax Authority and Customs Authority on 03-09-2018.

Pursuant to section a) of Article 6, paragraph 2, and section b) of Article 11, paragraph 1, of the LRAT, in the wording introduced by Article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council designated as arbitrators of the collective arbitral tribunal the undersigned, who communicated acceptance of the appointment within the applicable period.

On 23-10-2018, the parties were duly notified of this designation and did not express any intention to refuse the designation of the arbitrators, in accordance with the combined provisions of Article 11, paragraph 1, sections a) and b) of the LRAT and Articles 6 and 7 of the Code of Deontology.

Thus, in compliance with the provision in section c) of Article 11, paragraph 1, of the LRAT, in the wording introduced by Article 228 of Law No. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 13-11-2018.

The Tax Authority and Customs Authority submitted a response in which it argued that the claim should be judged unfounded and that the final decision should be notified to the Public Prosecutor.

By orders of 11-12-2018 and 17-12-2018 it was decided to dispense with the meeting provided for in Article 18 of the LRAT and that the case proceed with simultaneous written pleadings.

Only the Tax Authority and Customs Authority submitted pleadings.

The arbitral tribunal was regularly constituted, in accordance with the provisions of Articles 2, paragraph 1, section a), and 10, paragraph 1, of Decree-Law No. 10/2011, of 20 January.

The parties are properly represented, have legal personality and capacity, and have standing (Articles 4 and 10, paragraph 2, of the same legal instrument and Article 1 of Regulatory Order No. 112-A/2011, of 22 March).

The case is not subject to any nullities.

2. Facts

2.1. Proven Facts

  • The Claimant is a commercial company that carries on its business in the real estate sector;

  • The Claimant's object is the promotion and implementation of tourism enterprises, operation of the hotel industry and similar activities in its own establishments, or leased or used in any capacity, among other activities;

  • The Claimant and other companies in Group B... entered into an investment contract with the Portuguese State and other public entities, on 16 May 2000, the content of which was approved by Council of Ministers Resolution No. 22/2000, of 8 May ([1]) – which approves the terms of the investment contract relating to a project to be carried out in ...;

  • In such contract it was agreed, inter alia, that "the investment project to be implemented, having a predominantly tourism vocation, whose total investment value is estimated at approximately 40 million contos, provides, in particular, for the recovery, requalification and completion of structures and infrastructure already in existence, the demolition of buildings considered unsuitable to the urban planning and quality concept to be developed, as well as the construction of new tourism enterprises, a conference centre, a casino, a marina, an aquatic recreation park, a sports centre, an equestrian centre, an environmental nucleus intended for monitoring the environmental system and its management, and also the execution of recovery and restoration works of the Roman ruins of ...";

  • The Claimant is the owner of the urban properties mentioned in the assessment in question, namely the following:

    i- Property located at ..., registered in the matrix under article No. U-...;

    ii- Land for construction located at ..., registered in the matrix under articles No. U-... and U-...

    iii- Fractions located at ..., registered in the matrix under articles No. U-...-..., U-...-..., U-...-..., U-...-..., U-...-..., U-...-..., U-...-..., U-...-..., U-...-..., U-...-..., U-...-... and U-...-...;

    iv- Land for construction located in Portimão, registered in the matrix under article No. U-...;

    v- Property located at ..., registered in the matrix under articles U-...-... and U-...-...;

    vi- Fractions located at ..., registered in the matrix under articles No. U-...-..., U-...-..., U-...-... /..., U-...-..., U-...-..., U-...-..., U-...-..., U-...-...;

    vii- Fractions located at ..., registered in the matrix under articles No. U-..., U-...-..., U-... to ..., U-...-... to ..., U-...-... to ..., U-...-... to ..., U-...-... to ..., U-...-... to ... and U-...-... to ...;

    viii- Land for construction located in ..., registered in the matrix under articles No. U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-..., U-... and U-....

  • The properties referred to in items vi, vii, viii form part of the said real estate project in ...;

  • The Claimant acquired all properties for the purpose of promoting therein buildings in accordance with its financial capacity and promoting their operation according to market circumstances;

  • The Claimant was notified of the AIMI assessment No. 2017..., issued on 30-06-2017, relating to the year 2017, in the total amount of €119,537.06 – which includes the properties in question here, with determination of the respective tax due in the amount of €91,615.39 (document No. 2 attached with the request for arbitral decision, whose content is hereby reproduced);

  • On 29-09-2017, the Claimant paid the amount assessed (document No. 2);

  • The Claimant filed an administrative objection to the said assessment which was processed at the Finance Directorate of ... under No. ...2018... (document No. 1, attached with the request for arbitral decision, whose content is hereby reproduced);

  • The administrative objection was dismissed by order of 23-04-2018, issued by the Chief of the Tax Justice Division of the Finance Directorate of ... (document No. 1);

  • The decision dismissing the administrative objection refers to the justification of the draft decision contained in document No. 1, in which the following is stated, among other things:

ASSESSMENT OF THE CLAIM

AIMI was introduced into the Portuguese tax legal system by Law No. 42/2016, of 28 December (State Budget for 2017), and is a personal tax, on a cadastral basis, on real estate property.

Article 135-A, paragraph 1, of the IMI Code establishes that taxable persons are "... natural or legal persons who are owners, usufructuaries or superficiaries of urban properties located in Portuguese territory", with paragraph 3 of the same provision specifying that "The status of taxable person is determined in accordance with the criteria established in Article 8 of this Code, with the necessary adaptations, having as reference the date of 1 January of the year to which the additional municipal property tax relates."

It should be noted that paragraph 4 of Article 8 of the IMI Code defines one of these criteria, establishing the presumption that "owner, usufructuary or superficiary, for tax purposes, is whoever appears or should appear as such in the matrix."

Paragraph 1 of Article 135-B of the IMI Code provides that "The additional municipal property tax is levied on the sum of the tax values of urban properties situated in Portuguese territory of which the taxable person is the owner."

And paragraph 1 of Article 135-C of the IMI Code establishes that the taxable value of AIMI "corresponds to the sum of the tax values, as of 1 January of the year to which the additional municipal property tax relates, of the properties that appear in the property matrices in the ownership of the taxable person".

Furthermore, paragraph 1 of Article 135-G provides that AIMI is assessed annually "... on the basis of the tax values of the properties and in relation to the taxable persons appearing in the matrices on 1 January of the year to which the same relates."

Therefore, the calculation of the tax will be based on a register administratively maintained and which includes the information necessary for its assessment and the determination of the tax obligation.

For this purpose, the TA (Tax Authority) exercises ex officio initiative in the assessment procedures on the basis of data recorded in the property matrices and with effect to the date of the taxable event - 1 January of the year to which the tax relates - using the tax values (taxable matter) and the persons recorded therein as owners of the real property rights to the properties (subjective scope).

Regarding the claim's allegation that the legislation invoked is manifestly unconstitutional (by breach of the principles of tax capacity, equality and proportionality), it must first be noted that it is not incumbent on the TA, in accordance with Article 281 of the Constitution of the Portuguese Republic (CRP), to assess the alleged unconstitutionality of the norms supporting the AIMI assessment – noting that the law from which these derive was enacted and published by the President of the Republic in accordance with section b) of Article 134, paragraph 1, of the CRP, whereby it falls to the TA to assess and collect the tax in question, in its capacity as an active party to the tax relationship.

In fact, inasmuch as it falls to the Courts to assess (un)constitutionality, the tax administration, which is under the hierarchical dependence of the executive, cannot replace the courts in reviewing the constitutionality of the laws it is required to apply.

In support of what has been stated above, it is pertinent to cite the Administrative Supreme Court Decision of 2009-01-21, Proc. 0811/08, which states that "The rule in question appears in the Decree-Law, which is a legislative act deriving from the exercise by the Government of the legislative function. And, in that respect, there is no doubt that we are dealing with a legislative norm, so that the assessment and declaration of its possible illegality or unconstitutionality falls to the Constitutional Court (Article 281, paragraph 1, sections a) and b) of the CRP), being excluded from the jurisdiction of the administrative and tax courts".

On the contrary, in light of the principle of legality, to which it is bound in its actions, the TA cannot fail to apply and comply with the law.

In fact, as the TA is subject to the principle of legality (Article 266, paragraph 2, of the CRP and Article 55 of the General Tax Law), it cannot refrain from applying a norm on the grounds of unconstitutionality, unless the Constitutional Court has already declared the unconstitutionality thereof with general binding force or there is a breach of constitutional norms directly applicable and binding, such as those referring to rights, freedoms and guarantees, see Administrative Supreme Court Decision of 04-03-2015, Proc. 01529/14.

In the same sense we can see Vieira de Andrade, in Constitutional Law, Almedina, 1977, p. 270, who states that "This conflict [between constitutionality and the principle of legality] cannot be resolved through the automatic prevalence of constitutional law over legal law. That is not the issue, because what is at stake is not the constitutionality of the law, but the judgment that administrative organs may make about that law. On one hand, the Administration is not an organ for oversight of constitutionality; on the other hand, the submission of the Administration to the law aims not only at the protection of the rights of individuals, but also at the defense and pursuit of public interests [...]. The granting to administrative power of unlimited authority to review the unconstitutionality of the laws to be applied would lead to administrative anarchy, would invert the Law-Administration relationship and would directly violate the principle of separation of powers as enshrined in our Constitution."

The same position is defended by João Caupers, who states that "... the Administration does not, in principle, have the competence to decide not to apply norms whose constitutionality raises doubts, contrary to the courts, to whom it falls to oversee diffuse and concrete compliance with constitutional conformity, as demonstrated by the differences between Articles 207º (now 204º) and 266º, paragraph 2 of the Constitution. While the former prevents courts from applying unconstitutional norms, the latter stipulates the subordination of administrative organs and agents to the Constitution and the law."

It follows from the above that, in Portuguese Constitutional Law, there is no possibility for the TA to refuse to comply with a norm, even if it considers it unconstitutional, replacing the organs responsible for oversight of constitutionality.

Finally, it should also be noted that we are not aware of any intervention in terms of preventive or subsequent review of the constitutionality of the AIMI that could cast doubt on the tax acts carried out pursuant thereto.

CONCLUSION

Consequently, the AIMI assessment No. 2017... now objected to does not suffer from any error regarding its premises, so the present administrative objection should be dismissed.

  • On 31-08-2018, the Claimant filed the request for arbitral decision that gave rise to the present case.

2.2. Unproven Facts and Justification of the Determination of Facts

There are no facts relevant to the decision of the case that have not been proven.

The proven facts are based on the documents submitted by the Claimant and those contained in the administrative file.

The Tax Authority and Customs Authority does not dispute any of the facts alleged by the Claimant.

3. Law

3.1. Positions of the Parties

The Claimant presents its interpretation regarding the application of AIMI and concludes that "AIMI applies to properties with residential use, as well as to land for construction, regardless of its use – insofar as the same are not expressly listed in the norm defining the negative scope of application" (Article 23 of the request for arbitral decision).

The Claimant considers that Article 135-B, paragraph 1, of the IMI Code suffers from unconstitutionality by breach of the principle of equality, in its aspect of tax capacity, as well as by breach of the principle of proportionality.

The Claimant alleges, in summary, the following:

– this regime is defective by illegality due to breach of the constitutional principles of equality, proportionality and tax capacity, when properties held by companies in the course of their activity and because of it are at issue;

– in these situations, the premise that ownership of such properties may constitute a manifestation of a (or an increased) tax capacity that, in itself, should be subject to levy by taxation is wholly absent;

– therefore, taxation in AIMI should make a distinction between, on one hand, ownership of real estate property which, in itself, constitutes a manifestation of increased economic wellbeing and ownership of real property rights intended for the exercise of an economic activity and which, as such, may be recognized as factors of production;

– in the latter case, the size and tax value of such properties does not constitute, nor can it constitute, the manifestation of wealth that should be taxed but, rather, materializes only a set of elements necessary and essential to the development of an economic activity;

– there is thus created, without any factual basis, a glaring inequality in material terms between companies that have decided to pursue an economic activity that presupposes property ownership, in relation to other companies whose activity does not derive from property ownership;

– moreover, the legal conditions are created for the constitution of manifest situations of material inequality between the Claimant and companies that, owning real property, pursue therein a commercial, industrial or service activity;

– the AIMI regime does not adequately protect companies that, for the development of their economic activity, need to own properties – which contributes decisively to their negative fiscal discrimination, without any factual justification;

– there is no discernible reason for negatively discriminating against properties held by companies whose corporate purpose is the carrying out of real estate operations;

– with the tax act in question, the real estate sector is the only sector of activity effectively taxed for the ownership of production assets as an alleged manifestation of increased tax capacity;

– the value considered for application of the tax is not an actual production cost, determined and recorded in accounting, but rather the tax value (VPT) determined for tax purposes;

– properties held by companies pursuing real estate activities are not "luxury real estate property";

– the taxation in question constitutes a breach of the principles of tax capacity, equality and proportionality – insofar as the fact that the Claimant has in its inventory properties for construction, operation or sale in no way manifests a relevant tax capacity worthy of being (differently and autonomously) taxed, which is all the more evident when it is noted that other companies holding properties of identical or higher tax value, equally devoted to their economic activity, are not subject to similar taxation;

– the application thereof to the ownership of properties intended for the exercise of an economic activity, without sufficient justification, Article 135-B, paragraph 2, of the IMI Code should be disapplied as unconstitutional, insofar as it violates the principle of tax equality enshrined in Articles 13 and 104, paragraph 3, of the CRP;

– the legal norm in question is manifestly unbalanced, non-conforming and unsuitable for pursuing the legal purpose, the same is materially unconstitutional by breach of the principle of proportionality;

The Tax Authority and Customs Authority, with apparently deficient understanding of what is at issue in the case (extensive to the pleadings), addresses at length hypothetical questions that were not raised regarding the interpretation of norms of the AIMI regime (namely regarding land for construction whose potential purpose is not residential, a situation that does not even occur in the present case).

Finally, from Article 168 (one hundred and sixty-eighth) of the Response, the Tax Authority and Customs Authority ends up pronouncing itself, to some extent, on the questions raised by the Claimant, stating in summary, the following:

– the principle of equality is realized and thus has various dimensions, such as (i) the prohibition of arbitrariness, (ii) the prohibition of discrimination, and (iii) the obligation of differentiation;

– tax capacity, beyond income and the use of assets, is also expressed, in accordance with the law, through ownership of property, as established in Article 4/1 of the General Tax Law;

– the different valuation and taxation of a property with residential use, compared to a property intended for commerce, industry or services, results from the different suitability of the properties in question;

– the tax in question does not aim at a generic taxation of property, which is not required by Article 104, paragraph 3, of the CRP;

– within the framework of a partial taxation of property, in this case, affecting land for construction, the terms that should appropriately be taken as the basis for comparison, to assess compliance with the principle of equality, are the property assets of entities with the same corporate purpose;

– because only thus is there a confrontation between objectively equal situations, being therefore appropriate to reject that the comparison be established between property realities of entities that pursue different economic activities (companies whose activity does not derive from property ownership or "companies engaged in the sale of properties of other categories"), as well as from natural persons (who have a much higher rate);

– AIMI concerns a partial taxation of property, without specifically targeting companies or a specific type of company, as it encompasses all kinds of taxable persons who are owners of the real property rights listed on the properties in question, regardless of whether they assume an entrepreneurial character or not, extending, thus, beyond companies, to foundations, associations, natural persons;

– the duty to contribute to public expenditure through taxation is an immanent limit to property rights and freedom of economic initiative;

– it shall not be, therefore, the circumstance that other taxpayers who own identically valuable real estate property are exempt from the tax that will justify specific constitutional censure of the norm in question;

– the discriminatory treatment given relevance finds justification in the differences existing between the real property realities compared, so does not constitute a breach of the principle of equality in the twofold aspect of uniformity and generality;

– AIMI is, moreover, a deductible expense, negatively affecting the taxable profit of the fiscal period, or is deductible from the corporate income tax due when the properties in the taxable matter are included as income generated by properties, subject thereto, within the framework of rental or hospitality activity (Article 135-J, paragraph 1 and paragraph 2, of the IMI Code);

3.2. Assessment of the Questions Raised by the Claimant

Law No. 42/2016, of 28 December (State Budget for 2017) added to the IMI Code Chapter XV, with Articles 135-A to 135-K, which includes the regime for the Additional Municipal Property Tax (AIMI).

In the Report of that Budget it is stated:

The revenue-raising measures, in addition to the updating of Excise Duties and Vehicle Tax at 3%, focus on the introduction of two new forms of taxation: a progressive additional tax on IMI and an expansion of the IABA base to soft drinks. The two measures together represent only approximately 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 program of broadening the funding base of Social Security, while introducing a tax that falls on holders of larger real estate portfolios, strengthening the overall progressivity of the system.

(...)

Progressive taxation of real estate property

The additional municipal property tax introduces into the taxation of real estate property a progressive element on a personal basis, taxing higher amounts the larger portfolios, with a marginal rate of 0.3% applied to portfolios exceeding €600,000 per taxable person.

To avoid the impact of this tax on economic activity, excluded from the scope of taxation are rural properties, mixed properties, industrial properties, and those devoted to tourism activity, and companies are still allowed exemption of properties devoted to their productive activity up to €600,000. The possibility of deducting the amount of tax paid from the tax due on property income provides an additional incentive for rental and productive use of property.

This tax replaces the previous 1% stamp duty on the value of property exceeding 1 million euros. With a much lower rate (0.3%) it is also fairer because it takes into account the total value of the real estate portfolio and not, in isolation, the value of each property.

In Article 135-A the subjective scope of this tax is defined, establishing that "taxable persons of the additional municipal property tax are natural or legal persons who are owners, usufructuaries or superficiaries of urban properties located in Portuguese territory", with "any structures or centers of collective interests without legal personality that appear in the matrices as taxable persons of the municipal property tax being equated to legal persons".

Article 135-B defines the objective scope of this additional tax, establishing the following:

Article 135-B

Objective Scope

1 - The additional municipal property tax is levied on the sum of the tax values of urban properties located in Portuguese territory of which the taxable person is the owner.

2 - Excluded from the additional municipal property tax are urban properties classified as "commercial, industrial or for services" and "other" in accordance with sections b) and d) of Article 6, paragraph 1, of this Code.

In the wording that appeared in the proposed Budget this paragraph 2 had the following wording:

2 - Excluded from the additional municipal property tax are urban properties classified in the category "industrial", as well as urban properties licensed for tourism activity, the latter provided that their purpose is duly declared and proven.

Article 6 of the IMI Code establishes the following:

1 - Urban properties are divided into:

a) Residential;

b) Commercial, industrial or for services;

c) Land for construction;

d) Other.

2 - Residential, commercial, industrial or for services are buildings or constructions licensed for such purpose 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 area for which a license or authorization has been granted, prior notice has been admitted or favorable prior information has been issued for a subdivision or construction operation, and also land that has been declared as such in the acquisition title, with the exception of land in which the competent entities prohibit any of those operations, in particular those located in green areas, protected areas, or which, in accordance with the municipal land use plans, are devoted to public spaces, infrastructure or facilities.

4 - The provision in section d) of paragraph 1 includes land situated within an urban area that is neither land for construction nor is covered by the provision in paragraph 2 of Article 3 and also buildings and constructions licensed for purposes other than those referred to in paragraph 2 and also those in the exception in paragraph 3.

The wording of Article 135-B of the IMI Code that came to be approved does not exclude AIMI from applying to properties devoted to residential use and land for construction used by legal persons in the course of their economic activity.

The legislative concern of "avoiding the impact of this tax on economic activity" was announced in the Draft Law of the State Budget for 2017 and was to some extent implemented through the exclusion from the scope of "urban properties classified in the category "industrial", as well as urban properties licensed for tourism activity, the latter provided that their purpose is duly declared and proven" and the deduction from the taxable value of the amount of "€600,000.00, when the taxable person is a legal person with agricultural, industrial or commercial activity, for properties directly devoted to its functioning".

However, it was not on the basis of the activity to which the properties are devoted that the exclusion from scope came to be defined, for in the wording that came to be approved, non-application was defined solely on the basis of the types of properties indicated in Article 6 of the IMI Code, without any reference to devotion to the functioning of legal persons.

The concepts of devotion of a property, which presupposes a use, and the purpose to which it is intended, the "normal purpose", underlying the classifications of properties, to which Article 6, paragraph 2, of the IMI Code refers, are distinct.

If the final wording of the Budget had maintained the legislative intention of excluding application to properties directly devoted to the functioning of legal persons, the reference to this devotion that appeared in the proposal, which clearly expressed this legislative choice, would certainly have been maintained.

Thus, given that this reference to the devotion of properties has been removed, there is no legal support for concluding that residential properties and land for construction devoted to the activity of legal persons are outside the scope of AIMI.

Therefore, it is to be concluded that the devotion of properties to economic activities of legal persons does not exclude taxation in AIMI (except in cases of properties that previously were exempt or not subject to taxation in IMI, which are not counted for purposes of AIMI, in accordance with paragraph 3 of Article 135-B of the IMI Code).

The holding of high-value real estate property, regardless of whether or not it is devoted to economic activity, is tendentially revelatory of high tax capacity, superior to that which can be presumed to exist when property of reduced value is held or when it does not exist, so, in principle, limitation of taxation to the first situations is justified.

However, it is not explicitly evident from the Report of the 2017 Budget or from its parliamentary discussion what the reasons underlying the distinction, for purposes of AIMI taxation, between the tax values of properties classified as residential or land for construction (regardless of their actual devotion to such purposes) and those of urban properties that have other classifications, in light of Article 6 of the IMI Code.

Regarding properties classified as "other" in light of Article 6, paragraphs 2, section d), and 4, of the IMI Code, one may discern a reason for distinction in the fact that these are essentially properties that are not intended for income-generating activities, namely land located in urban agglomerations that do not meet the requirements necessary for their classification as land for construction nor are being used for agricultural or forestry purposes and buildings intended for public spaces or infrastructure or facilities. ([2])

With regard to the exclusion of taxation for properties intended for commerce, industry or services, one may perceive an explanation in the purpose invoked for the creation of this new form of taxation, which is to finance Social Security, ensured through the earmarking of AIMI revenues to the Financial Stabilization Fund of Social Security, provided in paragraph 2 of Article 1 of the IMI Code, in the wording of Law No. 42/2016, of 28 December.

It is not intended with AIMI to burden the taxation of luxury properties, as was primarily aimed at with the 28.1 line of the TGIS (Single Table of Excise Duties), for high-value real estate property may be constituted by a plurality of low-value properties, but rather to create another avenue for subsidization of the social security system, which is one of the constitutional duties of the State, provided in Article 63, paragraph 2, of the CRP.

The sustainability and stability of Social Security, ever in doubt, is a permanent concern that has justified numerous initiatives, well evidenced in the Major Options of the Plan for 2017 (Law No. 41/2016, of 28 December) and for 2018 (Law No. 113/2017, of 29 December) ([3]) among which is included the diversification of sources of funding, which constitutes a principle long adopted in the Framework Laws of 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, having in particular the objective of reducing non-wage labor costs (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 why the new AIMI taxation is not applied to legal persons holding properties intended for commercial, industrial and service activities, because holding properties of these types by legal persons is normally associated with the exercise of these activities, with the corresponding payment of contributions to Social Security, as employing entities [Article 92, section b), of Law No. 4/2007, and Articles 3, section a), and 14, section 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, one may discern some justification for distinguishing between ownership of real estate property by persons who, presumably, will develop activities connected with the financing of Social Security (which will already contribute to such financing) and the holding of properties not intended for those activities, whose owners, tendentially, will not be associated in the same way with such 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 it has been uniformly understood by the Constitutional Court, the principle of equality, as a limit on legislative discretion, does not require equal treatment of all situations, but rather implies that those found in equal situations are treated equally and those found in unequal situations are treated unequally, in a manner that does not create arbitrary and unreasonable discriminations, because they lack sufficient material foundation. The principle of equality does not prohibit the establishment of distinctions, but rather arbitrary distinctions, devoid of objective and rational justification. ([4])

Given what has been said, the creation of a special taxation of high-value property intended to ensure the financing of Social Security limited to real estate property that will not already be tendentially connected to 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 higher amounts the larger portfolios" (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, paragraph 3, of the CRP, for progressivity has as its corollary, tendentially, to impose greater taxation on those with greater tax capacity.

The tax capacity of business legal persons, relevant to assessing compliance with the principle of tax equality, is not evidenced only by income, namely the results of the activity to which the properties are intended. In fact, "property provides its owner with a special tax capacity, advantages that by their nature escape personal income taxation: thus, ownership of property facilitates access to credit, strengthens the negotiating position of its owner in the conclusion of various contracts, makes it easier to multiply wealth allowing it to take risks where in principle it would not do so. In this light, property taxation is seen as something more than an extension of personal income taxation - it is not a matter of burdening here income already subject to it but of reaching manifestations of tax capacity that in fact escape it" (...) "Taxes on property would be justified by allowing the transfer of resources to the benefit of the working class, instituting a "qualitative progressivity" complementary to the progressivity in amount of personal income taxes". ([5])

On the other hand, while it is true that the different purposes of properties do not necessarily imply distinction in the level of tax capacity, the exclusion of taxation for properties especially designed for productive activity, namely "commercial, industrial or for services", will find another justification (in addition to that already mentioned of the presumed greater contribution of these activities to Social Security through contributions), for it is ultimately reducible to favoring these activities, which is in harmony with (and therefore will have constitutionally acceptable foundation in) the obligation of the State to promote increased economic wellbeing, which presupposes good functioning of wealth-creating activities and constitutes one of its priority duties in the economic sphere [Article 81, section a), of the CRP]. Being this a duty constitutionally considered priority, the first listed in this provision, 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 good functioning of wealth-creating activities.

Thus, while it is true that the AIMI regime creates situations of discrimination in the taxation of companies with the same tax capacity evidenced by property, on the assumption that there is a need for money and new ways must be found to collect it (as stated in the Report of the 2017 Budget), there will be some justification for imposing taxation on some companies and not others with the same or greater tax capacity inherent to property, especially in light of the prevailing constitutional court jurisprudence cited by the Tax Authority and Customs Authority, which shows 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) outweigh strict compliance with the principle of equality.

On the other hand, as it is not the legislative objective to tax luxury housing but rather to obtain another means of financing Social Security, in keeping with the political choice of diversification, through "a tax that falls on holders of larger real estate portfolios, strengthening the overall progressivity of the system" (page 57 of the Report of the State Budget for 2017), it is in function of these objectives that it must be assessed whether there is a breach of the principle of proportionality.

From this perspective, it appears that this new taxation is not incompatible with the principle of proportionality, for it is appropriate to the purpose in view (it facilitates the increase in revenues sought), it is necessary (in light of the legislative choice to increase Social Security revenues with diversification of sources) and a reasonable measure is not exceeded, namely as regards legal persons, for the rates of the new tax are not high (and are lower for legal persons than for natural persons, in accordance with Article 135-F), the tax paid is deductible from the taxable matter of 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 strengthening the sustainability and stability of Social Security.

Therefore, it appears that it is not demonstrated that the principle of proportionality is breached.

In light of the foregoing, the taxation of AIMI is not incompatible with the principles of equality, proportionality and tax capacity, invoked by the Claimants, based on Articles 13, 18, and 104, paragraph 3, of the CRP.

4. Request for Restitution of Amounts Paid and Compensatory Interest

The Claimant requests restitution of the amounts collected by the Tax Authority and Customs Authority, as well as payment of compensatory interest.

As the request for arbitral decision is not to be judged well-founded, it cannot be concluded that there are undue payments and, consequently, annulment of the assessments, restitution of the amount paid, or payment of compensatory interest is not justified, in accordance with Article 43, paragraph 1, of the General Tax Law.

5. Decision

On these grounds, this Arbitral Tribunal agrees to:

  • Judge the request for arbitral decision unfounded;

  • Absolve the Tax Authority and Customs Authority from all claims.

6. Value of the Case

In accordance with the provisions of Article 305, paragraph 2, of the Code of Civil Procedure and Article 97-A, paragraph 1, section a), of the Code of Tax Procedure and Article 3, paragraph 2, of the Regulation, €91,615.39.

7. Costs

Pursuant to Article 22, paragraph 4, of the LRAT, the amount of costs is set at €2,754.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Claimant.

Lisbon, 15-01-2019

The Arbitrators

(Jorge Lopes de Sousa)

(Rita Guerra Alves)

(Alexandre Andrade)

[1] Published in the Official Journal, I Series B, No. 106, of 08-05-2000.

[2] On urban properties classifiable in the "other" category, see ANTÓNIO SANTOS ROCHA and EDUARDO JOSÉ MARTINS BRÁS, Taxation of Property, Almedina, 2015, page 47.

In summary, those classified as "other" shall be:

– land situated within an urban agglomeration and which cannot be considered as land for construction, namely which, by legal imperative, may only have use generating agricultural income and is not, in fact, having such concrete devotion or is intended for green areas, or protected areas, or spaces, infrastructure or public facilities;

– buildings and constructions licensed for purposes other than residential, commercial or service purposes or not licensed but devoted to such purposes.

[3] As evidenced by the Major Options of the Plan for 2018, the earmarking of AIMI revenue to the Financial Stabilization Fund of Social Security was one of several measures: "various initiatives have been developed by the Government in the area of sustainability and stability of the system, namely: the restoration of the mechanism for updating pensions and guarantee of no change to the calculation rules for benefits already awarded on a definitive basis; the definition of the sustainability factor for 2017 in compliance with current legislation and which came to establish the normal retirement age for 2018; the reassessment of the entire regime of early pensions through flexibility, with discussion in concertation with social partners, progress having been made in 2017 with the regime for protection of very long contribution careers through the elimination of penalties; convergence of the regime of the Civil Service Retirement Fund (CGA) with the general Social Security regime (RGSS) - to strengthen this convergence, the conditions of access and calculation of pensions for military and militarized personnel and personnel with police functions have been established".

[4] Essentially in this sense, the following Constitutional Court decisions may be seen, among others:

– No. 143/88, of 16-6-1988, issued in case No. 319/87, published in the Bulletin of the Ministry of Justice No. 378, page 183;

– No. 149/88, of 29-6-1988, issued in case No. 282/86, published in the Bulletin of the Ministry of Justice No. 378, page 192;

– No. 118/90, of 18-4-90, issued in case No. 613/88, published in the Bulletin of the Ministry of Justice No. 396, page 123;

– No. 169/90, of 30-5-1990, issued in case No. 1/89, published in the Bulletin of the Ministry of Justice No. 397, page 90;

– No. 186/90, of 6-6-1990, issued in case No. 533/88, published in the Bulletin of the Ministry of Justice No. 398, page 81;

– No. 155/92, of 23-4-1992, issued in case No. 204/90, published in the Bulletin of the Ministry of Justice No. 416, page 295;

– No. 335/94, of 20-4-1994, issued in case No. 61/93, published in the Bulletin of the Ministry of Justice No. 436, page 129;

– No. 468/96, of 14-3-1996, issued in case No. 87/95, published in the Bulletin of the Ministry of Justice No. 455, page 152;

– No. 1057/96, of 16-10-1996, issued in case No. 347/91, published in the Bulletin of the Ministry of Justice No. 460, page 284;

– No. 128/99, of 3-3-1999, issued in case No. 140/97, published in the Bulletin of the Ministry of Justice No. 485, page 26.

[5] SÉRGIO VASQUES, Tax Capacity, Income and Property, in Taxation, No. 23, page 36.

Frequently Asked Questions

Automatically Created

What is AIMI (Adicional ao Imposto Municipal sobre Imóveis) and how does it apply to real estate companies in Portugal?
AIMI (Adicional ao Imposto Municipal sobre Imóveis) is an additional tax on municipal property tax introduced by Law 42/2016 in Portugal's 2017 State Budget. It is a personal, cadastral-based tax on real estate property affecting natural and legal persons who are owners, usufructuaries, or holders of surface rights over urban properties in Portuguese territory. For real estate companies, AIMI applies to their property portfolios regardless of whether the properties are held as trading inventory for development and sale or as investment assets. The tax is calculated based on the aggregate taxable property value (VPT) as of January 1st each year. Companies face AIMI when their total VPT exceeds €600,000, with rates applied progressively to the value bands above this threshold. This creates particular challenges for real estate development companies that hold substantial property inventories as part of their core business operations, as these properties are treated similarly to passive investment holdings despite serving different economic functions and not necessarily generating income or reflecting actual economic capacity to pay.
Can AIMI be challenged on constitutional grounds of equality, ability to pay, and proportionality principles?
Yes, AIMI can be challenged on constitutional grounds related to equality, ability to pay (capacidade contributiva), and proportionality principles. The Portuguese Constitution establishes that taxation must respect the principle of contributory capacity and equal treatment of taxpayers in similar circumstances. Constitutional challenges to AIMI typically argue that: (1) the tax violates equality principles by treating commercial inventory properties the same as passive investment properties; (2) it breaches contributory capacity principles by taxing cadastral value rather than actual economic capacity or income-generating ability; (3) it lacks proportionality by imposing tax burdens on properties that may generate costs rather than revenues, particularly for development companies. These challenges can be raised through administrative objections, followed by arbitral proceedings at CAAD or judicial appeals. The Constitutional Court has jurisdiction to review AIMI's constitutionality, and questions of constitutionality raised in tax proceedings can be referred to the Constitutional Court. The effectiveness of such challenges depends on demonstrating concrete violations of constitutional principles in the specific factual circumstances of each case, particularly where the tax creates disproportionate burdens unrelated to actual economic capacity.
How did the CAAD arbitral tribunal rule on the unconstitutionality of AIMI in process 420/2018-T?
While the complete ruling is not provided in this excerpt, the document shows that Process 420/2018-T proceeded to address the unconstitutionality arguments raised by a real estate company against AIMI. The arbitral tribunal, constituted by three arbitrators (Cons. Jorge Lopes de Sousa as president, Dr. Rita Guerra Alves, and Dr. Alexandre Andrade), was properly formed on November 13, 2018. The claimant challenged an AIMI assessment of €91,615.39 for 2017 on constitutional grounds after exhausting administrative remedies. The Tax Authority argued the claim should be judged unfounded and requested that the final decision be notified to the Public Prosecutor, suggesting the constitutional issues raised were considered significant. The tribunal dispensed with the oral hearing and proceeded with written pleadings, with only the Tax Authority submitting pleadings beyond the initial submissions. The proven facts established that the claimant operated in real estate development with properties forming part of a State-approved tourism investment project, supporting arguments that the properties served commercial purposes rather than passive investment. The tribunal's ultimate ruling on the constitutionality claims would have analyzed whether AIMI's application to this specific fact pattern violated equality, contributory capacity, and proportionality principles under Portuguese constitutional law.
What is the procedure for filing an arbitral tax claim (pedido de pronúncia arbitral) against an AIMI assessment at CAAD?
The procedure for filing an arbitral tax claim (pedido de pronúncia arbitral) against an AIMI assessment at CAAD follows these steps: (1) First, the taxpayer must file an administrative objection (reclamação graciosa) with the relevant Finance Directorate within the legal deadline after receiving the AIMI assessment notice; (2) If the administrative objection is dismissed or not decided within the legal timeframe, the taxpayer may then submit a request for arbitral decision to CAAD pursuant to Article 2(1)(a) and Articles 10 et seq. of Decree-Law 10/2011 (RJAT - Legal Regime for Arbitration in Tax Matters); (3) The request must identify the contested assessment, state the grounds for challenge (including any constitutional arguments), and be accompanied by required documentation including the assessment notice and administrative decision; (4) Upon acceptance, the CAAD President notifies the Tax Authority, and the Deontological Council designates arbitrators to form the tribunal; (5) Parties have the right to refuse arbitrator appointments within specified deadlines; (6) Once constituted, the tribunal may dispense with oral hearings and proceed with written submissions and pleadings; (7) The entire process must respect procedural deadlines established in the RJAT. Payment of the assessed amount is generally required before filing the claim, though this does not preclude challenging the assessment's legality or constitutionality.
Does AIMI violate the constitutional principle of contributory capacity (capacidade contributiva) for companies in the real estate sector?
The constitutional challenge in this case centered on whether AIMI violates the principle of contributory capacity (capacidade contributiva) for real estate sector companies. The claimant argued that AIMI's application to properties held as commercial inventory by development companies violates this constitutional principle because: (1) The tax is based on cadastral value (VPT) rather than actual economic capacity or ability to pay; (2) Properties held as trading stock for development and sale are business assets that generate costs and do not represent disposable wealth or income-producing capacity until sold; (3) Real estate development companies hold properties temporarily as part of their core business operations, fundamentally different from individuals or entities holding properties as passive investments for wealth accumulation; (4) The tax burden is calculated without regard to whether properties generate income, profit, or positive cash flow, potentially taxing companies on unrealized and non-existent economic capacity; (5) For companies executing State-approved investment projects with long development timelines, AIMI imposes annual tax obligations on properties that won't generate returns for years. These arguments invoke Article 104(2) of the Portuguese Constitution, which establishes that taxation must respect equality and contributory capacity principles. The principle requires that tax obligations correlate with taxpayers' real economic ability to pay, measured by income, wealth, or consumption manifestations of economic capacity.