AIMI Unconstitutionality Challenge Under Article 135-B CIMI – CAAD Case 430/2018-T

ARBITRAL DECISION

Nuno Maldonado Sousa, arbitrator from the CAAD lists designated by the Deontological Council of the Centre for Administrative Arbitration to form the sole arbitral tribunal, constituted on 14-11-2018, hereby issues the arbitral decision in the proceedings identified below in the following terms.

I. Report

1. A... S.A., Tax Identification No. ..., with registered office in ..., ..., ... – ... Maia, requested the constitution of an arbitral tribunal pursuant to the provisions of articles 2, subsection 1, paragraph a), and 10 of the legal regime for arbitration in tax matters contained in Decree-Law No. 10/2011, of 20 January (RJAT), to assess the legality of the tax assessment act for the Additional Municipal Property Tax ("AIMI") No. 2017 ... for the year 2017, in the amount of €16,196.97.

The PORTUGUESE TAX AND CUSTOMS AUTHORITY is the Respondent in these proceedings.

1. The request for constitution of the arbitral tribunal was accepted by the President of CAAD on 04-09-2018 and was notified to the Portuguese Tax and Customs Authority (AT) on 10-09-2018.

Pursuant to article 6, subsection 1, and article 11, subsection 1, paragraph b) of the RJAT, the Deontological Council designated the undersigned as arbitrator of the arbitral tribunal with sole arbitrator status, who manifested acceptance of the appointment within the legal deadline. On 24-10-2018 the parties were notified of this designation and did not manifest any intention to refuse the arbitrator's designation, as provided for in the provisions of article 11, subsection 1, paragraphs a) and b) of the RJAT and in articles 6 and 7 of the Deontological Code. In compliance with the discipline contained in article 11, subsection 1, paragraph c), of the RJAT, the arbitral tribunal was constituted on 14-11-2018. The deadline for rendering the decision was extended by two months on 15-04-2019 and on 14-06-2019.

1. The Claimant petitions in these proceedings for the annulment of the assessment already identified, for which it invoked being a commercial company that carries out its activities in the real estate sector. It is owner of the urban properties identified in the assessment, which it acquired within the scope of its economic activity and for the purpose of promoting the construction of supermarkets and hypermarkets thereon, having already done so in some of them.

The Claimant considers that the rules governing the incidence of AIMI contained in articles 135-A and following of the Municipal Property Tax Code (CIMI), suffer from material unconstitutionality due to violation of the principle of equality provided for in article 13 of the Portuguese Constitution (CRP), concretized in its aspect of contributory capacity. It further asserts that AIMI unjustifiably discriminates companies in the real estate sector that need to hold properties for the development of their activities. It invokes in support of its thesis the Decision of the Constitutional Court No. 590/2015. In the same line of reasoning, it further asserts that the assessment violates the principle of fiscal equality provided for in article 13 of the CRP and the principle of contributory capacity provided for in article 104 of the CRP. It concludes that in particular subsection 2 of article 135-B of AIMI violates the principles of equality and contributory capacity, contained in articles 13 and 104, subsections 2 and 3, all of the CRP, which should determine the annulment of the decision and of the assessment.

1. The Portuguese Tax and Customs Authority sustained in the proceedings the lack of merit of the Claimant's grounds. It specifically stated that AIMI applicable to building land has its own regime, duly structured, and that the jurisprudence cited by the Claimant, regarding the former regime of Stamp Duty, does not have the scope intended. It adds that the most recent jurisprudence of the Constitutional Court that ruled on item 28.1 of Stamp Duty, which the Claimant argues is the historical antecedent of AIMI, concluded in favor of the constitutional conformity of that rule. The AT concludes in favor of the constitutionality of the incidence rules referenced, the legality of the assessment, and the complete lack of merit of the petition.

II. Procedural Cleansing

The arbitral tribunal was regularly constituted, in compliance with the provisions of articles 2, subsection 1, paragraph a), and 10, subsection 1, of the RJAT and is in office in obedience to the provisions of article 21, subsection 1 of the same statute.

The petition for arbitral ruling is timely, as it was filed within the deadline provided for in article 10, subsection 1, paragraph a), of the aforementioned regime.

The parties are duly represented, enjoy legal capacity and standing, and have legitimacy (articles 4 and 10, subsection 2, of the same regime and article 1 of Ordinance No. 112-A/2011, of 22 March).

The process does not suffer from any nullities and no preliminary issues were raised.

III. Reasoning

III (a) – Factual Matters

With relevance for the decision, the following facts that were established must be considered:

A. The Claimant is a commercial company that carries out its activities in the real estate sector. [Case File, 1st]

B. The following urban properties are registered in the property registry in favor of the Claimant: [Case File, 3rd; Plaintiff's Answer, p. 41]

C. This real estate property is intended for exploitation by the Claimant within the scope of its economic activity. [Case File, 5th]

D. The properties referenced in "B" are building land. [Case File, 3rd, 4th]

E. On 16-01-2019 the AT issued the assessment ref. 2017 ... and sent it to the Claimant, who received it, and assessed AIMI on the urban properties identified in "B", in the amount of €16,196.97. [Case File, 6th: doc.1]

F. On 22-03-2018 the Claimant paid the amount of €4,922.92 as a payment on account of the tax that was assessed against it. [Case File, 7th: doc. 2]

Facts Considered Not Proven

No facts alleged, with actual relevance to the proper decision of the case, were considered as not proven.

Reasoning for the Proven and Unproven Factual Matters

The tribunal is not required to pronounce on all the details of the factual matters alleged by the parties, but rather has the duty to select the facts that matter to the decision and to distinguish the matters it deems proven from those it considers unproven (cf. article 123, subsection 2, of the Tax and Customs Procedure Code (CPPT) and article 607, subsection 3 of the Code of Civil Procedure (CPC), applicable ex vi article 29, subsection 1, paragraphs a) and e), of the RJAT).

Thus, the facts pertinent to the judgment of the case are selected and shaped according to their legal relevance, which is established in view of the various solutions for the subject matter of the dispute under applicable law (article 596, subsection 1 of the CPC, applicable ex vi article 29, subsection 1, paragraph e), of the RJAT).

Accordingly, taking into account the positions assumed by the parties, in light of article 110, subsections 6 and 7 of the Tax and Customs Procedure Code (CPPT) and the documentary evidence, the facts listed above were considered proven, with relevance to the decision.

No allegations made by the parties of a merely conclusive nature were considered proven or unproven, even though they were presented as facts, as they are incapable of proof, and their correctness can only be assessed in comparison with the reasoning of the decision on the legal matters contained in the following chapter.

III (b) – The Law

The Subject Matter of the Dispute

The question underlying these proceedings is whether the application of the CIMI rules that support the AIMI assessment that is being challenged should be refused, as they are not in conformity with the Constitution, specifically with the principles of equality, proportionality, and contributory capacity, enshrined in the CRP.

The Incidence Rules in Question

The rule that the Claimant deems to be non-conforming with the CRP and whose application should therefore be refused is that contained in article 135-B, subsection 1 of the CIMI. Its content is as follows:

Article 135-B

Objective Incidence

1 - The additional tax to the municipal property tax is levied on the sum of the tax values of the urban properties situated in Portuguese territory of which the tax payer is the owner.

2 - Excluded from the additional municipal property tax are urban properties classified as "commercial, industrial or for services" and "other" pursuant to paragraphs b) and d) of subsection 1 of article 6 of this Code.

The Claimant's Thesis

The Claimant asserts that AIMI was created in 2017 to tax "the accumulation of residential real estate property of very high value", as well as to strengthen the overall progressivity of the tax system, through the introduction of "a tax that falls on holders of larger real estate portfolios", succeeding the taxation previously in force through item 28.1 of the General Tax System (TGIS). It points out that the similarity resides in intending to tax "luxury real estate property" in both situations. In this line of reasoning, the Claimant considers that the reservations it believes existed regarding the legality of the prior taxation through item 28.1 of the TGIS are pertinent in the current framework, specifically its application to "properties essential to obtaining income in the context of economic activity". It concludes by asserting that the cited item of the TGIS contained "violation of the principle of equality, concretized in its aspect of contributory capacity", which persists, although tailored to the characteristics of AIMI. With the transposition of the vices that it deems to have affected the former tax to AIMI, it consequently concludes that the assessment of which it was the subject materializes "the violation of the most basic canons of equality, proportionality and contributory capacity".

In the Claimant's view, the principle of equality expressed in the CRP "prohibits the establishment of distinctions devoid of an objective and rational justification" and that "in the matter of taxation of property, the CRP itself establishes a central orientation in subsection 3 of its article 104, when it states that taxation of property [as is the case with AIMI] should contribute to equality among citizens". It argues that in the case of these proceedings the opposite occurs, as the system resulting from the AIMI rules causes "material inequality on the level of companies that have decided to pursue an economic activity that presupposes the holding of properties, in relation to other companies whose activity does not result from the holding of properties" and also between itself and "companies that, holding real estate, pursue thereon a commercial, industrial or service provision activity", creating discrimination against "companies that, for the development of their economic activity, need to hold properties", for which "no material, legal, fiscal, economic or other foundation is discernible". As for the principle of contributory capacity, it understands that it is not respected, as the properties it holds and which were "subject to taxation under AIMI, are, given its corporate purpose, essential to obtaining income in the context of its economic activity" and therefore it is not permissible to affirm that "ownership of such properties may [not] constitute evidence of a (or increased) contributory capacity". In reasoning that associates the principle of equality with the principle of contributory capacity, the Claimant asserts that it "observes that other companies holding properties of identical or higher tax value, equally dedicated to their economic activity, are not subject to similar taxation", generating inequality among companies with equal contributory capacity. It concludes the reasoning of its thesis by asserting that "there is no minimally perceptible and rational material foundation to propound negative fiscal discrimination against real estate-based companies" and thus considers that "the assessment now under review violates the principle of fiscal equality provided for in article 13 of the CRP and the principle of contributory capacity provided for in article 104 of the CRP".

The Claimant identifies, in support of its thesis, jurisprudence delivered in the context of CAAD, regarding item 28.1 of the TGIS, but does not test its validity against decisions already taken regarding AIMI.

The Jurisprudence in CAAD

Although the present proceeding is intended to assess the legality of a specific situation, as is the case in all proceedings in CAAD and is not aimed at verifying the general regularity of rules, which is the exclusive competence of the Constitutional Court, it is not without interest to verify the direction in which other proceedings have been decided that address situations identical to that depicted in these proceedings and in which similar vices are also invoked. From this verification it must be concluded that this issue has already been analyzed in other proceedings that took place before CAAD, both in decisions and in individual rulings. It is believed that the orientation of the decisions taken in collective arbitral tribunal and published on the CAAD website during the last 12 months can be summarized in the following table, with all of them having manifested, without dissenting vote from the respective president, in the direction of the conformity of the AIMI rules, specifically applied in each case, with the Constitution.

The Legal Solution

It appears to this Tribunal that the decision delivered on 13-05-2019 in case No. 681/2018-T [JOSÉ PEDRO CARVALHO et al] synthesizes well the best interpretation of the entire instrument that governs AIMI in its application to building land. The reasoning thereof is followed closely herein.

It results clearly from the established factual matters that the Claimant is the owner of various properties on which AIMI was levied, which are building land, which it holds in the exercise of its economic activity.

Although the Claimant identifies as the illegal rule that contained in article 135-B, subsection 1 of the CIMI, it objects primarily to not benefiting from the exclusion of incidence that is actually contained in subsection 2 of the same article; that is, it is the combined interpretation of the two provisions that seems unacceptable to it in light of constitutional principles. It is believed that it is mistaken.

From a historical perspective it is not easy to dissect the motivation of a particular law when its generation process occurs in the complex process of formulation of the State Budget, in which numerous proposals on the same subject are crossed with diverse grounds. One can know the idea underlying the original proposal and even the objectives of certain amendment proposals, but the final synthesis, resulting from negotiations on multiple matters under review, will always have a true nuance of intentions. The interpreter will have only and always the analysis of the solution that results objectively from the approved text.

It does not appear that AIMI is an actual successor to the taxation that was carried out through item 28.1 of the TGIS. One can even accept that there is chronological succession and identity in some respects at the level of incidence, but AIMI does not effectively occupy the place that item 28.1 occupied in the Portuguese tax system. First of all because item 28.1 was never properly a rule of the system; it was created to address a concrete emergency and was understood as such. AIMI is today a structured tax, with rules integrated into the tax nomenclature, and the issues that have been brought before the courts do not rest on it itself, but rather on the alleged heredity of the vices that were pointed out to item 28.1.

In light of the new regime, in an interpretation stripped of historical elements that cannot be fixed with certainty and that moreover are always subsidiary elements in the search for legal meaning, it appears settled that the rule in subsection 2 of the article clearly delimits what realities it intends to exclude from incidence. It is not apparent that there was an intention to exclude from taxation any properties, taking into account the purpose they serve in the activity of the tax payers; the rule intends to exclude from taxation certain properties taking into account their class and states with precision, to be excluded from the incidence of AIMI "urban properties classified as 'commercial, industrial or for services' and 'other' pursuant to paragraphs b) and d) of subsection 1 of article 6 of this Code"; now, the heading of article 6 – classes of urban properties – is perfectly clear and entirely consistent with its content. In light of ordinary law, the assessment under review merits no criticism whatsoever.

It is important to see whether this ordinary law that the AT applied violates constitutional principles, as the Claimant argues.

The Claimant's position regarding the conformity of AIMI with constitutional parameters can be summarized in its assertion that "there is no minimally perceptible and rational material foundation to propound negative fiscal discrimination against real estate-based companies". For that reason, rather than invoking a rule that violates the CRP, it asserts that the very AIMI regime suffers from illegality due to violation of the Fundamental Law and concretizes this idea by stating that the interpretation of subsection 2 of article 135 of the CIMI should encompass building land intended for commerce or services, in particular when held by companies that acquire them for future promotion of buildings with that dedication, and concludes that "subsection 2 of article 135-B of the CIMI should be deemed materially unconstitutional, insofar as it does not exclude from AIMI the building land whose authorized or anticipated construction is the construction of properties intended for commerce or services, due to violation of the principles of equality and contributory capacity, contained in articles 13 and 104, subsections 2 and 3, all of the CRP". If the Claimant's position is correctly understood, it ultimately intends to assert that the combined interpretation of the rules of subsections 1 and 2 of article 135 of the CIMI in the sense of taxing in AIMI the building land held by companies in the real estate business, when those properties are intended to be dedicated to buildings intended for commerce or services, is not in conformity with the Constitution.

Let it be seen whether the interpretation made in this manner violates the cited constitutional provisions or the principles contained therein.

The recent position set out in the aforementioned decision handed down in case 681/2018 of this CAAD is followed closely here as well, embracing the most recent doctrine of the Constitutional Court, specifically that which results from its Decision 378/2018, which admits the constitutionality of the legislative technique used, to delimit the scope of incidence of taxes on property by reference to ownership of certain assets, regardless of the economic function they perform for their owners (as subsection 1 of article 135 of the CIMI does today); the same doctrine also admits the regularity of a tax on property if it does not single out or distinguish the tax payers by resort to any criterion other than the ownership of those properties (as subsection 2 of the cited article 135 currently does).

The legislative technique used merely results in that, in the current formulation of article 6 of the CIMI, the properties taxed under this tax on property are residential urban properties and building land (paragraphs a and c of subsection 1 of article 6) and that are not subject to incidence the commercial, industrial or service urban properties and those classified as "other" (paragraphs b and d of subsection 1 of article 6). The rule is not subjectively discriminatory; it merely uses a certain technique to identify what patrimonial assets are intended to be taxed, not discriminating against any economic activities. As is proper for taxes on property.

For the reasons set forth, it is considered that nothing violates the legal and constitutional regularity of the rules of article 135, subsections 1 and 2 of the CIMI, in the application that AT made thereof in the assessment being challenged.

The assessment effected by the AT is thus valid, and therefore the petition filed in this arbitral instance is entirely without merit.

IV – Decision

For the reasons set forth, the arbitral tribunal decides to judge the petition filed in this instance to be without merit.

The Claimant is condemned to pay the costs of this proceeding, in the amount of €1,224.00.

V - Value of the Proceeding

In the present proceeding, the annulment of an assessment valued at €16,196.97 was petitioned. The value of the proceeding is fixed at €16,196.97, pursuant to article 97-A, subsection 1, paragraph a) of the CPPT, applicable ex vi article 29, subsection 1, paragraphs a) and b) of the RJAT and article 3, subsection 2, of the Regulations for Costs in Tax Arbitration Proceedings.

VI - Costs

The arbitration fee is fixed at €1,224.00, pursuant to Table I of the Regulations for Costs in Tax Arbitration Proceedings, to be paid by the Claimant, pursuant to articles 12, subsection 2, and 22, subsection 4, both of the RJAT, and article 4, subsection 4, of the cited Regulations.

Let notice be given.

Lisbon, 17 June 2019

The Arbitrator

(Nuno Maldonado Sousa)