IRS Urban Rehabilitation Tax Benefits: CAAD Arbitral Decision 475/2017-T on Fiscal Incentives

ARBITRAL DECISION

The arbitrators Councillor Jorge Manuel Lopes de Sousa (arbitrator-chairman, designated by the other arbitrators), Dr. José Almeida Fernandes and Dr. José Rodrigo de Castro (arbitrators-members, designated by the taxpayer and by the Tax Authority, respectively) to form the Arbitral Court, constituted on 06-12-2017, agree as follows:

1. REPORT

A…, NIF…, resident in …– Madrid (hereinafter designated as "Claimant"), came, pursuant to the provisions of arts. 2, no. 1, paragraph a), 6, no. 2, paragraph b), and 10 of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters – RJAT), to submit a request for arbitral pronouncement, with a view to assessment of the legality and annulment of the IRS assessment no. 2016…, as well as of the IRS assessment no. 2016…, dated 28 October 2016, and the Reconciliation Statement no. 2016…, which maintained the total amount payable, following the tacit dismissal of the administrative complaint presented on 17-01-2017.

The PORTUGUESE TAX AND CUSTOMS AUTHORITY is the Respondent.

The Claimant designated as arbitrator Prof. Doctor João Sérgio Ribeiro, pursuant to the provisions of article 6, no. 2, paragraph b), of the RJAT.

The request for constitution of the Arbitral Court was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 16-08-2017.

Following the non-acceptance of the initial designation, the Claimant indicated as arbitrator Dr. José Almeida Fernandes.

Pursuant to the provisions of paragraph b) of no. 2 of article 6 and of no. 3 of the RJAT, and within the period provided for in no. 1 of article 13 of the RJAT, the head of the Tax Administration service designated as arbitrator Dr. José Rodrigo de Castro.

The arbitrators designated by the parties designated as President arbitrator Councillor Jorge Lopes de Sousa, who was accepted.

On 15-11-2017 the parties were duly notified of this designation, having not expressed any will to refuse the designation of the arbitrators, in accordance with the combined provisions of article 11, no. 1 paragraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

Thus, in accordance with what is laid down in paragraph c) of no. 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 06-12-2017.

The Tax and Customs Authority responded defending that a preliminary ruling should be requested from the CJEU and that the request should be judged ungrounded.

By order of 23-01-2018 a hearing was dispensed with and it was decided that the proceedings would continue with written submissions, indicating that, "in the event it is deemed necessary to request a preliminary ruling, the parties should indicate which question or questions they understand should be put to the CJEU".

The parties presented submissions.

The arbitral tribunal was regularly constituted, in accordance with the provisions of arts. 2, no. 1, paragraph a), and 10, no. 1, of DL no. 10/2011, of 20 January, and is competent.

The parties are duly represented and enjoy legal personality and capacity, are legitimate and are represented (arts. 4 and 10, no. 2, of the same act and art. 1 of Ordinance no. 112-A/2011, of 22 March).

The proceedings do not suffer from nullities and there are no exceptions nor any obstacle to the assessment of the merits of the case.

2. FINDINGS OF FACT

2.1. Proven Facts

Based on the elements contained in the proceedings and documents attached with the request for arbitral pronouncement, the following facts are considered proven:

• On 21-12-2012, the Claimant acquired the right of ownership of the autonomous unit "D" and, on 24-01-2014, of the autonomous units "B" and "E", all situated in the urban property registered in the respective urban land registry under article … of the parish of …, municipality and district of Lisbon, for the amounts of € 3,159,887.00, € 350,000.00 and € 2,000,000.00, respectively (documents nos. 12 and 14 attached with the request for arbitral pronouncement, whose contents are hereby reproduced);

• The said property – Palace, entrance by Rua …, no. … – was subject to rehabilitation works, initiated on 23-08-2010 and completed on 12-08-2012 (certificates which appear on pages 139 to 149 of the administrative file whose contents are hereby reproduced and document no. 13 attached with the request for arbitral pronouncement, whose content is hereby reproduced);

• The said property was acquired by the Claimant from B… – Special Closed Real Estate Investment Fund, on whose behalf the rehabilitation works were carried out;

• On 28-10-2015, the Claimant sold to entity C…, S.A., the properties referred to above, for the global value of € 8,086,000.00, namely, unit B for € 520,000.00, unit D for € 5,663,000.00 and unit E for € 1,903,000.00 (documents nos. 16 and 17 attached with the request for arbitral pronouncement, whose contents are hereby reproduced);

• With this sale, the Claimant realised a capital gain in the total amount of € 2,206,440.68, which was taxed by the Tax and Customs Authority at the special rate of 28%, pursuant to paragraph a), of no. 1, of article 72 of the IRS Code, through the IRS assessment no. 2016…, dated 09-08-2016, relating to the year 2015, the corresponding tax being € 617,803.40 (document no. 3 attached with the request for arbitral pronouncement, whose content is hereby reproduced);

• Subsequently, following a substitution declaration presented on 25-10-2016, the Tax and Customs Authority issued the IRS assessment no. 2016…, dated 28-10-2016, relating to the year 2015, in which it made an identical assessment, and made the reconciliation of accounts no. 2016…, calculating a balance payable in the amount of € 644,119.43 (document no. 5 attached with the request for arbitral pronouncement, whose content is hereby reproduced);

• On 17-01-2017, the Claimant filed an administrative complaint against the first assessment, which bore no. 2016…, in which it argued that the rate of 5%, provided for in article 71, no. 5, of the Tax Benefits Statute (EBF) was applicable to the said capital gain (document no. 1 attached with the request for arbitral pronouncement, whose content is hereby reproduced);

• The Tax and Customs Authority understood that the administrative complaint should be assessed as having the second assessment referred to as its subject;

• In the said administrative complaint, the Tax and Customs Authority drew up a draft decision, which was notified to the Claimant for exercise of the right to be heard, which appears in the administrative file, whose content is hereby reproduced, in which the following is mentioned, among other things:

V – ANALYSIS OF MERITS

Having analysed all the documentation of the proceedings and, after consultation of the computer system database, it is reported that:

1- Pursuant to no. 5 of article 71 of the EBF, "capital gains obtained by IRS taxpayers resident in Portuguese territory are taxed at an autonomous rate of 5%, without prejudice to the option of grouping, when they are entirely derived from the sale of property situated in 'urban rehabilitation area', recovered in accordance with the respective rehabilitation strategies (underlined and in bold by us).

2- Accordingly, they are subject to a special autonomous rate of 5%, the capital gains generated by the sale of real estate recovered in "urban rehabilitation area", "in accordance with the respective rehabilitation strategies", when the taxpayers are resident in national territory.

3- Therefore, they are essential and cumulative requirements for the verification of the establishment of the tax benefit enshrined in no. 5 of article 71 of the EBF that the capital gains generated by the sale of recovered real estate:

i. are obtained by taxpayers resident in national territory;

ii. are located in "urban rehabilitation area";

iii. and have been recovered "in accordance with the respective rehabilitation strategies".

4- The norm of no. 5 of article 71 of the EBF requires, as one of the essential requirements, that the IRS taxpayer is resident in national territory.

4.1- As mentioned above, the Claimant is registered in the SGRC as non-resident in national territory, on 2015-12-31 (pages 188 to 189);

4.2- Therefore, as the Claimant is non-resident, it will not be able to benefit from this incentive for urban rehabilitation, provided for in no. 5 of article 71 of the EBF.

4.3.1- More is to be said that as regards the alleged violation of the principle of freedom of movement of persons and capital, due to the fact that Portuguese legislation is not in accordance with the decisions of the Court of Justice of the European Union (CJEU), it is for the tax administration to interpret and apply the national provisions in force, having regard to their wording at the date of the facts.

4.3.2- It is noted that the decisions of the CJEU result from an interpretation of Community law in light of the provisions of national law specific to each Member State, thus existing, in each case at issue, specificities specific to the same.

4.3.3- As such, it is not for the tax administration to assess the conformity of internal legal norms with the Treaty on the Functioning of the European Union (TFEU), nor to adopt directly and automatically for the resolution of concrete cases, the interpretative guidance emanating from the case law of the CJEU, especially when the latter has not, in its genesis, the assessment of the compatibility of specific provisions of Portuguese national law.

5- Notwithstanding the application of the norm of no. 5 of article 71 of the EBF being prejudiced, at the outset, by the quality of the Claimant as non-resident in national territory, it is concluded that it also fails to meet another of the remaining requirements of the norm.

Let us see:

6- With respect to the rehabilitated property being integrated in an urban rehabilitation area, defined pursuant to paragraph b) of no. 22 of article 71 of the EBF, it is verified from the document attached as Document no. 6, whose content is hereby fully reproduced (pages 139 to 148), that:

6.1- Within the scope of proceedings no. …/DOC/2010, which took place at the Municipal Chamber, requested by B… – Special Closed Real Estate Investment Fund, reports nos. …/INF/DZS/… of 2010-06-04 and no. …/INF/DZS/… /2010 of 2010-07-09 were prepared, within the scope of which it is concluded and transcribed from the latter that: "the property analysed here is not located in …, as raised by the Requester, but in the parish of …, and the very characterisation of the neighbourhood of … does not influence the classification of the area surrounding the building as an urban rehabilitation area. In these terms, having in consideration that according to the plan for classification of urban rehabilitation area (...), the property situated in Rua de …, … is not integrated in an Urban Rehabilitation Area, as was delimited by Resolution no. 31/AM/OS of 28/04/2009 taken in Municipal Assembly (page 144, underlined by us).

6.2- Within the scope of proceedings no. …/DOC/2012, which took place at the Municipal Chamber, requested by B… – Special Closed Real Estate Investment Fund, the report no. …/INF/UITCentroHistorico/… /2012 of 2012-12-18 was prepared, whose content is hereby fully reproduced, within the scope of which it is concluded that "the building is situated in an Urban Rehabilitation Area" in accordance with the plan on page 17, pursuant to paragraph b), of no. 21, of article 71 of the EBF (page 147, underlined and in bold by us).

6.3- By the foregoing, at the conclusion of the works, the building was situated, pursuant to Report no. …/INF/UITCentroHistorico/…/2012 of 2012-12-18 provided by the Lisbon Municipal Chamber, in the Urban Rehabilitation Area.

7- Finally, the property must be recovered, "in accordance with the respective rehabilitation strategies".

7.1 – The law does not define what is meant by "rehabilitation strategies", so it should be understood that "these are those established by the respective municipality for the urban rehabilitation area", not requiring that the requirement of the concept of "rehabilitation action", provided for in paragraph a) of no. 22 of article 71 of the EBF, be met.

7.2.1- "The verification of the beginning and completion of rehabilitation actions is the competence of the municipal chamber or other entity legally qualified to manage an urban rehabilitation programme for the area where the property is located, being incumbent upon them to certify the condition of the properties, before and after the works comprised in the rehabilitation action" (article 71, no. 24 of the EBF, underlined by us).

7.2.2- Thus, it is the responsibility of the Chamber to verify the state of conservation of the property before the start of the rehabilitation action, which must be formalised by request after its completion.

7.2.3- Notwithstanding the Report no. …/lNF/UITCentroHistorico/…/2012 of 2012-12-18 on pages 146 to 148, whose content is hereby fully reproduced, not informing whether the rehabilitation of the property was carried out "in accordance with the respective rehabilitation strategies", attention is drawn to the following points of the indicated report, which are transcribed below:

"An initial inspection was not carried out, to verify the state of conservation before the start of works (..,.) however, observing the photographs of the existing building, contained in the architectural project (...) it is considered possible to assess the conservation before the start of the works, assigning level no. 3 of conservation (medium).

An inspection of the property was carried out on 05-12-2012 (...).

(...) it is proposed for consideration approval of the assessment form, assigning, pursuant to article 5 of DL 156/2006, of 08/08, the following level of conservation:

• Level: 5;

• State of conservation: Excellent.

Considering that the increase in the conservation level after the completion of the works is 2, pursuant to article 23 of article 71 of the EBF, approval is also proposed for the issuance of the certificate where the following elements appear:

Owner: B… – Special Closed Real Estate Investment Fund;

Property: Rua de … – … (building…);

Start of works: 23-08-2010;

Completion of works: 12-08-2012 (as indicated by the requesting entity (...));

Level of conservation before the start of works: 3

Level of conservation after completion of works: 5;

Increase in conservation level: 2 (underlined and in bold by us)

As results from Report no. …/INF/UITCentroHistorico/… /2Q12 of 2012-12-18 (pages 146 to 148), the approval of the conservation levels of the building refers to units A, B, C, D and E, being excluded the work carried out in blocks 1 and 2, because it not only falls within the notion of urban rehabilitation defined in the Urban Rehabilitation Strategy.

7.4.1- The ratio legis of this system of tax incentives aims to grant tax benefits to natural persons who carry out rehabilitation actions, in the terms and conditions enshrined in the norms of article 71 of the EBF.

7.4.2- Now, the Claimant acquired, on 2012-12-21, the right of ownership of the autonomous unit D of the urban property registered in the respective land registry under article … of the parish of …, municipality and district of Lisbon, pursuant to Public Deed of Purchase and Sale and Mortgage on pages 65 to 84, and, on 2014-01-24, acquired the autonomous units B and E of the same urban property, pursuant to Public Deed of Purchase and Sale, Loan with Mortgage and Power of Attorney on pages 85 to 108 and 109 to 132, respectively, that is, the Claimant acquired the said units on a date subsequent to the rehabilitation action, whose completion occurred on 2012-08-12 (pursuant to Report no. …/INF/UITCentroHistorico/… /2012 of 2012-12-18 on pages 146 to 148),

7.4.3- By the foregoing, the Claimant, even if it had the quality of resident in national territory, could not benefit from this regime of no. 5 of article 71 of the EBF, in that it was not the promoter of the rehabilitation action of the real estate identified above, the same having been already acquired with an excellent state of conservation (degree of conservation: 5).

8- For the requirements of no. 1 of article 43 of the General Tax Code not being met, in this case, the assessment of the right to compensatory interest is prejudiced.

VI – DRAFT DECISION

By the foregoing, it is proposed that the REQUEST CONTAINED IN THE ADMINISTRATIVE COMPLAINT BE DISMISSED, and the Claimant should be notified for exercise of the right to be heard, pursuant to paragraph b) of no. 1 of article 60 of the General Tax Code.

• The Claimant was notified of the draft decision, for exercise of the right to be heard, by registered letter sent on 17-07-2017;

• The Claimant did not exercise the right to be heard;

• The administrative complaint was not decided by 14-08-2017, the date on which the Claimant submitted the request for arbitral pronouncement that gave rise to the present proceedings;

• By order of 25-08-2017, the draft decision was converted into final, the administrative complaint being dismissed;

• On 31-12-2015, the Claimant was not resident in national territory;

• The amount assessed not having been paid, the Tax and Customs Authority initiated the tax enforcement proceedings no. …2016…, for coercive collection;

• In the said tax enforcement proceedings the Claimant was authorised to pay in instalments;

• The Claimant offered as guarantee for purposes of suspension of the enforcement proceedings, in a request dated 19 June 2017, the pledge of shares of which it is a holder, directly and indirectly, on the capital of Commercial Company D…, S.A., company with the single registration number and collective person number …, with registered office on Rua …, …-… Lisbon, with share capital of € 12,000,000.00 (Document no. 8 attached with the request for arbitral pronouncement, whose content is hereby reproduced);

• On 31-07-2017, the Claimant paid the amount of € 18,535.47, relating to the 1st instalment fixed in the tax enforcement proceedings (document no. 11 attached with the request for arbitral pronouncement, whose content is hereby reproduced);

2.2. Unproven Facts and Justification for the Determination of the Facts

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

The proven facts are based on the documents submitted by the Claimant with the request for arbitral pronouncement and on the administrative file.

There is no controversy over the facts.

3. LEGAL MATTERS

The Claimant acquired, on 21-12-2012, from B… – Special Real Estate Investment Fund a property situated on Rua …, no. …, Lisbon, in which the latter carried out urban rehabilitation works.

At the date of completion of the works the building was situated, pursuant to Report no. …/INF/UITCentroHistorico/… /2012 of 2012-12-18 provided by the Lisbon Municipal Chamber, in an Urban Rehabilitation Area.

With respect to the works referred to, a certificate was issued by the Lisbon Municipal Chamber, at the request of B…, to the effect that the requirements provided for in article 71 of the EBF were met.

On 28-10-2015, the Claimant sold units B, D and E of the said property to entity C…, S.A., obtaining capital gains in the total value of € 2,206,440.68.

The Tax and Customs Authority understood that these capital gains are taxed in IRS at the rate of 28%, provided for in paragraph a) of no. 1 of article 72 of the IRS Code, having made the respective assessment.

The Claimant filed an administrative complaint expressing the understanding that the rate of 5%, provided for in no. 5 of article 71 of the EBF was applicable to the said capital gains.

The Tax and Customs Authority dismissed the administrative complaint, on the grounds that, in summary:

– the Claimant was not resident in Portuguese territory on 31-12-2015;

– it is not for the tax administration to assess the conformity of internal legal norms with the Treaty on the Functioning of the European Union (TFEU), nor to adopt directly and automatically for the resolution of concrete cases, the interpretative guidance emanating from the case law of the CJEU, especially when the latter has not, in its genesis, the assessment of the compatibility of specific provisions of Portuguese national law;

– the Claimant cannot benefit from the regime of no. 5 of article 71 of the EBF, in that it was not the promoter of the rehabilitation action of the real estate identified above, the same having been already acquired with an excellent state of conservation.

Article 71 of the EBF in the wording in force in 2015, establishes the following:

Article 71

Incentives for urban rehabilitation

1 – Real estate investment funds that operate in accordance with national legislation, provided they are constituted between 1 January 2008 and 31 December 2013 and at least 75% of their assets are real property subject to rehabilitation actions carried out in urban rehabilitation areas, are exempt from IRC on income of any nature. (Wording of Law no. 66-B/2012, of 31 December)

2 – Income relating to units of participation in the investment funds referred to in the previous number, paid or made available to the respective holders, whether by distribution or by redemption operation, is subject to withholding at source at IRS or IRC rate of 10%, except when the holders of the income are entities exempt as regards income from capital or non-resident entities without permanent establishment in Portuguese territory to which the income is attributable, excluding:

a) Entities that are resident in a country, territory or region subject to a clearly more favourable tax regime, contained in a list approved by decree of the Minister of Finance;

b) Non-resident entities held, directly or indirectly, in more than 25% by resident entities.

3 – The positive balance between capital gains and losses resulting from the sale of units of participation in the investment funds referred to in no. 1 is taxed at the rate of 10% when the holders are non-resident entities to which the exemption provided for in article 27 of the Tax Benefits Statute does not apply or IRS taxpayers resident in Portuguese territory who obtain the income outside the scope of a commercial, industrial or agricultural activity and do not opt for its inclusion in aggregate income.

4 – There are deductible against IRS, up to a limit of (euro) 500, 30% of the expenses borne by the owner related to the rehabilitation of:

a) Properties, located in 'urban rehabilitation areas' and recovered in accordance with the respective rehabilitation strategies; or

b) Properties let subject to phased rent updating in accordance with articles 27 and following of the New Urban Leasing Regime (NRAU), approved by Law no. 6/2006, of 27 February, which are subject to rehabilitation actions.

5 – Capital gains obtained by IRS taxpayers resident in Portuguese territory are taxed at an autonomous rate of 5%, without prejudice to the option of inclusion in aggregate income, when they are entirely derived from the sale of property situated in 'urban rehabilitation area', recovered in accordance with the respective rehabilitation strategies.

6 – Real estate income obtained by IRS taxpayers resident in Portuguese territory is taxed at the rate of 5%, without prejudice to the option of inclusion in aggregate income, when it is entirely derived from the leasing of:

a) Properties situated in 'urban rehabilitation area', recovered in accordance with the respective rehabilitation strategies;

b) Properties let subject to phased rent updating in accordance with articles 27 and following of the NRAU, which are subject to rehabilitation actions.

7 – Urban properties subject to rehabilitation actions are eligible for exemption from municipal property tax for a period of five years, counting from the year, inclusive, of completion of the rehabilitation, and may be renewed for an additional period of five years.

8 – Acquisitions of urban property or of an autonomous unit of urban property intended exclusively for permanent own residence, in the first transfer of the rehabilitated property, are exempt from Transfer Tax, when located in the 'urban rehabilitation area'.

9 – The withholding at source referred to in no. 2 is of a definitive character whenever the holders are non-resident entities without permanent establishment in Portuguese territory or IRS taxpayers resident who obtain the income outside the scope of a commercial, industrial or agricultural activity, being able, however, these to opt for inclusion in aggregate income for purposes of that tax, in which case the withheld tax has the nature of tax on account, in accordance with article 78 of the IRS Code.

10 – The exemption from withholding at source in the cases provided for in no. 2 only takes place when the beneficiaries of the income provide proof, before the paying entity, of the exemption from which they benefit or of the quality of non-resident in Portuguese territory, up to the date on which the withholding at source is to be made, remaining, in case of omission of proof, the substitute taxpayer obliged to deliver the total of the tax that should have been withheld in accordance with the law, the general provisions being applicable in the relevant codes relating to liability for any missing tax.

11 – Proof of the quality of non-resident in Portuguese territory is made in accordance with the terms provided for in articles 15, 16 and 18 of Decree-Law no. 193/2005, of 7 November.

12 – Holders of income relating to units of participation in the investment funds referred to in no. 1, when they include in aggregate income the income distributed to them, are entitled to deduct 50% of the income relating to dividends, in the terms and conditions provided for in article 40-A of the IRS Code. (Wording of Law no. 66-B/2012, of 31 December)

13 – The obligations provided for in article 119 and in no. 1 of article 125 of the IRS Code must be met by the managing or registering entities.

14 – The managing entities of the investment funds referred to in no. 1 are obliged to publish the amount of distributed income, the amount of tax withheld to the holders of units of participation, as well as the deduction corresponding to them for purposes of the provisions of no. 6.

15 – Should the requirements referred to in no. 1 cease to be met, application of the regime provided for in this article ceases, the regime provided for in article 22 becoming applicable, and the income of the investment funds referred to in no. 1 that, as at that date, have not yet been paid or made available to the respective holders shall be taxed at the rates provided for in article 22-A, with the addition of corresponding compensatory interest. (Wording of Decree-Law no. 7/2015, of 13 January)

16 – The managing entities of the investment funds referred to in no. 1 are jointly and severally liable for the tax debts of the funds whose management is their responsibility.

17 – The expenses referred to in no. 4 must be duly proven and depend on prior certification by the management body of the rehabilitation area or the municipal arbitration committee, as the case may be.

18 – The entities mentioned in the previous number must send to the tax administration the certifications referred to in the previous number.

19 – The exemptions provided for in nos. 7 and 8 are dependent on a resolution of the municipal assembly, which defines their scope and extent, in accordance with no. 2 of article 12 of the Local Finance Law.

20 – The tax incentives enshrined in this article are applicable to properties subject to rehabilitation actions initiated after 1 January 2008 and which are completed by 31 December 2020.

21 – The following are covered by this regime: rehabilitation actions which have as their object properties that meet at least one of the following conditions:

a) Are urban properties let subject to phased rent updating in accordance with articles 27 and following of the NRAU;

b) Are urban properties located in 'urban rehabilitation areas'.

22 – For purposes of this article, the following are considered:

a) 'Rehabilitation actions' interventions intended to confer adequate performance characteristics and functional, structural and constructional safety to one or more buildings, or to functionally adjacent constructions incorporated in their land, as well as to their units, or to give them new functional aptitudes, with a view to permitting new uses or the same use with higher performance standards, from which results a state of conservation of the property, at least, two levels above that assigned before the intervention;

b) 'Urban rehabilitation area' the territorially delimited area, comprising urban spaces characterised by insufficiency, degradation or obsolescence of buildings, urbanistic infrastructures, social facilities, free areas and green spaces, being able to cover in particular areas and historic centres, protection zones of classified property or in the process of being classified, in accordance with the Cultural Heritage Basic Law, degraded urban areas or consolidated urban zones;

c) 'State of conservation' the state of the building or dwelling determined in accordance with the provisions of the NRAU and of Decree-Law no. 156/2006, of 8 August, for purposes of phased rent updating or, when not applicable, classified by the competent municipal services, in an inspection carried out for that purpose, with reference to the conservation levels contained in the table of article 33 of the NRAU.

23 – Verification of the beginning and completion of rehabilitation actions is the competence of the municipal chamber or other entity legally qualified to manage an urban rehabilitation programme for the area where the property is located, being incumbent upon them to certify the condition of the properties, before and after the works comprised in the rehabilitation action.

24 – The delimitation of urban rehabilitation areas for purposes of this article is the competence of the municipal assembly, under a proposal from the municipal chamber, obtaining the opinion of the IHRU, I.P., within 30 days, not renewable.

25 – If the delimitation operates on an area classified as a critical urban recovery or reconversion area (ACRRU), no opinion referred to in the previous number is issued.

Law no. 114/2017, of 29 December, amended the said no. 5, giving it the following wording:

5 – Capital gains obtained by IRS taxpayers resident in Portuguese territory resulting from the first sale, subsequent to the intervention, of property located in urban rehabilitation area, are taxed at an autonomous rate of 5%, without prejudice to the option of inclusion in aggregate income.

In the case at hand, only the applicability of the regime of no. 5 of article 71 of the EBF is disputed, on the two grounds invoked by the Tax and Customs Authority in the decision on the administrative complaint: the Claimant was not resident in Portuguese territory on 31-12-2015 and could not benefit from that regime because it was not the promoter of the urban rehabilitation action.

On the grounds for dismissal invoked by the Tax and Customs Authority, the Claimant argues in the present proceedings, in summary, that

– "the discrimination made between residents and non-residents, as regards the tax benefit enshrined in article 71, no. 5, of the EBF, is not compatible with European Union Law, which is why the same should apply, indiscriminately, to taxpayers resident in national territory or in other Member States of the European Union";

– "it is irrelevant for purposes of application of this tax benefit that the Claimant '[was not] the promoter of the rehabilitation action of the real estate identified above, having the same been acquired with an excellent state of conservation (degree of conservation: 5).'".

Given that there are two grounds for the position of the Tax and Customs Authority, each with the potential to, by itself, preclude the applicability of the regime of no. 5 of article 71 of the EBF, it is sufficient that one of them be legal to ensure the legality of the impugned assessment.

Since the possibility of requesting a preliminary ruling is being raised and this should only be made by "the national court from the moment it considers that a decision on the interpretation or validity is necessary to deliver its decision" ( [1] ), it is justified to prioritise the assessment of the question of the application of the regime provided for in no. 5 of article 71 of the EBF only to the promoters of rehabilitation actions, because, should the Tax and Customs Authority be right, it will be unnecessary to assess the ground of non-applicability of the tax benefit to non-resident IRS taxpayers and, possibly, to request the preliminary ruling.

3.1. Question of whether the Claimant can or cannot benefit from the regime provided for in art. 71, no. 5, of the EBF, not being the promoter of the urban rehabilitation action

3.1.1. Positions of the Parties

The Tax and Customs Authority defends, in summary, the following:

– "the ratio legis of this system of tax incentives aims to grant tax benefits to natural persons who carry out rehabilitation actions, in the terms and conditions enshrined in the norms of article 71 of the EBF", so that the Claimant, "even if it had the quality of resident in national territory, could not benefit from this regime of no. 5 of article 71 of the EBF, in that it was not the promoter of the rehabilitation action of the real estate identified above, the same having been already acquired with an excellent state of conservation;

– this is the teleological and systematic interpretation of article 71, no. 5, of the EBF;

– the heading of article 71 is "incentives for urban rehabilitation";

– the logic of a policy incentivizing urban rehabilitation is incomprehensible whereby, subsequently, it is allowed that properties already subject to a first rehabilitation action benefit successive acquirers in the context of capital gains;

– it would serve only a policy of incentivizing speculative real estate investment, in the sense of the same property being successively acquired and resold in the expectation of obtaining capital gains subject to a reduced rate of 5%, thus the incentive being to successive purchase for resale (the said real estate speculation) and not to urban rehabilitation proper;

– what is intended with the benefit in question is, undoubtedly, to encourage acquisitions of degraded properties to be subject to rehabilitation, valorisation and, possibly, subsequent sale, by the original owner, or resale by the investor who carries out the rehabilitation actions and that the Claimant's interpretation would empty of meaning no. 23 (current no. 24) of article 71 of the EBF, for it would make no sense to verify, by the municipal chambers, the beginning and completion of rehabilitation actions.

The Claimant defends, in summary, the following, on this matter:

– the Law is sufficient with merely objective criteria, which are (i) the realisation of capital gains (ii) on the sale of properties (iii) situated in "urban rehabilitation area", (iv) and have been recovered in accordance with the respective rehabilitation strategies;

– nothing is said, therefore, as to the entity (natural or legal person) that must carry out such rehabilitation works;

– in strict compliance with the principle of fiscal legality, inherent in articles 103, no. 2 and 165, no. 1, paragraph i), of the Constitution of the Portuguese Republic ("CRP"), the AT cannot distinguish where the Law does not;

– if such conclusion were not already evident from comparison with the requirements of other benefits established in parallel, of which the example is the limitation to "first transfer" in the case of the exemption from Municipal Transfer Tax ("IMT") contained in article 71, no. 8, of the EBF, the same is crystalline reinforced by the very recent legislative amendment made upon entry into force of the State Budget Law ("LOE") for 2018, approved by Law no. 114/2017, of 29 December, stating that "Capital gains obtained by IRS taxpayers resident in Portuguese territory resulting from the first sale, subsequent to the intervention, of property located in urban rehabilitation area, are taxed at an autonomous rate of 5%, without prejudice to the option of inclusion in aggregate income.";

– this legislative amendment was made without introducing any reference that the amendment in question has an interpretative character - which it so often does, unjustifiably -, instead assuming it as a true "innovation" vis-à-vis the previous wording of the norm;

– the legislator, by providing in the 2018 LOE that only capital gains resulting from the first sale subsequent to the rehabilitation intervention qualify for application of the tax benefit provided for in article 71, no. 5, of the EBF, accepts that, before entry into force of such amendment and, therefore, in the wording in force at the date of the facts of the present dispute, that requirement was not legally provided for.

3.1.2. Assessment of the Question

As established by article 11, no. 1, of the General Tax Code, "in determining the meaning of tax norms and in the qualification of the facts to which they apply, the general rules and principles of interpretation and application of laws are observed".

Thus, the general rules for interpretation of laws, indicated in article 9 of the Civil Code, which establishes as a primary rule that "interpretation should not be confined to the letter of the law, but should reconstruct from the texts the legislative thought, having especially in account the unity of the legal system, the circumstances in which the law was elaborated and the specific conditions of the time in which it is applied", are applicable to the interpretation of article 71, no. 5, of the EBF.

In the matter of tax benefits, a special relevance is justified of teleological interpretation, for, by definition, tax benefits are "measures of an exceptional nature instituted for the protection of relevant extrafiscal public interests that are superior to the taxation itself which they prevent" (article 2, no. 1, of the EBF).

As referred to in Decision no. 855/14 of the Constitutional Court "tax benefits are norms which, subtracting from taxation situations that, in other respects, would fall within the scope of a tax norm, aim at the pursuit of economic-social objectives which justify the establishment of an exception to the norm. For this reason, tax benefits "derogate the principle of contributive capacity as a standard for distribution of tax burdens" (Saldanha Sanches, Manual de Direito Fiscal, 3rd ed., Coimbra Editora, 2007, p. 450, and Manuel Henrique Freitas Pereira, Fiscalidade, 4th ed., 2013, Almedina, p. 381 et seq.)."

This case law is reiterated in the decision of the Constitutional Court no. 53/2018, in which it is added, following Decision no. 188/2003, that "because they result in an 'exception' to the general rule of incidence of the corresponding tax, tax benefits introduce a certain dimension of 'inequality' in the tax system, in that they institute a 'privileged' tax treatment of their beneficiaries, which is why it becomes necessary that they are justified 'by a reason and a (public) interest that is relevant', and that they find in that interest their foundation" (in bold by us).

Thus, in the matter of tax benefits, the ratio legis assumes fundamental relevance, justifying that where its raison d'être ceases to be applicable, application of the benefit ceases, on the presumption that the legislator established the most appropriate solution, as must be presumed (article 9, no. 3, of the Civil Code).

No. 5 of article 71 of the EBF does not provide for a tax benefit of an objective nature, applicable to whoever is owner of the recovered property, but rather a benefit of a subjective nature, as evidenced by the fact that a requirement is even established connected with the residence of the taxpayer.

The text of no. 5 of article 71 refers to capital gains "when they are entirely derived from the sale of property situated in 'urban rehabilitation area'", and not "from the sales".

The word sale is used in the singular and not in the plural.

That word can be interpreted as reporting only to a "sale" (which, naturally, will be the one subsequent to recovery of the property) as to a category of sale acts (covering, with this meaning, all the acts that will be carried out in the future encompassable in the concept of sale).

If legislatively it was intended to adopt this second meaning, the appropriate word to express it unambiguously would be "sales", in the plural.

In fact, the text that would reveal unequivocally this meaning would be:

5 - Capital gains obtained by IRS taxpayers resident in Portuguese territory are taxed at an autonomous rate of 5%, without prejudice to the option of inclusion in aggregate income, when they are entirely derived from the sales of property situated in 'urban rehabilitation area', recovered in accordance with the respective rehabilitation strategies.

Since it must be presumed that the legislator knew how to express its thought in adequate terms (article 9, no. 3, of the Civil Code), if this unambiguous formula was not used to express a thought to the effect that the tax benefit is applicable to all future sales of the property, without any quantitative limit, it is to be presumed that this was not the legislative thought expressed. Moreover, if this were the legislative thought of referring to all future sales of the property (not only the 2nd, the 3rd, and the 4th, but also the 20th and the 100th etc. subsequent to recovery, without any limit other than the physical existence of the property, which can extend over centuries) it would be to be expected that an unambiguous manifestation of will, since it would be an unusual solution when a tax benefit of a subjective nature is at issue.

In any case, the use of that word "sale", instead of "sales" is support for a declarative interpretation in the sense advocated by the Tax and Customs Authority, which corresponds to one of the possible meanings of the text, is perfectly expressed in it and is even the one that corresponds most linearly to the tenor of the text.

The meaning of this declarative interpretation is corroborated by the systematic element (concept of tax benefit and constitutional admissibility of tax benefits as permissible exceptions to the principle of equality) and rational or teleological (purpose intended to be achieved with the attribution of the tax benefit).

In fact, in a context in which "incentives for urban rehabilitation" are provided for, justification can only be found for the departure from the general regime of taxation of capital gains when the reduction in the applicable rate has the capacity to constitute an incentive for the realisation of the actions that it is legislatively intended to incentivise, which are the motive and relevant public interest.

Therefore, application of the regime cannot be justified in situations where the sale generating the capital gains is carried out by someone who has already acquired the rehabilitated property.

The public interest in encouraging rehabilitation, which is what justifies the tax benefit in question, is not pursued by sales made by those who acquired them already recovered and intend to obtain gains with their resale, for the tax benefit was not envisaged as an incentive to activities of a purely speculative nature, dissociated from activity of rehabilitation of properties.

Therefore, in a teleological interpretation, presuming that the legislator established the most appropriate solution (article 9, no. 3, of the Civil Code), it is to be concluded that the legislator only dispensed with the normal taxation of capital gains to the strict extent that the reduction in the rate can function as an incentive for the realisation of urban rehabilitation actions.

This interpretation, endorsed by the Tax and Customs Authority, is manifestly more reasonable and justified than that advocated by the Claimant, which amounts to that all subsequent sales of properties benefit from reduced rate, transfiguring the benefit, objectively, into an incentive to real estate speculation, which cannot be considered a relevant public interest.

On the other hand, the interpretation defended by the Tax and Customs Authority is the one that is consistent with the constitutional principle of equality and the referred case law of the Constitutional Court, for there is no sufficient ground to depart from the normal regime of taxation of capital gains for those who limited themselves to a mere activity of acquisition and resale of property, without the practice of any recovery activity.

By the foregoing, the Claimant could not benefit from the reduction in the rate provided for in no. 5 of article 71 of the EBF, so that the impugned assessment does not suffer from the illegality by applying the rate of taxation of capital gains of 28%, provided for in paragraph a) of no. 1 of article 72 of the IRS Code.

3.2. Questions Prejudiced as to Knowledge

As the dismissal of the application of the tax benefit in question to the Claimant's situation has legal foundation, it must be concluded that the challenge is ungrounded, so knowledge of the remaining grounds of the request for arbitral pronouncement is unnecessary, in particular that of the incompatibility of article 71, no. 5, of the EBF with European Union Law.

For this reason, knowledge of this question is prejudiced, in accordance with the provisions of articles 130 and 608, no. 2, of the Code of Civil Procedure, subsidiarily applicable by virtue of the provisions of article 29, no. 1, paragraph e), of the RJAT.

4. Reimbursement of Amount Paid and Compensatory Interest

As it has not been demonstrated that improper payment of tax has occurred, the claims for full or partial reimbursement of the amount paid by the Claimant as well as compensatory interest are ungrounded, for both depend on the existence of improper payment of tax, in accordance with the provisions of no. 1 of article 43 of the General Tax Code.

5. DECISION

In accordance with the foregoing, the arbitral tribunal agrees to judge the request for arbitral pronouncement ungrounded and to absolve the Tax and Customs Authority of the claims.

6. Value of the Case

In accordance with the provisions of art. 305, no. 2, of the Code of Civil Procedure and 97-A, no. 1, paragraph a), of the Code of Tax Procedure and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at € 644,119.43.

Lisbon, 14-03-2018

The Arbitrators

(Jorge Lopes de Sousa)

(José Rodrigo de Castro)

(José Almeida Fernandes)

(Dissenting as per attached statement)

DISSENTING OPINION

I dissented from the arbitral decision, disagreeing with the position which prevailed, for the reasons which I set out below.

The arbitral decision proceeds from the analysis that no. 5 of article 71 of the EBF did not provide for a tax benefit of an objective nature. Indeed the arbitral decision emphasises that one would be faced with a benefit of a subjective nature for essentially the same being connected with the residence of the taxpayer, as well as by the text of the norm referring in the plural to "sale" as a textual manifestation of the interpretation of the norm which prevailed.

The teaching of Nuno Sá Gomes regarding the distinction between objective and subjective benefits is that "in the former, one has regard to the objective element of the relieved fact without having regard to the nature and quality of the benefited persons; in the latter, one takes into consideration the subjective or personal element of the relieved element, that is, the nature or quality of the persons relieved" (cf. Teoria Geral dos Benefícios Fiscais, Tax Science and Technique Cadernos, no. 165, Lisbon, 1991, pp. 141).

Now, if tax benefits are to be considered subjective when they have regard to the "nature or quality of the persons to benefit" this manifestly does not occur in the present case given the norm refers only in a neutral manner to "IRS taxpayers" and the mere allusion to residence is not sufficient to be understood as reflecting with propriety to any "nature" or "quality" of the taxpayer. Further, the connection to residence in Portuguese territory was precisely the question to which the present Arbitral Tribunal was called upon to pronounce itself, that is, whether that discrimination based on fiscal residence would not be illegal for violating European Union Law.

As regards the text of the norm, the reference to "sale of property" must be interpreted as reporting to a category of sale acts. Indeed, for purposes of IRS, note that precisely in the definition of the category of what are considered capital gains, one opts also for the use of the singular: "onerous transfer of real rights over real property" (cf. article 10, no. 1, paragraph a) of the IRS Code). Furthermore, little would be understood the (contradictory) reference to "sale" in the singular and "property" in the plural if the legislator intended to restrict the tax benefit only to "the first sale". Furthermore, a contrario, where the legislator intended to restrict the scope of the rehabilitation incentive, in the context of Transfer Tax, it expressly provided that the same applies only to "the first transfer of the property" and not "properties" in the plural (cf. article 71, no. 8 of the EBF). The letter of the law did not permit finding there such minimum verbal correspondence required by article 9, no. 2 of the Civil Code so as to conclude the subjective nature of the tax benefit.

The legislator, when, in our interpretation, recently felt the need to restrict the tax benefit provided for in article 71, no. 5 of the EBF, amended the letter of the law so that the benefit would only be applicable to "the first sale, subsequent to the intervention" (cf. article 263 of the cited Law no. 114/2017, of 29 December). It is to be noted that also in this new wording of no. 5 article 71 of the EBF, the legislator expressly opts for not providing subjectively that the tax incentive can only benefit the "promoter" or the taxpayer who rehabilitates the property, which reiterates that it is an objective tax benefit.

The objective nature of the tax benefit finds full support in the letter of the law and in systematic terms, as also demonstrated by the other norms of article 71 itself of the EBF in which objective tax incentives are provided for as these are "applicable to properties subject to rehabilitation actions" in accordance with the then no. 20 of article 71 of the EBF. Further, the very interpretation of the AT expressed in Circular Memo no. 20144 of 26-01-10 of the IRS Directorate of Services, regarding article 71, no. 5 of the EBF, is that it is objectively "the properties which benefit from this regime". And, therefore, the tax benefit would be applicable to rehabilitated properties and the autonomous IRS rate of 5% applicable to capital gains realised with the sale of those properties, including the capital gains realised by the Claimant in the case sub judice.

In the interpretation which prevailed it is further considered, in what proves to be a decisive element of that interpretation, that the relevant public interest would not be pursued if subsequent sales of rehabilitated properties benefited from reduced rate and that this would be an incentive to real estate speculation, what is deduced would constitute an interpretation materially unconstitutional vis-à-vis the limits to the admissibility of tax benefits as permissible exceptions to the principle of equality.

Regardless of the interpreter's judgment on the merit, relevance and appropriateness of the tax benefit in question or on the perfection of the way in which the same was expressed in the law, the legislator intended with the introduction of these tax benefits for rehabilitation to "dynamise the real estate rehabilitation market" as expressly stated in the Report of the State Budget for 2009 (cf. pp. 15 to 17), which includes the benefit provided for in no. 5 of article 71 of the EBF. The fact that capital gains realised with the sale of rehabilitated properties in subsequent sales after the intervention is applicable an autonomous tax rate of 5% is an obvious tax incentive to that rehabilitation market which the legislator confessedly intended to create by reducing taxation on the market of purchase and sale of those properties in the context of IRS. An aim which was perfectly understandable in 2009 when the tax benefit was defined already given that the real estate rehabilitation market was then practically non-existent in Portugal and hence the comprehensiveness of the incentive (counterbalanced by the fact that it is expressly a benefit of a temporary character subject to expiry in accordance with article 3, no. 1 of the EBF and, thus, it is imposed an obligatory re-evaluation of the necessity of its maintenance by the legislator).

Now, the Constitutional Court has in its more recent case law, regarding the interpretation of tax benefits and in concrete those provided for in the EBF, reaffirmed that "the legislator is not freed, in the context of tax benefits, from being bound by the principle of equality. But, in the assessment of the possible violation of that parameter of constitutionality, relating to a norm which enshrines a tax benefit, it should be admitted for the legislator an ample freedom of configuration". And, therefore, "control of constitutionality passes through ascertaining whether the option which presided over such establishment presents itself 'intolerable and inadmissible, from a constitutional-legal perspective', or if, on the contrary, the same rests on a 'minimal rational connection between the criterion of differentiation mobilised and the objectives pursued by the act" (Decision no. 855/14). In this context, the Court cannot substitute itself for the legislator, weighing the situation of diversity of treatment in accordance with its own judgment of justice or opportuneness, at the risk of distorting the space for freedom of configuration recognised to the latter, there being only required that it set aside the legal solutions which, because they are incapable of rational legitimating credence, show themselves to be constitutionally intolerable" (in bold by us) (cf. Decision of the Constitutional Court no. 53/2018, Proc. no. 374/14, 2nd Section, delivered on 31.01.2018).

Reason for which, concluding that the tax benefit provided for in article 71, no. 5 of the EBF was an objective benefit applicable to rehabilitated properties and that this was obviously not "constitutionally intolerable", it is not the responsibility of the AT and of the arbitrators of this Arbitral Tribunal, paraphrasing the Constitutional Court, to "substitute themselves" for the legislator, weighing the situation as if they were in its place and imposing their own idea of what would be, in the case, the "reasonable", "just" and "opportune" solution (what would be the ideal solution in the case))" (cf. Decision of the Constitutional Court no. 750/95, Proc. no. 253/94, 1st Section, delivered on 27.04.1995).

Finally, although it is admitted that in the case sub judice facing the position which prevailed it is prejudiced knowledge of the incompatibility of article 71, no. 5 of the EBF with European Union Law, it is important to refer synthetically that there exists objectively no difference which justifies a different treatment of the taxation of capital gains realised with the sale of a rehabilitated property between IRS taxpayers resident and non-resident, what would lead inexorably to a judgment of incompatibility of the norm with article 63, no. 1 of the TFEU.

For this reason, the request for arbitral pronouncement should have been judged grounded.

Lisbon, 14 March 2018

José Almeida Fernandes

[1] Point 18 of the "Recommendations for the attention of national courts, relating to the presentation of preliminary ruling proceedings", published in Official Journal C 338/2012.