AIMI on Construction Land Used for Services: CAAD Arbitration 517/2018-T Ruling

ARBITRAL DECISION

The Arbitrator, Professor Doctor Jónatas Machado, appointed by the Deontological Council of the Centre for Administrative Arbitration to sit on this Arbitral Tribunal, constituted on 02.01.2019, hereby renders the following decision:

REPORT

1. A..., LDA, legal entity no. ..., with registered office currently at Rua ... no. ..., ..., ...-... Lisbon, having been notified by the Tax and Customs Authority (hereinafter Respondent or TA) of the assessment of the Additional Municipal Property Tax (AIMI) no. ..., in the amount of 829.04 €, and disagreeing therewith, hereby, under Article 2, no. 1, paragraph a), and Article 10, nos. 1 and 2, both of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters or "RJAT") and Articles 1 and 2 of Ordinance no. 112-A/2011, of 22 March, requests the constitution of an Arbitral Tribunal and the consequent arbitral pronouncement declaring the illegality of the disputed AIMI assessment.

2. The request for constitution of the arbitral tribunal was accepted by the President of the CAAD on 19.10.2018.

3. In accordance with Articles 5, no. 2, paragraph a), 6, no. 1, and 11, no. 1 of the RJAT, the Deontological Council of this Centre for Administrative Arbitration (CAAD) appointed Professor Doctor Jónatas Machado as sole arbitrator on 10.12.2018.

4. The parties were duly notified of this appointment, to which they did not object, in accordance with Articles 11, no. 1, paragraphs b) and c), and 8 of the RJAT and 6 and 7 of the CAAD Deontological Code.

5. By virtue of the provision in paragraph c) of no. 1 and no. 8 of Article 11 of the RJAT, as communicated by the President of the Deontological Council of the CAAD, the Arbitral Tribunal was constituted on 02.01.2019.

6. The Claimant requests that the illegality of the tax assessment act of AIMI no. ..., issued by the TA under no. 1 of Article 135-G of the IMI Code (CIMI) be declared, with the consequent annulment thereof as it suffers from errors in both factual and legal prerequisites, and that the TA be condemned to reimburse the Claimant for the AIMI paid in relation to the assessment sub judice, in the amount of 829.04 €, and to pay compensatory interest at the legal rate until full reimbursement of the amount owed and calculated on the tax, in accordance with Articles 43, no. 4 and 35, no. 10 of the General Tax Law (LGT), Article 61 of the Tax Procedure and Process Code (CPPT), Article 137 of the CIMI, Article 559 of the Civil Code, and Ordinance no. 291/2003 of 8 April.

7. The Respondent, pursuant to Article 17 of the RJAT, presented its reply on 06.02.2019, in which it defended itself by way of objection, petitioning that this request for arbitral pronouncement be judged dismissed as unproven, and, consequently, the Respondent be absolved of all claims with the corresponding legal consequences.

8. As it was not requested by the parties and was deemed unnecessary, the tribunal dispensed with the meeting provided for in Article 18 of the RJAT, through an order issued on 25.02.2019.

9. In their final submissions, presented by the Claimant on 06.03.2019 and by the Respondent on 18.03.2019, the former sustained its positions in essence and the latter referred to the content of the defence.

Description of Facts

1. The Claimant is the owner of a building plot inscribed under article no. ... in the parish of ... (...) with a patrimonial value of 207,260.00 €.

2. The said plot is intended for the construction of leisure and sports equipment and is valued with the classification coefficient of "services", it not being possible to assign it any other purpose by force of the approved and licensed subdivision and as expressly stated in the licensing permit.

3. The Claimant holds as its only asset related to its economic activity the plot in question, which it has attempted to sell without any success, bearing the costs inherent to its ownership, namely the IMI, through the contributions of its shareholders, given that it derives no income from the asset it possesses, being a building plot without any profitability as such, and with a "services" classification that deprives it of the majority of its marketing potential.

4. Facing liquidity difficulties, the Claimant is in the process of liquidation, having however made full and timely payment of the assessed tax on 22.02.2018.

Arguments of the Parties

1. The arguments and counter-arguments put forward by the parties relate fundamentally to the relevance of the property's situation for purposes of taxation by AIMI.

2. The Claimant alleges that the disputed assessment is illegal due to an error in the characterization of the taxable event with arguments that are summarized as follows:

• The TA disregarded the fact that the property in question is a building plot intended for the construction of leisure and sports equipment and is valued with the classification coefficient "services", it not being possible to assign it any other purpose by force of the subdivision and licensing, and as expressly stated in the permit;

• AIMI was created by Article 219 of Law no. 42/2016, of 28.12, which approved the State Budget for 2017, by the addition to the CIMI Code of Articles 135-A to 135-K, which establish its legal regime, becoming Chapter XV of that tax legal code, which subsequently had two further additions with Articles 135-L and 135-M, introduced by Law no. 214/2017, of 29.12;

• In Article 135-B of the CIMI, the properties classified as "commercial, industrial or for services" and "other" are excluded from the additional municipal property tax in accordance with paragraphs b) and d) of no. 1 of Article 6 of this Code;

• This negative delimitation of the scope of urban properties classified as commercial, industrial or for services and other, as a legislative choice, is based on the principle that building plots intended for the construction of such buildings and which are as such valued with the classification coefficient of one of those classifications — commercial, industrial or services, and are not intended for housing, also mandatorily benefit from the exclusion provided for in no. 2 of Article 135-B, in coherence with this legislative choice;

• Having the taxable event chosen as an index of contributive capacity the ownership of real property assets of value considered high, it would be incoherent not to apply the tax to buildings intended for services and to apply it to the plots intended for their construction, whose value is incorporated in the value of the buildings;

• From a perspective that bears in mind the unity of the legal system (Article 9, no. 1, of the Civil Code), which has decisive interpretive value, imposed by the principle of axiological or value coherence of the legal order, the exclusion provided for in no. 2 of Article 135-B of the CIMI concerning urban properties classified as "for services" should be interpreted extensively as expressing a legislative intention to exclude from taxation the plots intended for the construction of such properties;

• The literal interpretation of this rule, with the meaning that all building plots are covered by the scope of AIMI, will be materially unconstitutional, being incompatible with the principle of equality (Article 13 of the Constitution of the Portuguese Republic);

• The consideration of the ownership of plots for the construction of properties intended for services as a taxable event and not the ownership of the properties built thereon, constitutes unfavourable treatment of taxpayers in the first situation without material justification, since the contributive capacity indicated by real property assets in that situation is necessarily smaller, and must be present, and increasing, in the second;

• The indiscriminate applicability of AIMI to all "building plots" disregarding the legal criterion of the property's designation, demonstrates a glaring inconsistency of the legal regime in question and constitutes discriminatory treatment, which promotes unjustified inequality between taxpayers that violates, plainly, the principle of equality, constitutionally enshrined in Articles 13 and 104, no. 3 of the Constitution of the Portuguese Republic (CRP) and in Articles 5 and 55 of the General Tax Law (LGT);

• The assessment in question relating to the building plot for the construction of leisure and sports equipment, inscribed under article no. 4703, of the Parish of Azambuja, Municipality of Azambuja, cannot be considered anything but illegal, justifying its annulment, in accordance with no. 1 of Article 163 of the new Code of Administrative Procedure (CPA), approved by Decree-Law no. 4/2015, of 07/01, subsidiarily applicable by force of paragraph c) of Article 2 of the LGT.

1. To the contrary, the TA came to support the maintenance of the tax assessment act of AIMI with the following grounds:

• The Claimant's understanding does not correspond to the prevailing line of arbitral and judicial jurisprudence;

• The current legal text faithfully and accurately reflects the legislative choices in a particular historical context;

• AIMI created another avenue for subsidizing the social security system, which is one of the constitutional responsibilities of the State, in accordance with the principle of diversification of sources of social security financing;

• AIMI aims to reduce non-wage labour costs, which may explain why it does not apply to legal entities holding properties intended for commercial, industrial and services activities, since the holding of such properties by legal entities is normally associated with the exercise of these activities, with the corresponding payment of contributions to Social Security as employer entities;

• Having removed the reference to the designation of the properties from the final text of the law, the literal wording reveals unequivocally the legislative intention to remove any relevance to it for purposes of exclusion from taxation;

• The ownership of real property assets of high value, regardless of whether or not they are dedicated to economic activity, is tendentially indicative of high contributive capacity, higher than that which is to be presumed to exist when property of reduced value is held or when it does not exist, so, in principle, the limitation of taxation to the first situations is justified;

• In this delimitation of the actual scope it is clear that the criterion adopted is intended to be universally objective, inducing greater uniformity and equality in the treatment of properties subject to taxation, to the detriment of other criteria that would appeal to case-by-case verifications about the effective purpose given to properties;

• Given that in the final approved version now in force the delimitation of the scope and exclusion from the scope has been expressly established only on the basis of the types of properties indicated in Article 6 of the CIMI, the legislative choice must therefore be respected;

• There is no reason to conclude that the legislature did not know how to express its intention in adequate terms, as must be presumed by force of Article 9, no. 3, of the Civil Code, on the contrary, the question was duly considered, having been abandoned in the final wording;

• AIMI applies to real property assets possessing the characteristics indicated in Article 135-B of the IMI Code, that is, subjecting any and all entity that is the holder of real rights over urban properties in accordance with objective reality and not merely potential reality at the moment of verification of the tax act;

• The fact that the building plot in question is, according to the tax record, licensed for one of these purposes is not an immutable situation.

PRELIMINARY EXAMINATION

1. The request for arbitral pronouncement is timely in accordance with no. 1 of Article 10 of the RJAT.

2. The Arbitral Tribunal is regularly constituted (Articles 5, no. 2, 6, no. 1, and 11 of the RJAT) and is materially competent (Articles 2, no. 1, paragraph a) of the RJAT).

3. The parties have legal standing and capacity and are duly represented.

4. The proceedings do not suffer from any nullities nor have exceptions been raised, permitting proceedings to the decision on the merits of the case.

GROUNDS

Facts Found to be Proven

1. On the basis of the documents brought into the record, the following facts relevant to the decision of the case sub judice are found to be proven:

• The Claimant is the owner of a building plot inscribed under article no. ... in the parish of ... (...) with a patrimonial value of 207,260.00 € (documents 2 and 3);

• The said plot is intended for the construction of leisure and sports equipment and is valued with the classification coefficient of "services", it not being possible to assign it any other purpose by force of the approved and licensed subdivision and as expressly stated in the licensing permit (documents 2 and 3);

• The Claimant was notified by the Respondent of the assessment of AIMI no. ..., in the amount of 829.04 € (document 1);

• The Claimant made full and timely payment of the assessed tax on 22.02.2018 (document 1).

Facts Not Proven

1. With relevance to the decision on the merits, there are no facts alleged that should be considered as not proven.

Reasoning

1. With regard to factual matters, the Tribunal does not need to pronounce on everything alleged by the parties, it being its task to select the facts that matter for the decision and to distinguish proven matters from unproven matters (cf. Article 123, no. 2, of the CPPT and Article 607, no. 3 of the Code of Civil Procedure, applicable ex vi Article 29, no. 1, paragraphs a) and e), of the RJAT).

2. The facts relevant to the judgment of the case are chosen and determined in function of their legal relevance, which is established in attention to the various plausible solutions to the issues that are the subject of the dispute (v. Article 596, no. 1, of the CPC, ex vi Article 29, no. 1, paragraph e), of the RJAT).

3. Accordingly, the facts enumerated above are deemed proven as relevant to the decision.

Issue to be Decided

1. The issue to be decided concerns whether the rule that excludes from AIMI urban properties classified as «commercial, industrial or for services» and «other» in accordance with paragraphs b) and d) of no. 1 of Article 6 of the CIMI, should be interpreted in a manner that encompasses building plots licensed for commercial, industrial or services purposes, thereby justifying, in the concrete case, the invalidity of the AIMI assessment no. ..., in the amount of 829.04 €.

3.4.1. Origin, Nature and Scope of AIMI

1. The history of AIMI is well-established and widely known. In the aftermath of the economic and financial crisis, it was created by Article 219 of Law no. 42/2016, of 28 December, which approved the State Budget for 2017[1], through the addition to the CIMI Code of Articles 135-A and following up to Article 135-K, becoming Chapter XV of that code, introducing special taxation of high-value assets designed to ensure the financing of Social Security. No. 2 of Article 1 of the CIMI was amended by Law no. 114/2017, of 29 December, which approved the State Budget for the year 2018, now stating:

"2 - The additional municipal property tax, deducted from collection expenses and the provision for deductions from the tax collection of personal income tax (IRS) and corporate income tax (IRC), constitutes revenue of the Social Security Financial Stabilization Fund."

1. The objective, assumed by the said State Budget, consisted of broadening the financing base of Social Security through a tax falling on those holding greater real property assets, in a logic of reinforcing the overall progressivity of the system[2]. It is not the task of this tribunal to determine whether AIMI is an adequate means to pursue that end, namely if it is true that increased property taxation tends to have a negative repercussion on the value thereof, with potential effects on other taxes[3].

2. As can be seen from the Report on the 2017 Budget (p. 60) - the creation of the additional to the IMI, as a supplementary tax on real property assets, was intended to introduce into taxation "a progressive personal-basis element, taxing more heavily the larger assets", and, in that sense, seeks to be suited to the principle of progressivity of the tax to which Article 104, no. 3 of the Constitution refers, which has as its corollary the tendential imposition of greater taxation on those with greater contributive capacity.

3. Similar to the regime of the Municipal Property Tax (IMI), the passive subjects of AIMI are "owners, usufructuaries or surface holders of the respective properties", regardless of their status as natural or legal persons, being equated to these "any structures or centers of collective interests without legal personality appearing in the matrices as passive subjects of municipal property tax, as well as the undivided estate represented by the head of household" (nos. 1 and 2 of Article 135-A of the CIMI).

4. In that the modeling of the amount to be paid abstracts from the economic dimension of the entities, namely the qualification as a small, medium or large enterprise, as well as in that it does not reach the entirety of the net assets of the entities, it may be stated that AIMI levied on urban properties of which legal entities and equivalent structures are owners, usufructuaries or surface holders assumes the nature of a real tax, close to a general tax on real property (no. 2 of Article 135-A of the CIMI).

5. AIMI replaced entry 28.1 of the General Schedule of Stamp Tax. However, it is not primarily intended to burden the taxation of luxury properties, since the high-value real property assets on which AIMI objectively applies may consist of a plurality of properties of reduced value. Pursuant to Article 135-B of the CIMI, "the additional municipal property tax applies to the sum of the patrimonial values of urban properties situated in Portuguese territory of which the passive subject is the holder."

6. The legislative concern to «avoid the impact of this tax on economic activity» was announced in the Draft Law on the State Budget for 2017 and was implemented through the exclusion from the scope of «properties classified as 'industrial', as well as urban properties licensed for tourism activity, the latter provided that their destination is duly declared and proven» and the deduction from the taxable value of the amount of «€600,000.00, when the passive subject is a legal entity with agricultural, industrial or commercial activity, for properties directly related to its operation».

7. However, in the wording that was finally approved, the non-applicability was defined only on the basis of the types of properties indicated in Article 6 of the CIMI, without any reference to the designation thereof. Thus, the exclusion from the scope was not carried out on the basis of the business economic activity to which the properties were attached. Pursuant to no. 2 of Article 135-B of the CIMI, "the following are excluded from the additional municipal property tax: urban properties classified as «commercial, industrial or for services» and «other» in accordance with paragraphs b) and d) of no. 1 of Article 6 of this Code." That is, according to the literal wording, covered by the objective scope of AIMI are properties for "housing" and "building plots" as defined in the said Article 6, no. 1, paragraphs a) and c) of the CIMI, and this, as regards the latter, regardless of the potential designation that may come to correspond to them.

8. In order to discern some rationality in this solution, it was argued that, given that AIMI aims not to increase non-wage labour costs, this may explain its non-application to legal entities holding properties intended for commercial, industrial and services activities, in that the holding of such properties by legal entities is normally associated with the exercise of these activities, with the corresponding payment of contributions to Social Security as employer entities.[4]

9. This interpretation of the rules governing the scope of AIMI seems to presuppose the objective of avoiding double taxation, understood here as taxation of the same income twice in the legal sphere of the same entity. It was said, in fact, that "it will not be completely devoid of objective and rational explanation the creation of special taxation of high-value assets designed to ensure the financing of Social Security limited to real property assets which will not already be tendentially connected with that financing." [5]

10. Article 135-C, no. 1 of the CIMI provides that "[t]he taxable value corresponds to the sum of the patrimonial values, referred to 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 passive subject." No. 2 provides, in paragraphs a) and b), for the deduction from the taxable value of the amount of 600,000 € when the passive subject is a natural person or an undivided estate. In the case of legal entities, no deduction is provided.

3.4.2. AIMI, Building Plots and Buildings for Commerce, Industry and Services

1. The answer to the issue to be decided has not proved free from controversy. On the contrary, it has sparked a significant divergence in the jurisprudence of the CAAD, expressing different approaches to the interpretation and application of rules of a tax nature. For a first line of jurisprudence, the literal argument is an initial hermeneutical support invoked in favor of the taxation of building plots, although it is not necessarily the endpoint of legal interpretation. In fact, reference is made to Article 9 of the Civil Code, which provides that:

"Interpretation should not be limited to the letter of the law, but should reconstruct from the texts the legislative thinking, having especially in mind the unity of the legal system, the circumstances in which the law was drafted and the specific conditions of the time in which it is applied."

1. However, for the jurisprudential approach in question, no. 2 of the same provision seems to be very important, which states:

"However, the legislative thinking that does not have in the letter of the law a minimum of verbal correspondence, even if imperfectly expressed, cannot be considered by the interpreter."

In accordance with what is provided therein, appeals to the legislative purpose, the unity of the legal system and the circumstances in which the law was drafted cannot disregard a minimum of verbal correspondence, even if imperfect. Now, in the jurisprudential understanding under analysis, the negative provision governing the scope of AIMI, in no. 2 of Article 135-B of the CIMI, maintains the taxation of residential properties and building plots referred to in Article 6, no. 1, paragraphs a) and c) of the CIMI, despite it being very easy for the legislature to proceed to its express exclusion or to distinguish among categories of building plots according to their designation, which it did not do[6]. Moreover, it is stressed that the normative structure created for AIMI consists of a rule of general scope, imposing itself on real properties subject to IMI, followed by an exceptional regime of exclusion from the scope with respect to a certain type of property[7].

1. For this approach, the literal element suggests that it was not on the basis of the activity to which the properties are dedicated that the exclusion from the scope came to be defined, since in the wording that was finally approved the non-applicability was defined only on the basis of the types of properties indicated in Article 6 of the CIMI, without any reference to the designation and economic activity of legal entities. Having been removed the reference to the designation of the properties in the final text of the law, the legislative intention to remove any relevance to it for purposes of exclusion from taxation seems unequivocal.

2. From the perspective of the literal-grammatical element, the distinction is considered relevant, for purposes of objective scope, between already-constructed properties intended for commercial, industrial or services purposes, on the one hand, and building plots, on the other. In its favor, this jurisprudential approach could always invoke the ideas — in any case presupposed in the argumentation expended — that, in the exercise of its autonomous conforming and regulatory capacity of a socioeconomic and fiscal nature, the legislature, in the field of objective scope, proceeded to the delimitation of two categories of properties, ensuring uniformity and equality of tax treatment within each of them[8].

3. In this delimitation of the objective scope it appears that the criterion adopted was intended to be universally applicable, inducing greater uniformity and equality in the treatment of properties subject to taxation, to the detriment of other criteria that would appeal to case-by-case verifications about the effective purpose given to properties, there being no reason to conclude that the legislature did not know how to express its intention in adequate terms, as must be presumed, by force of Article 9, no. 3, of the Civil Code, rather, on the contrary, the question will have been duly considered, and therefore abandoned in the final wording.

4. Another line of reasoning in favor of the taxation of building plots — which supports the jurisprudential approach under analysis — relates to the consideration of patrimonial value. This directs the discussion to the formal or quantitative element of the taxable event. It is based on the principle that the value of a building plot corresponds fundamentally to a legal expectation, embodied in a right to build thereon a property with certain characteristics and a certain value. It is this expectation of production of wealth materialized in a property to be constructed that increases the value of the assets and the wealth of the owner of the building plot, once the property in question begins to be considered as a building plot. Such alone, according to this viewpoint, is sufficient to justify the taxation of these properties by AIMI. In the classic distinction between potentiality and actuality, potentiality is already a taxable event.

5. This reasoning does not assume itself to be merely conceptual or formalistic, invoking in its favor the existence of a minimum of economic rationality in the legislative option, susceptible of redeeming constitutionally the categorical delimitation at hand. In this sense, it is argued that we are dealing with different taxable events. "In one case, the law subjects to taxation urbanizable plots that constitute an economic asset due to their suitability for construction. In another case, the law excludes from the tax built property that performs an instrumental function in relation to productive activity."[9] In accordance with this understanding, one would be faced here with a categorical delimitation that is not arbitrary, endowed with sufficient material foundation[10]. This would only not be so, it could be added, if that delimitation served objectives that are hostile or oppressive — constitutionally suspect — in relation to a passive subject or a certain class of passive subjects[11].

6. The regime for valuation of the patrimonial value of building plots is enshrined in Article 45 of the CIMI. The valuation model is the same as for constructed buildings, although starting from the building to be constructed, taking as its basis the respective project. Pursuant to nos. 1 and 2 of this article, the patrimonial taxable value of building plots is the sum of the value of the area of establishment of the building to be constructed, which is that situated within the perimeter of the establishment of the building on the ground, measured by the exterior part, added to the value of the land adjacent to the establishment. The value of the area of establishment varies between 15% and 45% of the value of the authorized or envisaged buildings.

7. According to the provision in no. 3 of Article 45 of the CIMI, in setting that percentage, the characteristics corresponding to the location coefficient are taken into account, relating to accessibility, proximity to social facilities, public transport services and location in areas of high real property market value. The greater the value of the property to be constructed, the greater the value of the building plot that underlies it (cf. Article 6, no. 3 of the CIMI). In accordance with this understanding, ownership of a building plot is in itself indicative of contributive capacity, the subjection to AIMI being entirely justified.

8. A third line of argument detected in this jurisprudential approach relates to the existence of fundamental differences between buildings dedicated to commercial, industrial or services activities, on the one hand, and building plots, on the other, capable of justifying the non-taxation of the former and the taxation of the latter. The first concerns the fact that a building plot is not yet being used for a productive activity, unlike what normally occurs with an urban property dedicated to commerce, industry and services, regarding which it can reasonably be presumed that whoever holds an urban property classified as commercial, industrial or for services engages in economic activity that, through the deductions owed by the employer entity, contributes to the financing of social security[12]. Although this presumption may not be confirmed in all concrete cases, it does not cease to have underlying a sufficient dose of reality.

9. The second fundamental difference concerns the fact that, regarding such enterprises, the government has a comprehensible interest in "mitigating the impact of AIMI on the business exercise of economic activities in general, through the exclusion of urban properties with industrial, commercial and services purposes, and 'other', with the purpose of not burdening in fiscal terms the competitiveness of enterprises, especially in international markets"[13].

10. Underlying this approach is the fact that taxes can also play, negatively, the role of fiscal expenditure. The tax system can be used to encourage or protect certain economic activities from the standpoint of their utility for society as a whole. The non-taxation of properties dedicated to commercial, industrial and agricultural activities appears here as a sort of fiscal expenditure, compensated by the fact that, presumably, their owners, in the business sphere, already contribute indirectly to the financing of social security.

11. The objectives and purposes of taxation include the intentional use of tax forms to promote economic and social results considered politically desirable. Even if this reasoning has not been taken to its ultimate conclusions by the legislature — since it did not ensure, in all cases, that real property dedicated to the exercise of any economic activity not be affected — still it can be stated that that presumption and that interest can be invoked in tendential terms.

12. On the other hand, and this is another in this line of argument, the fact that the building plot in question is, according to the tax record, licensed for one of these purposes is not, in the abstract, an immutable situation. The fact that the building plot has been licensed for commerce, industry or services deprives it of the nature of a simple building plot, giving it a patrimonial value susceptible to AIMI taxation as objective and autonomous property, at the moment of the taxable event, it not being legally possible to apply retroactively, even if merely for analysis or legal construction purposes, tax criteria that only apply after the construction of the building and not before it. A building plot is not equal, conceptually, formally, materially or economically identical to an urban property for housing or classified as commercial, industrial or for services, and therefore need not be subject to exactly the same tax treatment.

13. In accordance with this understanding, the legislature has a reasonable margin of legislative and regulatory maneuver in economic matters, with the respect for the principles of tax equality being fully assured by the uniform and non-discriminatory application of tax rules to the owners of urban properties in each of the categories, once it is established that they are not arbitrary. Legally relevant to taxation in AIMI, regarding building plots, regardless of the entity that is their holder, is the objective reality at the moment of the taxable event and the exigibility of the tax in question, particularly because it is not always difficult to change the intended purpose for the use of the same building plot, and if that were to occur, it would constitute a form of evasion, possibly planned.

14. In accordance with this understanding, the solution reached does not suffer from any organic and formal unconstitutionality. The tax that falls on building plots regardless of their designation for commerce, industry or services is properly typified, resulting clearly from the literal wording of the provision, and is capable of reaching all natural and legal persons who are holders of plots satisfying the legal criteria of predictability, equality, legal security and protection of the confidence of citizens.

15. To this may be added that the principles of tax equality and contributive capacity, being indisputably structural principles of the tax system, do not apply in the same manner to all taxes. Even for reasons of practicability, the system is not in a position to ensure full and perfect material equality in the field of PIT, CIT, VAT, IMI, IMT or ISV, to name but a few[14]. The case of VAT is paradigmatic, in that it ultimately becomes, in practice, a regressive tax in that it impacts with special weight on poorer consumers and therefore with greater propensity to consume, and for whom all spent income has high marginal utility. Ultimately, the evaluation of the justice of the tax system will depend not so much on the consideration of each tax individually considered, but on the justice of the system as a whole and its articulation with public spending.

16. This jurisprudential approach — as described and considered here with all seriousness and the maximum respect it undoubtedly deserves — despite being able to invoke in its favor arguments of non-negligible weight and gathering support among domestic and foreign academic sources and jurisprudence, has been rejected in national arbitral jurisprudence by another, which charges it with the hermeneutic-legal weakness of basing itself on an overly broad conception of fiscal legislative discretion, resulting from a corresponding minimalist interpretation of the values of tax equality, horizontal equity and attention to contributive capacity inherent in the constitutional principles of the rule of law and the social state. And the problem is all the more serious given that tax activity is among the functions of the State one that can produce the most intense intrusive and ablative effect in the relationship between the State and individuals, presenting therefore special constitutional delicacy.

17. In this context, it cannot be overlooked that the principles of tax equality, horizontal equity and respect for contributive capacity (Articles 13 and 104, no. 3 of the CRP and 4, no. 1, 5 and 55 of the LGT) are intended to constitute a normative parameter for guidance and control of fiscal legislative activity[15]. The consideration of the normative force of these principles in the concrete case requires, therefore, a further effort of interpretive densification, based essentially on the following arguments, or, if preferred, the following steps of a single fundamental argument.

18. First, it should be emphasized that the literal element of interpretation of legal rules is initial, incomplete and insufficient, and therefore the consequent necessity of adopting a teleological interpretation, systematic and in conformity with the Constitution and its corresponding system of values, principles and rules. Should a literal interpretation of this rule be adopted, with the meaning that all building plots are covered by the scope of AIMI, it will be materially unconstitutional, being irreconcilable with the principle of equality (Article 13 of the CRP), in considering as a taxable event the ownership of building plots for the construction of properties intended for commerce, industry and services and not the ownership of the properties built thereon, in that it constitutes unfavourable treatment of taxpayers in the first situation without sufficient material justification, for the contributive capacity indicated by real property assets in that situation is necessarily less, and must be present, and greater, in the second.

19. Underlying this understanding is the notion that, in establishing the positive or negative rules governing the objective scope of AIMI — as it does in Article 135-B of the CIMI — the legislature does not have unlimited discretion to distinguish among different categories of urban properties (e.g. building plots; urban properties classified as commercial, industrial or for services), even if it treats their respective owners equally within each category. The principle of equality before public charges does not exhaust itself in an understanding that is merely formal of equality.

20. This line of orientation requires that, in a first moment, an analysis be made of the purposes that underlay the creation of AIMI and then to ask whether the distinction between building plots and urban properties dedicated to commerce, industry and services can be rational and proportionally related to those purposes. As was seen previously, the purpose of AIMI consisted of broadening the base of financing of social security while minimizing the impact on economic activity, and in light of that it should be evaluated the rationality of the distinction between building plots and urban properties dedicated to commerce, industry and services having regard to the constitutional principles of tax equality — in its corollary of horizontal equity — and of contributive capacity.

21. A second argument, fully derived from the first, points to the fact that taxation must obey criteria of equality, horizontal equity and contributive capacity, with the legislature not being able to arbitrarily ignore these principles when it proceeds to conceptual and categorical delimitation for purposes of determining the subjective or objective scope of taxes. Articulating the two arguments, it can be said that the categorical distinctions made by the legislature should be evaluated by the tax jurisdiction in light of the purpose pursued by it and its conformity with the constitutional principles of tax equality and contributive capacity. Let it be insisted, equality before public charges cannot be understood in merely formal terms, and should be subordinated to principles of material justice.

22. This does not mean, obviously, that one would expect full and perfect material equality in PIT, CIT, VAT, IMI, IMT or ISV. In the case of taxation of real property assets, the difficulty in ensuring total equity among passive subjects is generally recognized[16]. Nor is the idea rejected that, in a social state, the final evaluation of the justice of the public financial system passes not only through the analysis of each tax individually considered, but also through the evaluation of the tax system as a whole and of the rationality, efficiency and justice of public spending itself.

23. Nevertheless, the truth is that even within each tax the categorical distinctions made by the tax legislature should establish a proportional relationship with the existing factual differences, subject, in its contours, to tax justice. For example, this could hardly accept, from a constitutional standpoint, a legislative choice that would subject caviar to a reduced VAT rate and subject bread and pasta to a higher rate, having regard to the absence of any functional homology between these categories of products, their different economic and social significance and the respect due to the constitutional principles of reasonableness, justice, material equality and economic capacity.

24. Were this interpretation not to be endorsed, one would witness, in practice, the weakening of the substantive normativity of these principles, of explicit constitutional and legal enshrinement, the erosion of the principle of interpretation of tax laws in conformity with the Constitution and the substantial emptying of the jurisdictional control of fiscal legislative activity. This would enjoy a margin of discretion and conformation almost unlimited, with economic and fiscal categorizations delineated by it remaining practically immune to jurisdictional review. The disregard by the fiscal legislature of the principles of tax equality and contributive capacity finds a not insignificant obstacle in the constitutionally structural principle of the social state, and namely its corollaries of social justice and the social market economy[17].

25. In light of these considerations — concerning the purposes of the legislature and the constitutional fiscal principles that shape its activity — the exclusion of the objective scope of AIMI from built urban properties dedicated to commerce, industry and services and the simultaneous taxation of building plots that have been given a commercial, industrial or services designation, is not rationally justifiable, does not ensure horizontal equity among owners of properties intended for commerce, industry and services nor properly expresses their contributive capacity.

26. And this is a third argument — not disregarded, moreover, by the TA — based on the fact that the legislature, despite having excluded from the scope of AIMI urban properties classified as commercial, industrial or for services, expressly chose to maintain other properties that also integrate the assets of enterprises — even of those that already contribute to social security through the single social rate deductions regarding workers — such as those classified as residential or building plots, in not including them in the negative delimitation enshrined.

27. The argument that enterprises that already pay the single social rate should not therefore pay AIMI on properties dedicated to commerce, industry and services should apply to all properties and not only to these. Now, the wording of Article 135-B of the CIMI that was finally approved does not exclude the application of AIMI to properties intended for housing and building plots used by legal entities in the scope of their economic activity. That is, the legislature did not ensure, nor did it intend to ensure, in all cases that real property dedicated to the exercise of any economic activity not be affected.

28. The problem is that one does not rationally perceive what criteria were used in the delimitation of the positive and negative categories of objective scope, from the standpoint of the purposes pursued by the legislature and the principles of tax equality and contributive capacity. If the concern was to "avoid the impact of this tax on economic activity", it is not clear why objective indicators of contributive capacity were not used, with the legislature instead opening the door to the non-taxation of enterprises with greater contributive capacity and the taxation of enterprises with no or very reduced contributive capacity. The absence of objectively intelligible criteria is especially problematic, from the standpoint of the principle of the rule of law, in that it feeds a requirement of rationality and prohibition of arbitrariness in state action.

29. Likewise, if the criterion was that of the effective use of the property for economic activity, neither does that correspond to the legislative formulation adopted. The attempt to justify the solution literally enshrined in no. 2 of Article 135-B of the CIMI by simply saying that a building plot is not yet being used for a productive activity, unlike what normally occurs with an urban property dedicated to commerce, industry and services, does not prove sufficient. Even properties already built and dedicated to those purposes may not yet be being effectively used for economic activity, if we consider that the building may exist but still be in the commercialization phase.

30. In fact, both a building plot and a commercial, industrial or services building still in the commercialization phase are not yet in the effective service of a commercial, industrial or services activity, although that is the authorized or envisaged use. In truth, the legislature did not adopt a criterion of effective use or indispensability of properties to economic activity.

31. This difficulty in discerning a rational and constitutionally adequate criterion underlying the legislative choice is expressly recognized by some arbitral jurisprudence, when it says that "the reasons that may underlie the distinction, for purposes of AIMI taxation, between the patrimonial values of properties classified as residential or building plots (regardless of their effective designation for those purposes) and those of urban properties having other classifications do not explicitly result from the Report on the 2017 Budget nor from its parliamentary discussion, in the face of Article 6 of the CIMI.[18]"

32. In this domain, the legislature used only a formalistic distinction, without regard to the socioeconomic substance and the fiscal relevance of the property's designation as a measurable indicator of each passive subject's contributive capacity. It gave primacy to form over substance, differently from what is generally advocated in fiscal matters, where the principle of primacy of substance over form applies. In accordance with the literal solution, enterprises that already contribute indirectly to social security via the single social rate of workers may not be taxed in AIMI by being owners of properties dedicated to the commercial, industrial or services activity, even if they reflect the existence of significant contributive capacity, whereas other enterprises may be taxed for building plots licensed for these activities, although they have significantly lesser contributive capacity.

33. The unsuitability of building plots to provide a satisfactory indicator of the contributive capacity of their owners was noted by the Constitutional Court in its Decision no. 250/2017, of 24 May, when it stated that "behind the tax imposed on the owner of a building plot will normally be an entrepreneur, usually in the form of a commercial company dedicated to real property development, about whose economic force we know nothing. In fact, we cannot presume that such taxpayer has economic force proportional to the value of the plot, which is merely instrumental in relation to their economic activity. We do not know what margin of profit they will derive from its exercise, if they are in the legal and economic conditions to develop it, or whether they may not even have a negative net situation."

34. This reality is particularly relevant, moreover, from the standpoint of the constitutional principle according to which the taxation of enterprises falls fundamentally on their actual income (Article 104, no. 2 of the CRP) and the legal imperative that taxes should "be based essentially on contributive capacity" revealed, namely, through income or property (Article 4, no. 1 of the LGT). Although the expressions "fundamentally" and "essentially" point to some flexibility in the understanding of the rules under analysis, the truth is that, in the ownership of enterprises, building plots "constitute assets intended to be transacted, not being indicative of contributive capacity but a necessary condition for the exercise of economic activity, just as occurs with a company that is the holder of goods of another type, which it holds for trade within its activity".[19] It is often there, not of income or property, but of factors of production economically oriented toward the generation of income[20]. Even if it is understood that this does not result in an absolute prohibition on the application of AIMI to some sectors of economic activity, there must nevertheless result special care — in the field of rationality, equality, proportionality and consideration of contributive capacity — in the delimitation and definition of its rules of scope and rates.

35. On the other hand, if contributive capacity is determined by the value of property, it is not clear why properties of equal value (e.g. 200,000 €) can be treated so differently fiscally (e.g. a building plot intended for commerce will be subject to AIMI and an urban commercial property will be excluded from AIMI) whereas other properties of such distinct value (e.g. two urban properties dedicated to commercial activity, one valued at 200,000 € and another at 2,000,000 €) can be treated in the same fiscal manner, paying no AIMI whatsoever. Such a result will hardly be plausible from the standpoint of the principles of tax equality, contributive capacity, proportionality and prohibition of excess, being resistant to a materially convincing justification in light of a constitutionally adequate understanding of the unity, coherence and justice of the tax system[21].

36. Being, within AIMI, the taxable event chosen as an indication of contributive capacity the ownership of real property assets of value considered high, it is entirely incoherent, from the standpoint of the justice of the system, not to apply the tax to buildings intended for commerce, industry or services and to apply it to the plots intended for their construction, whose value is incorporated in the value of the buildings. In fact, in the understanding of this tribunal, it is not sufficient to assert the existence of a minimum of sufficient material foundation to distinguish between building plots and already-constructed buildings dedicated to commercial, industrial or services purposes, nor is it sufficient to discern the substantial difference between them in the fact that the latter are capable of being, or being immediately dedicated to, the activities to which they are intended, unlike the former. Material respect for the constitutional principles of tax equality and contributive capacity requires, beyond that, that the difference in fiscal treatment be proportional to the material-factual and economic differences existing between the two types of properties.

37. From the standpoint of the unity of the legal system (Article 9, no. 1, of the Civil Code), which has decisive hermeneutical and methodological value, by force of the principle of axiological or value coherence of the legal order — shaped by the principles of tax equality, horizontal equity and contributive capacity — the exclusion provided for in no. 2 of Article 135-B of the CIMI concerning urban properties classified as commerce, industry and services should be interpreted extensively as expressing an objective legislative intention to exclude from taxation also the plots intended for the construction of such properties.

38. This line of orientation has the merit of recognizing the parametric character of the constitutional principles of tax equality, horizontal equity and consideration of contributive capacity. In accordance with the same, the categorical classifications employed by the legislature in the delimitation of the subjective and objective scope of taxes must be rationally adequate, necessary and proportional relative to the constitutionally legitimate purposes pursued by it, and the differentiations operated among taxpayers and properties must correspond, in proportional terms, to the factual differences existing in the field of contributive capacity. This point is especially important given the intrusive and ablative intensity of tax law.

3.4.3. Application of the Approach Adopted to the Concrete Case

1. The concrete case allows one to observe the effects to which a literal interpretation of Article 135-B, no. 2 of the CIMI would lead. Enterprises, such as the Claimant, that are owners of building plots intended for the construction of leisure and sports equipment and valued with the classification coefficient of "services", it not being possible to assign it any other purpose by force of the approved and licensed subdivision and as expressly stated in the licensing permit, will not only have practical difficulty in succeeding in selling the property — which in itself is already economically equivalent to bearing a property tax — but are additionally burdened in relation to the generality of enterprises, under the pretext of a supposed contributive capacity, in reality merely presumed and apparent, as recognized by the Constitutional Court itself.

2. The Claimant states that it holds as its only asset related to its economic activity the plot in question, which it has attempted to sell without any success, bearing the costs inherent to its ownership, namely the IMI, through the contributions of its shareholders, given that it derives no income from the asset it possesses, being a building plot without any profitability as such, and with a "services" designation that deprives it of the majority of its marketing potential. Any enterprise in a similar situation, facing liquidity problems and forced into liquidation, will certainly be an example of lesser contributive capacity than that evidenced by another enterprise that is the owner of a property dedicated to commercial, industrial or services activity that is being effectively used for productive economic activity.

3. Having regard to the concrete case, but without ceasing to consider the repercussions in identical cases, this tribunal understands that the arbitral jurisprudential approach, endorsed in a considerable number of cases, in the sense of the extensive interpretation of the exclusion provided for in no. 2 of Article 135-B of the CIMI concerning urban properties classified as commerce, industry and services — as expressing an objective legislative intention to also exclude from taxation the plots intended for the construction of properties intended for the same purposes — is the one that best expresses the principle of interpretation of laws in conformity with the Constitution, in the sense that, faced with various possible interpretations, and within a framework of reasonable and proportional weighing of interests, it allows for the realization of constitutional principles, prevents their hermeneutical and methodological denaturing and dissolution, promotes the legislature's purpose of broadening the sources of social security financing with reduction of AIMI's impact on economic activity and attends to the differentiated contributive capacity of the owners of different types of urban properties, properly indicated.

4. For the reasons stated, this tribunal concludes that the exclusion provided for in no. 2 of Article 135-B of the CIMI concerning urban properties classified as commerce, industry and services should be interpreted extensively as expressing an objective legislative intention to also exclude from taxation the plots intended for the construction of properties with the same designation.

3.5. Request for Restitution of Amount Paid and Compensatory Interest

1. The Claimant submits a request for restitution of the amounts collected by the Tax and Customs Authority, as well as for the payment of compensatory interest. Pursuant to the provision in paragraph b) of Article 24 of the RJAT, the arbitral decision on the merits of the claim from which no appeal or challenge is available binds the Tax Administration from the end of the period provided for appeal or challenge, with this authority, in the exact terms of the merits of the arbitral decision in favor of the passive subject and until the end of the period provided for the spontaneous execution of decisions of the tax courts, «re-establish the situation that would exist if the tax act that is the subject of the arbitral decision had not been performed, adopting the necessary acts and operations for that purpose», in accordance with what is provided in Article 100 of the LGT [applicable by force of the provision in paragraph a) of no. 1 of Article 29 of the RJAT] which establishes that «the tax administration is obliged, in case of total or partial merit of complaint, judicial challenge or appeal in favor of the passive subject, to the immediate and full re-establishment of the legality of the act or situation that is the object of the dispute, including the payment of compensatory interest, if applicable, from the end of the execution period of the decision».

2. Notwithstanding the fact that Article 2, no. 1, paragraphs a) and b), of the RJAT uses the expression «declaration of illegality» to define the competence of the arbitral tribunals functioning in the CAAD, making no reference to condemnatory decisions, it has long been understood that this includes the powers that in judicial challenge proceedings are attributed to tax courts, this being the interpretation that aligns with the sense of the legislative authorization upon which the Government based itself to approve the RJAT, in which it proclaims, as the first guideline, that «the tax arbitral process should constitute an alternative procedural means to judicial challenge proceedings and to the action for the recognition of a right or legitimate interest in tax matters».

3. Although it is essentially a process of annulment of tax acts, the challenge process does admit condemnation of the Tax Administration in the payment of compensatory interest, as is evident from Article 43, no. 1, of the LGT, where it is established that «compensatory interest is due when it is determined, in amicable settlement or judicial challenge, that there was error attributable to the services from which resulted payment of the tax debt in an amount greater than legally due» and Article 61, no. 4 of the CPPT (in the wording given by Law no. 55-A/2010, of 31 December, to which corresponds no. 2 in the original wording), which «if the decision recognizing the right to compensatory interest is judicial, the period for payment is counted from the beginning of the spontaneous execution period».

4. Thus, no. 5 of Article 24 of the RJAT, in saying that «payment of interest, regardless of its nature, is due in accordance with what is provided for in the general tax law and the Tax Procedure and Process Code», should be understood as permitting the recognition of the right to compensatory interest in arbitral proceedings. This understanding flows from the principle of effective jurisdictional protection and the corresponding expansion of the powers shaping administrative and tax jurisdiction. For this reason, the Claimant has the right to be reimbursed for the tax paid and compensatory interest by force of the aforementioned Articles 24, no. 1, paragraph b), of the RJAT and 100 of the LGT, for this is essential to «re-establish the situation that would exist if the tax act that is the subject of the arbitral decision had not been performed».

5. In this case, the illegality of the assessment does not result from unconstitutionality, but rather from the interpretation that should be made of no. 2 of Article 135-B and no. 3 of Article 135-C of the CIMI, with the argument of the absence of right to compensatory interest in cases in which the illegality of the assessment derives from unconstitutionality having no application here. The illegality of this assessment is attributable to the TA, as it issued it on its own initiative, with erroneous interpretation of the law. Consequently, the Claimant has the right to compensatory interest, pursuant to Articles 43, no. 1, of the LGT and 61 of the CPPT, regarding the amount to be reimbursed. Compensatory interest is due from the date the Claimant made payment until full payment of the amount that should be reimbursed, at the legal default rate, pursuant to Articles 43, no. 4, and 35, no. 10, of the LGT, Article 61 of the CPPT, Article 559 of the Civil Code and Ordinance no. 291/2003, of 8 April.

DECISION

In light of the foregoing, this Arbitral Tribunal hereby decides:

• To declare the illegality of the tax assessment act of AIMI no. ..., issued by the Tax and Customs Authority, under no. 1 of Article 135-G of the CIMI, proceeding, consequently, to its annulment, as it suffers from error in both factual and legal prerequisites;

• To judge as meritorious the request for restitution to the Claimant of the amount of 829.04 €, paid regarding assessment no. ..., as well as the request for compensatory interest, and to condemn the Tax and Customs Authority to pay to the Claimant that amount plus compensatory interest thereon calculated at the legal rate, from the date of payment until the issuance of the respective credit note.

VALUE OF THE PROCEEDINGS

The value of the proceedings is fixed at 829.04 €, in accordance with Article 306, no. 1 of the Code of Civil Procedure and Article 97-A, no. 1, a), of the Tax Procedure and Process Code, applicable by force of paragraphs a) and b) of no. 1 of Article 29 of the RJAT and no. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

COSTS

The value of the arbitration fee charged to the Respondent is fixed at €306.00 in accordance with Articles 12, no. 2, and 22, no. 4, both of the RJAT, and Article 4, no. 4, of the Regulation of Costs in Tax Arbitration Proceedings and Table I attached thereto.

Let notice be given.

Lisbon, 11 April 2019

The Arbitrator

Jónatas Machado