Summary
Full Decision
ARBITRAL DECISION
I - Report
1. A... S.A., legal entity no. ..., with registered office at ... no. ..., ... ..., ...-... Carnaxide (hereinafter referred to as "Claimant"), filed, on 29-10-2018, a request for arbitral pronouncement, pursuant to article 2, no. 1, subparagraph a) and article 10, nos. 1 and 2 of the Legal Framework for Tax Arbitration, provided for in Decree-Law no. 10/2011, of 20 January, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter abbreviated as "RJAT") and articles 1 and 2 of Ministerial Order no. 112-A/2011, of 22 March.
2. The Claimant seeks the pronouncement of the Arbitral Tribunal with a view to annulling the assessment act for the Additional Municipal Property Tax ("AIMI") no. 2017..., relating to the year 2017, in the amount of €10,726.19 (ten thousand seven hundred and twenty-six euros and nineteen cents), and likewise the administrative order issued by the Head of the Finance Service Porto ... which dismissed the administrative appeal no. ...2018..., on 24-07-2018, concerning the aforementioned assessment act.
3. The Tax and Customs Authority (hereinafter referred to as "Respondent") is the defendant.
4. The request for establishment of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority, on 30-10-2018.
5. Pursuant to subparagraph a) of no. 2 of article 6 and subparagraph b) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council of CAAD designated as arbitrator of the singular arbitral tribunal His Excellency Dr. Olívio Mota Amador who, within the applicable period, communicated acceptance of the appointment.
6. The Claimant was notified, on 18-12-2018, of the designation of the arbitrator and did not express any intention to refuse the designation, in accordance with the combined provisions of article 11, no. 1, subparagraphs a) and b) of the RJAT and articles 6 and 7 of the Code of Ethics.
7. In accordance with the provision of subparagraph c) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Arbitral Tribunal was constituted on 09-01-2019.
8. The Respondent, duly notified through the arbitral order of 11-01-2019, filed its Response on 12-02-2019.
9. The Arbitral Tribunal, by order of 13-02-2019, determined: (i) to waive the holding of the meeting provided for in article 18 of the RJAT, considering that no exceptions were raised nor is there evidence to be produced; (ii) should the parties wish to submit written pleadings, these shall be produced within 10 days, successively, from notification of this order; (iii) to set 25 March 2019 as the deadline for issuance of the arbitral decision.
10. The Claimant and the Respondent did not submit any pleadings.
11. The Arbitral Tribunal, through order of 25-03-2019, extended to 29-04-2019 the deadline for issuance of the arbitral decision.
12. The position of the Claimant, in accordance with the provisions of the request for establishment of the Arbitral Tribunal, is, in summary, as follows:
12.1. The Claimant cannot accept that the AT, through the assessment act now in question, applied AIMI to the real estate property held by it, as it is evident that the legislative rationale underlying the rule for exclusion of objective scope of application, enshrined in no. 2 of article 135-B of the Property Tax Code, was essentially based on the intention not to impose excessive tax burdens on taxpayers who, by virtue of their economic activities, hold real estate for the pursuit of their corporate purpose.
12.2. In fact, to tax such properties would mean to tax directly an "economic activity" – something that the legislature expressly intended to avoid by creating AIMI. Thus, it is demonstrated that the AIMI assessment sub judice, issued with respect to the property held by the Claimant, appears to be manifestly unlawful, due to errors in the factual and legal assumptions, and must be promptly annulled, with all legal effects.
12.3. As a subsidiary argument, it is important to note that the assessment sub judice includes the taxation of a property which, by its nature, cannot be covered by the scope of objective application of the rules under analysis. In fact, for the calculation of the AIMI (allegedly) owed by the Claimant, the AT counted, for purposes of determining the tax base value of this tax, the value of a "land for construction" intended for the erection of buildings for those purposes – which cannot be accepted.
12.4. The taxation methodology adopted by the AT, in the sense of including in the taxable value for purposes of AIMI the taxpayers holding "land for construction" with the purposes identified by no. 2 of article 135-B of the Property Tax Code, constitutes discriminatory treatment that violates the principle of equality, constitutionally enshrined in articles 13 and 104, no. 3, of the Constitution and in articles 5 and 55 of the General Tax Law.
12.5. As a subsidiary argument and without prejudice to what has been stated above, the Claimant considers that the AIMI taxation regime is contrary to the fundamental principle of equality, enshrined in article 13 of the Constitution and, in parallel, contrary to the principle of fiscal equality and tax capacity enshrined in article 104, no. 3, of the same instrument.
12.6. It is also important to refer in the analysis of the AIMI regime to the repealed item 28 of the General Stamp Tax Table (TGIS) and the constitutional case law pronounced on the same, namely Constitutional Court Decision no. 250/2017, of 24 May 2017, delivered in case no. 156/20. Now, according to the Constitutional Court, taxation under Stamp Tax of land for construction violates the principle of tax equality enshrined in articles 13 and 104 no. 3 of the Constitution. Notwithstanding the structural differences, the truth is that the similarities between the repealed item 28 of the TGIS and the legal regime of AIMI are abundantly evident. Wherefore also from this perspective it is demonstrated that the application of AIMI to "land for construction" of entities that promote economic activities implies a differentiated treatment and an unjustified inequality among taxpayers, in clear violation of the principle of fiscal equality and tax capacity, enshrined in articles 13 and 104, no. 3, of the Constitution.
12.7. As this assessment appears to be manifestly unlawful, the Claimant must be fully reimbursed for the amount of AIMI assessed on the basis thereof, inasmuch as it was not due.
12.8. The Claimant also requests that compensatory interest be paid for the delay in receiving the requested reimbursement, in accordance with the provisions of articles 43 and 100 of the General Tax Law.
13. The position of the Respondent, expressed in its response, may be summarized as follows:
13.1. The taxation embodied in AIMI amounts to a specific levy on property (cf. article 4, no. 1 of the General Tax Law) and not on income. Like any tax on property, AIMI is dissociated from any eventual profit-making through the sale of real estate, as well as from the existence or non-existence of a negative or positive net position, with only the patrimonial value of the land being relevant to the tax base.
13.2. Land for construction is not merely instrumental to the exercise of economic activity; rather, it forms part of the very core of the economic activity, with intrinsic economic value and, normally, quotation in the real estate market, i.e., it can be sold, exchanged, pledged as collateral for obligations and obviously evidences a certain economic capacity. In fact, land for construction does not reduce to mere construction rights, or things to come, and all of them are autonomous assets which, even by their natural scarcity, always have intrinsic economic value and, normally, quotation in the real estate market, i.e., they can be sold, exchanged, pledged as collateral for obligations.
13.3. The holding of high-value real estate, regardless of whether or not it is dedicated to economic activity, tends to reveal high tax capacity. Thus, it is not apparent that the taxation of the Claimant's real estate property violates the principle of fiscal equality and tax capacity merely because the ownership of real estate constitutes the very object of its economic activity.
13.4. In sum, it does not appear that the application of AIMI to properties owned by companies that carry out their activity in the real estate sector, notably land for construction acquired with the intention of promoting thereon buildings intended for sale, is discriminatory or that these companies should merit more favorable treatment than that granted to the generality of urban property owners.
13.5. On this matter, the Arbitral Tribunal has already pronounced extensively, namely in the context of proceedings nos. 664/1017-T, 676/2017-T, 678/2017-T, 682/2017-T, 683/2017-T, 684/2017-T 690/2017-T, 6/2018-T, 310/2018-T, 324/2018-T, 401/2017-T and 420/2018-T. In accordance with the cited case law, to which it fully adheres, it is concluded that the ownership of high-value real estate by a natural person or by a legal person (whether a real estate company, real estate fund or other) evidences, as in relation to any owner of property intended for housing, a special economic capacity to be able to contribute additionally to the Financial Stabilization Fund of Social Security, to which the AIMI revenue is assigned.
13.6. In sum, AIMI applies to real estate property that has the characteristics indicated in article 135-B of the Property Tax Code, that is, subjecting any and all entity that is holder of real rights over urban property according to objective reality and not merely potential reality at the moment of verification of the tax act.
13.7. Regarding the alleged parallelism between Item 28.1 of the TGIS and AIMI, it must be noted that the current understanding of the Constitutional Court, contained in Decision no. 378/2018, is contrary to what is alleged by the Claimant, because the Constitutional Court came to understand that there is no unconstitutionality of item 28 of the TGIS. In light of this decision by the Constitutional Court, the entire argument of the Claimant in attempting to attribute any non-conformity of AIMI with the fundamental law has no legal support whatsoever.
13.8. With regard to the payment of compensatory interest, provided for in article 43 of the General Tax Law, it is considered that the impugned acts are not affected by any defect that determines their annulment. It thus follows, in accordance with the consolidated doctrine of higher courts, that should it be decided that the impugned act is unlawful, compensatory interest is not due, in accordance with article 43 of the General Tax Law.
II - Procedural Matters
14. The parties have standing and legal capacity, are shown to be proper parties and are regularly represented (articles 4 and 10, no. 2, of the RJAT and article 1 of Ministerial Order no. 112-A/2011, of 22 March).
15. The tribunal is competent and properly constituted.
16. No exceptions have been raised that require consideration.
17. There are no nullities nor any other circumstances that prevent consideration of the merits of the case.
18. In these terms, the Arbitral Tribunal is properly constituted to hear and decide the subject matter of the proceedings.
III - Merits
III.1. Factual Matters
19. Established Facts
19.1. With relevance to the consideration and decision of the questions raised, the following facts are taken as established and proven:
The Claimant is a joint-stock company whose corporate purpose is to undertake real estate development projects, namely the purchase, sale, construction, reconstruction, urbanization, promotion and leasing of its own and third-party properties, including the resale of those acquired for that purpose.
The Claimant is the owner of the urban property registered in the land register under article ..., described in the Urban Property Register as land for construction, with a Patrimonial Tax Value of €2,681,547.15, located at ..., Municipal Union of ..., ... and ..., municipality of Porto.
The Claimant was notified by the AT of the assessment of AIMI, under no. 2017..., for the year 2017, made on 30-06-2017, with respect to the property identified in the preceding item, in the amount of €10,726.19.
The Claimant filed, on 26-09-2017, an administrative appeal against the assessment identified in the preceding item, which received no. ...2018....
The Claimant was notified, through official letter from the Finance Service Porto ..., of 12-02-2018, to exercise its right to prior hearing, in accordance with article 60, no. 1, subparagraph b) of the General Tax Law, but did not do so.
The administrative appeal identified in item D) was dismissed by order of 24-07-2018, issued by the Head of Finance Service and notified to the Claimant through official letter from the Finance Service Porto ..., dated 30-07-2018.
19.2. Substantiation of Factual Matters
With respect to factual matters, taking into account the provisions of article 123, no. 2, of the Administrative Court of First Instance Rules of Procedure and article 607, no. 3, of the Code of Civil Procedure (CPC), applicable pursuant to article 29, no. 1, subparagraphs a) and e), of the RJAT, the Tribunal need not pronounce on everything that was alleged by the parties, it being incumbent upon it to select the facts that matter for the decision and to distinguish proven from unproven matters.
Thus, in accordance with article 596 of the Code of Civil Procedure (CPC), applicable pursuant to article 29, no. 1, subparagraph e), of the RJAT, the facts relevant to the judgment of the case were selected and determined in function of their legal relevance, which was established taking into account the legal questions raised.
Having regard to the positions taken by the parties, in light of article 110, no. 7, of the Administrative Court of First Instance Rules of Procedure, the documentary evidence and the Administrative File, attached to the proceedings, the facts listed above were considered proven, with relevance to the decision.
III.2. Legal Matters
20. The main questions raised by the Claimant in the present proceedings are: i) Are land for construction dedicated to an economic activity or are they not covered by the exclusion rule of no. 2 of article 135-B of the Property Tax Code; ii) Is AIMI or is it not contrary to the constitutional principles of equality and tax capacity: iii) Does the inclusion of land for construction within the scope of application of AIMI or does it not contradict the principle of equality constitutionally established; iv) Does the application of AIMI, should it include entities that develop real estate activity, promote or does it not promote differentiated treatment and unjustified inequality between taxpayers in manifest violation of the principles of fiscal equality and tax capacity established in the Constitution.
It is necessary to examine this.
21. It is important to begin by noting that Law no. 42/2016, of 28 December, State Budget Law for 2017, introduced the Additional Municipal Property Tax ("AIMI"), which entered into force on the date of that law, that is, 1 January 2017.
The regulation of AIMI was added to the Property Tax Code through chapter XV, entitled "Additional Municipal Property Tax", comprising articles 135-A to 135-K[1].
Numbers 1 and 3 of article 135-A of the Property Tax Code establish that the taxpayers of AIMI are "natural or legal persons who are owners, usufructuaries or holders of the surface right of urban property situated in Portuguese territory" on 1 January of the year to which the aforementioned Additional relates.
Number 2 of the same article provides that: "are equated to legal persons any structures or centers of collective interests without legal personality that appear in the registers as taxpayers of the municipal property tax, as well as the undivided succession represented by the head of household".
AIMI applies, in accordance with no. 1 of article 135-B of the Property Tax Code, "to the sum of the patrimonial tax values of the urban properties situated in Portuguese territory of which the taxpayer is the owner" – with this sum being subject to the deduction of the amount of €600,000 whenever the taxpayer is a natural person or an undivided succession.
Excluded from the objective scope of application of AIMI are "urban properties classified as 'commercial, industrial or for services' and 'other' in accordance with subparagraphs b) and d) of no. 1 of article 6 of this Code", as provided in no. 2 of article 135-B of the Property Tax Code.
The applicable rate is 0.4% for legal persons and 0.7% for natural persons and undivided successions, provided that the taxable value does not exceed €1,000,000, in accordance with no. 1 of article 135-F of the Property Tax Code, and in cases where the taxable value exceeds €1,000,000, a rate of 1% applies when the taxpayer is a natural person.
Pursuant to no. 1 of article 135-G and article 135-H of the Property Tax Code, AIMI is assessed annually, in the month of June, based on the patrimonial tax values of properties subject to tax and in relation to taxpayers appearing in the registers on 1 January of each year, and must be paid by the end of the month of September.
22. The legislature, in the negative delimitation of the scope of application of AIMI, refers to the typology of properties, in accordance with the classification attributed to them by the Property Tax Code.
In this respect, it is useful to cite the Arbitral Decision of 04-05-2018, delivered in proceedings no. 675/2017-T, with which we agree, when it states:
"If the final legislative intent to exclude the application to properties directly dedicated to the functioning of legal persons had been maintained in the final text of the Budget, the reference to this dedication that appeared in the proposal and clearly expressed this legislative option would certainly have been maintained. Thus, as this reference to the dedication of properties has been deleted, there is no legal support to conclude that residential properties and land for construction dedicated to the functioning of legal persons are not relevant to the scope of application of AIMI." And it adds "(…) in light of the departure from the proposed text in which relevance was given to the dedication of properties, there is no reason to conclude that the legislature did not know how to express its thinking in adequate terms, as must be presumed, by virtue of the provision of article 9, no. 3, of the Civil Code."
In these terms, we understand that the position according to which the legislature intended to exclude land for construction from the scope of application of AIMI in order not to impose excessive tax burdens on taxpayers who possess this type of property by virtue of their corporate purpose, has no support in the language of the law.
For the legislature, the relevant criterion, within its margin of discretion, was the classification of properties in accordance with article 6 of the Property Tax Code and not their dedication to the economic activity of taxpayers.
Having the legislature defined an exclusion clause by express reference to certain species of urban properties, which are defined in law, it is not possible to make an extensive interpretation to include other typologies that the legislature did not contemplate.
On this issue, this Tribunal agrees with the position adopted in the Arbitral Decision of 16-07-2018, delivered in proceedings no. 676/2017-T, when it states:
"The exclusion from the tax thus covers properties classified as commercial, industrial or for services, being understood as such the buildings or constructions licensed for these purposes or that have as their normal purpose each of these ends. It also encompasses the residual species referred to in subparagraph d) of no. 1 of that article 6, including therein lands situated within or outside an urban agglomeration that are neither land for construction nor rural property, and also buildings and constructions that do not fit into any of the previous classifications. The scope of objective application, by virtue of the reference to that article 6, was thus defined not only by reference to a certain species of urban property, but also by reference to the administrative procedure through which the classification was made, or, in the absence of a license, to the normal purpose of those properties for commercial, industrial, services or other purposes."
Notwithstanding reasons of tax policy that could justify conferring on land for construction, intended for buildings for commercial, industrial or services purposes, the same status as properties classified as "commercial, industrial or for services", this was not the legislative option. Consequently, the fact that the Claimant is the owner of the land for construction identified in the proceedings, as the substrate of its economic activity, does not preclude the application of AIMI.
23. The questions of constitutionality raised in the present proceedings have already been analyzed by various arbitral decisions in a sense contrary to that defended by the Claimant, notably by the arbitral decision of 06-09-2018, delivered in proceedings no. 690/2017-T, which the arbitrator of the present proceedings endorsed in the capacity of member of the Collective Arbitral Tribunal.
24. Regarding the alleged unconstitutionality resulting from the discrimination contained in the rule of no. 2 of article 135-B of the Property Tax Code, with respect to land for construction as opposed to properties classified as commercial, industrial or for services, which are excluded from taxation by virtue of that rule, it is important to emphasize that we are dealing with different tax events that constitute different situations. It is possible to discern a sufficient material foundation that allows the legislature to distinguish, for purposes of taxation of property, between these different tax events.
Thus, the law subjects to taxation urbanizable land that constitutes an economic asset due to its aptitude for construction. Thus, land for construction has its own patrimonial value which constitutes an indicator of tax capacity independent of its eventual and future use in the context of construction.
While the law excludes from the tax the built property that has an instrumental function with respect to productive activity. Built property that is classified as commercial, industrial or services property already has an instrumental function with respect to a certain productive activity that the legislature intended to safeguard, within its margin of free discretion.
In sum, there is a sufficient material foundation to establish the differentiated treatment, in line with the regime legally enshrined.
In developing this position, the Arbitral Decision of 04-05-2018, delivered in proceedings no. 675/2017-T, pertinently states the following:
"the ownership of high-value real estate evidences, as in relation to any owner of property intended for housing, a special economic capacity to be able to contribute additionally to the Financial Stabilization Fund of Social Security, to which the AIMI revenue is assigned, and which 'corresponds to the objective of the government's program of broadening the financing base of Social Security' (Report on the 2017 Budget, page 57). Therefore, the imposition on the generality of holders of residential properties or land for construction of residential buildings does not appear to be materially unconstitutional, in light of the principles of equality and tax capacity."
Thus the alleged defects of unconstitutionality raised by the Claimant are found to be without merit.
25. The Claimant further invokes the similarity between Item no. 28 of the TGIS and the constitutional case law pronounced on the same, namely Constitutional Court Decision no. 250/2017, of 24 May 2017, and the configuration of AIMI. Thus, the Claimant seeks to demonstrate that AIMI suffers from the same defects as that Item, particularly because, with respect to real estate essential in obtaining income in the context of economic activity, it lacks identical substantiation on the tax plane.
However, the Plenary of the Constitutional Court, through Decision no. 378/2018, of 04-07-2018, found Item 28.1 of the TGIS not unconstitutional, approved by Law no. 55-A/2012, of 29 October, and amended by Law no. 83-C/2013, of 31 December, in the part that imposes annual taxation on the ownership of land for construction whose building, authorized or planned, is for housing and whose patrimonial tax value is equal to or greater than €1,000,000.00.
Pursuant to article 2 of Law no. 28/82, of 15 November, "the decisions of the Constitutional Court are binding on all public and private entities and prevail over those of the remaining courts and any other authorities".
Thus, based on the decision by the Constitutional Court in Decision no. 378/2018, it must be concluded that the assessments by the Tax and Customs Authority that applied Item no. 28 of the TGIS to land for construction, under the conditions referred to, are not affected by the defects of unconstitutionality that had been attributed to them.
In this way and given the foregoing, it is considered appropriate to reject, on this point, what is alleged by the Claimant.
26. As the annulment of the tax act relating to the AIMI assessment for the above-identified property is without merit, the requests made by the Claimant for annulment of the decision dismissing the administrative appeal, as well as reimbursement of the amount paid and payment of compensatory interest, are likewise rendered moot.
IV – Decision
In view of the foregoing, the Arbitral Tribunal hereby decides:
a) To find unmeritorious the request for arbitral pronouncement for annulment of the AIMI assessment, relating to the tax year 2017, with respect to the above-identified property;
b) To uphold the decision dismissing the administrative appeal;
c) To find unmeritorious the request for reimbursement of the amount paid by the Claimant plus compensatory interest, inasmuch as this request is rendered moot by the lack of merit of the arbitral request referred to in a), relieving the Respondent of the respective claim;
d) To condemn the Claimant to pay the costs of the present proceedings.
V - Value of the Proceedings
Having regard to the provisions of articles 32 of the Administrative Court of First Instance Rules of Procedure, 306, no. 2, of the Code of Civil Procedure and 97-A of the Administrative Court of First Instance Rules of Procedure, applicable by virtue of article 29, no. 1, subparagraphs a) and b), of the RJAT, and article 3, no. 2, of the Regulations on Costs in Tax Arbitration Proceedings (RCPAT), the value of the proceedings is set at €10,726.19 (ten thousand seven hundred and twenty-six euros and nineteen cents).
VI - Costs
The amount of costs is set at €918.00 (nine hundred and eighteen euros) to be borne by the Claimant, in accordance with Table I of the RCPAT, in compliance with articles 12, no. 2, and 22, no. 4, both of the RJAT, as well as article 4, no. 4, of the RCPAT.
Let notice be given.
Lisbon, Administrative Arbitration Center, 17 April 2019
The Arbitrator
(Olívio Mota Amador)
[1] Subsequently, Law no. 114/2017, of 29 December, added articles 135-L and 135-M.
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