Process: 557/2018-T

Date: June 30, 2019

Tax Type: IMI

Source: Original CAAD Decision

Summary

CAAD arbitration case 557/2018-T addressed whether AIMI (Additional Municipal Property Tax) constitutionally applies to construction land held as inventory by real estate development companies. The claimant, a real estate company, challenged the 2017 AIMI assessment on construction plots registered as inventory and essential to its business activity. The company argued AIMI violates constitutional principles of equality, proportionality, and contributive capacity when applied to properties used for income-generating economic activities rather than wealth accumulation. The claimant contended AIMI was designed to tax accumulation of high-value residential property, not business assets, citing parallels to the previous Item 28 Stamp Tax regime which judicial precedent had limited. The company highlighted discriminatory treatment: while land for construction faces AIMI, commercial/industrial properties are exempt, despite both serving economic purposes. The Tax Authority countered that legislative choices in Articles 135º-A and 135º-B of the IMI Code clearly include construction land and residential properties regardless of owner type or intended use, with classification under Article 6º of the IMI Code being the sole relevant criterion. This case represents typical constitutional challenges by real estate developers arguing AIMI taxation on business inventory violates fundamental tax principles when properties generate taxable income rather than manifesting wealth accumulation warranting additional taxation.

Full Decision

ARBITRAL DECISION

I – REPORT

  1. A..., SA, legal entity no. ..., with registered office at ..., ..., ...-... ..., filed on 12-11-2018 a request for establishment of an arbitral tribunal, in accordance with Articles 2º and 10º of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to as RJAT), in conjunction with Article 102º of the Tax Procedure Code (CPPT), in which the Tax and Customs Authority (hereinafter referred to as the Respondent, or ATA) is required.

  2. The Claimant seeks, with its request, a declaration of illegality of the tax assessment act for the Additional Municipal Property Tax – AIMI – no. 2017-... for the year 2017, as well as the rejection of the administrative appeal to which the number ...2018... was assigned.

  3. 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 13-11-2018.

3.1. The Claimant did not proceed with the appointment of an arbitrator, and therefore, pursuant to the provision of paragraph a) of Article 6º, paragraph 2, and paragraph b) of Article 11º, paragraph 1, of the RJAT, the President of the Deontological Council appointed the undersigned as arbitrator of the arbitral tribunal, who communicated acceptance of the appointment within the respective deadline.

3.2. On 03-01-2019 the parties were notified of the appointment of the arbitrator, with no objection being raised.

3.3. In accordance with the provision of paragraph c) of Article 11º, paragraph 1, of the RJAT, the arbitral tribunal was constituted on 23-01-2019.

3.4. Accordingly, the Arbitral Tribunal is properly constituted to hear and decide on the subject matter of the proceedings.

  1. To support its request for arbitral pronouncement, the Claimant alleges, in summary, the following:

The Claimant is a commercial company that conducts its activities in the real estate sector.

It is the owner of the urban properties mentioned in the contested assessment, land for construction, which are recorded on the claimant's books as inventory.

The claimant acquired such land with the aim of promoting construction on it to the extent of its financial capacity and according to market circumstances, and therefore such assets are intended exclusively for exploitation within its economic activity.

It paid the tax following the initiation of a tax enforcement process, but this does not entail implicit recognition of the legality of the tax assessment act.

With the entry into force of the State Budget Law for 2017, the AIMI was created, configured as a supplementary tax to the IMI, with the aim of taxing "the accumulation of residential real estate property of very high value".

With regard to the ratio legis of the AIMI, according to the State Budget Report for 2017, "the allocation of progressive taxation of real estate property to the Financial Stabilization Fund of Social Security corresponds to the objective of the government program to broaden the financing base of Social Security, while introducing a tax that falls on holders of larger real estate assets, reinforcing the overall progressivity of the system".

As provided in Article 135º-B, paragraph 2, of the IMI Code, it is found that the AIMI applies to properties with residential purpose, as well as land for construction, regardless of their purpose – insofar as they are not expressly listed in the negative scope definition rule.

The AIMI replaced the previous method of taxing "luxury real estate property", the rate of which was provided for in Item 28 of the General Table of Stamp Tax in the version given by Law no. 55-A/2012 and Law no. 83-C/2013. Although the AIMI was conceived to continue the taxation of luxury properties and to remedy many of the shortcomings that had been pointed out to Item 28 of Stamp Tax, its contours present several divergences from the initial regime.

Considering that the parallelism between Item 28 and the current configuration of the AIMI is undeniable, the Claimant intends to demonstrate that the AIMI suffers from the same defects as its predecessor – especially because, with regard to properties essential for obtaining income within the scope of economic activity, it lacks identical material support in the tax context.

It argues that in such cases, the AIMI violates the principle of equality, as manifested in its aspect of contributive capacity, in terms already advocated by arbitral and judicial case law when discussing Item 28, duly adapted to the characteristics of this new tax.

Moreover, it is clear and indisputable – as repeatedly reiterated by Arbitral and Judicial Case Law – that, with the said item, the legislator never intended to tax the ownership of land for construction.

Furthermore, the tax assessment act in question also materializes the violation of the most basic canons of equality, proportionality and contributive capacity. With regard to this principle, the Constitution itself, in the matter of taxation of assets, establishes a central orientation in paragraph 3 of Article 104º, when it provides that "Taxation of assets [as is the case with AIMI] must contribute to equality among citizens".

The properties held by the Claimant, and which are subject to taxation under the AIMI, are essential for obtaining income within its economic activity – themselves also subject to taxation, and therefore the assumption that ownership of such properties can constitute a manifestation of (or increased) contributive capacity that, in itself, should be subject to tax levy entirely fails.

With this tax, unequal treatment is given, without any material supporting basis, to companies owning properties intended for the exercise of an economic activity, compared to companies that, for the same reason, own properties classified as "commercial, industrial or for services" – which are exempt from AIMI.

There is no material basis whatsoever, minimally perceptible, rational and reasonable, to advocate a negative tax discrimination against companies owning properties used in the pursuit of their activity.

In light of the intended purpose of the rule, particularly when it points to the configuration of a supplementary tax to the IMI aimed at taxing "the accumulation of residential real estate property of very high value", through "a tax that falls on holders of larger real estate assets, reinforcing the overall progressivity of the system", it is evident the violation of the principle of proportionality.

Article 135º-B, paragraph 1, of the IMI Code should be disapplied by the Tribunal, given its material unconstitutionality on the aforementioned grounds, insofar as it applies to properties held by companies engaged in real estate activity, resulting in the annulment of the contested decision and assessment.

  1. The Tax and Customs Authority submitted a response, alleging in summary the following:

The arguments raised by the Claimant, in particular with invocation of decisions of the Constitutional Court, have no support whatsoever, in light of the various decisions subsequently issued by that Court.

The legislative choice enshrined in Articles 135º-A and 135º-B, of qualifying as taxable persons natural and legal persons and any structures or centers of collective interests without legal personality that are owners, usufructuaries or superficiaries of urban properties situated in Portuguese territory with the classification as "land for construction" or "buildings or constructions for residential purposes", inevitably brought, into the scope of taxation, entities engaged in economic activities.

The only criterion relevant to delimiting the scope of objective scope of application is solely the typology of classification of urban properties provided for in Article 6º, paragraph 1, of the IMI Code, to which paragraph 2 of Article 135º-B expressly refers, and therefore it has ceased to be an appropriate source for attempting to apprehend the real intentions of the AIMI legislator with respect to the taxation of properties held by entities engaged in business activity.

The ATA does not proceed with any unconstitutional interpretation of the rule, since it is not the ATA who decides to include in the AIMI taxation urban properties affected by economic activities (and in this fact no unconstitutionality is discerned, it should be said), but rather, because it is what results from Article 135º-B, paragraph 2, of the IMI Code, only urban properties classified as industrial, commercial or for services and others are not taxed.

Therefore, having the contested assessment been carried out in accordance with the law, there is no indication as to where the illegality of the decision issued by the ATA may reside.

Noting the teleology of the tax, it is interpreted that this tax aims, primarily, to reach a portion of the assets of the respective taxable persons of the tax, applying to movable assets that constitute part of an asset, legally recognizable as capital of a given entity (singular or collective), regardless of whether or not it is affected by any productive process or income-generating process.

However, the legislator chose in paragraph 2 of that rule a negative delimitation of scope, excluding from the AIMI properties which, by virtue of their potential use, can be economically recognized as production factors, in the form of capital, that is, as intermediate goods which, combined with other production factors, produce new utilities – economic goods that satisfy needs.

For this purpose, it resorted to a criterion that invokes the structure of typologies of urban property provided for in Article 6º of the IMI Code and which operates through the subtraction from the AIMI of urban properties that, as a result of the licensing of use declared by municipalities or, in its absence, of their normal purpose, are classified as typologies of paragraphs b) and d) of paragraph 1 of that rule. Thus, the universe of urban properties subject to the AIMI is determined by recourse to the remaining two typologies contained in Article 6º, paragraph 1, namely, residential urban properties and land for construction.

The tax under examination does not aim at generic taxation of assets. What is at issue is only a partial tax on certain manifestations of contributive capacity.

Since what is at issue is the establishment of partial taxation of the total assets of taxpayers, it is considered not to be normatively appropriate to make a comparison between the overall value of assets of other taxpayers.

The AIMI respects partial taxation of assets without specifically targeting companies, as it includes all kinds of taxable persons who are holders of the real rights stated over the properties in question, regardless of whether they assume a business character or not, thus encompassing, in addition to companies, foundations, associations, natural persons. Being, thus, unfeasible to invoke, considering the scope of application of the rule under examination, principles of strictly business purpose, since the taxation is directed at assets and not at those who hold them.

The constitutional principle of equality requires that what is necessarily equal be treated equally and what is essentially different be treated differently, not preventing, however, differentiation of treatment, but only arbitrary, unreasonable discriminations, i.e., distinctions of treatment that have no justification and sufficient material basis.

No unjustified differences in treatment between taxpayers contrary to those constitutional principles result from the rules established.

As to the application of the constitutional principles invoked, as well as that referred to regarding the ratio legis underlying Article 135º-B, paragraph 2, of the AIMI Code, it follows that, in light of the same, the choices inherent in the delimitation of the objective scope of the AIMI are made within the margin of "legislative discretion".

As for land for construction, these do not reduce to mere rights to build, of future things, and all of them are autonomous assets that, even by their natural scarcity, always have intrinsic economic value and normally have quotation in the real estate market, i.e., they can be sold, exchanged, pledged as security for obligations.

In the context of AIMI it makes no sense to invoke case law relating to Item 28.1 of the General Stamp Tax Table, because the AIMI ignores the potential use of land for construction, and because it applies indistinctly based on the quality of the taxable person as long as they are holders of real rights over urban properties covered by Article 135º-B of the IMI Code.

Contrary to what the Claimant intends, it is understood that it is not possible to configure the unconstitutionality of a fiscal rule based simply on the fact that it has significant influence on the economic decisions of taxpayers – by nature, this is a typical effect of tax rules.

The legislator of the AIMI, in consideration of the extrafiscal purposes pursued, safeguarded from taxation urban properties that constitute the support for the performance of industrial, commercial and service economic activities, that is, those that are held for use in the production or supply of goods and services, in order to avoid negatively influencing economic development and the competitiveness of national companies.

In that manner, it did not extend the exclusion from the scope of application of the AIMI to "land for construction" and "buildings or constructions for residential purposes", whether such properties are held for the owner's enjoyment, for exploitation or for commercialization or are classified accountably as "goods" or "non-current assets held for sale" or as "investment properties".

Where the legislator did not distinguish, it is not appropriate for the interpreter to distinguish.

It is considered that Article 135º-B, paragraph 2, of the IMI Code is unconstitutional, when interpreted in the sense that the exclusion from taxation provided for therein also includes properties classified as land for construction whose potential purpose is not residential, as it violates the constitutional principle of separation and interdependence of powers, enshrined in Articles 2º and 111º of the Constitution, constituting itself as a reference and limit to the powers of cognition of the courts in the exercise of their function within the rule of law (cf. Articles 202º and 203º of the Constitution), as well as the constitutional principle of equality (cf. Article 13º of the Constitution) and, likewise, the principle of legality formulated in paragraph 2 of Article 103º, paragraph i) of paragraph 1 of Article 165º, all of the Constitution, which is hereby declared for all legal purposes.

The respondent concludes by asserting the legality of the assessment act contested by the Claimant which should, therefore, be maintained.

  1. By order of 26-03-2019, the meeting provided for in Article 18º of the RJAT was dispensed with, and, with the consent of the parties, the filing of pleadings was dispensed with.

II – PRELIMINARY EXAMINATION

8.1. The tribunal is competent and properly constituted.

8.2. The parties have legal standing and capacity, are shown to be entitled and are properly represented (Articles 4º and 10º, paragraph 2, of the RJAT and Article 1º of Order no. 112-A/2011, of 22 March).

8.3. The proceedings are not affected by any nullities.

8.4. No exceptions were raised that would prevent examination of the merits of the case.

III – MATTERS OF FACT AND LAW

III.1. Matters of Fact

Having regard to the positions assumed by the parties and the documentary evidence attached to the case file – bearing in mind that the Tribunal is not obliged to pronounce on all the matters alleged, but instead has the duty to select those of interest for the decision, taking into account the cause of action that supports the claim filed (cf. Articles 596º, no. 1 and 607º, nos. 2 to 4, of the Civil Procedure Code, in the version of Law 41/2013, of 26/6) and to state whether it considers them proven or not proven (cf. Article 123º, no. 2, of the CPPT) – the following facts are considered, with relevance for the examination and decision of the issues raised:

a) The Claimant is a company that conducts its activities in the real estate sector;

b) The Claimant is the owner of the plots of land intended for urban construction registered in the urban property register of the parish of the city of ..., under articles ... and ...;

c) The Claimant was notified by the ATA of the AIMI assessment, concerning the above-identified properties, for the year 2017, with the number 2017-...;

d) The Claimant filed an administrative appeal against that assessment which was instituted under the number ...2018...;

e) In the said administrative appeal, a rejection order was issued on 03-08-2018;

f) The Claimant paid the tax resulting from that assessment, in the context of a tax enforcement process.

Basis for the Matters of Fact:

The matters of fact taken as proven rest on the critical examination of the uncontested documentary evidence presented, which is hereby reproduced, as well as the administrative proceedings attached to the case file.

No facts with relevance to the decision of the case were taken as not proven.

III.2. Matters of Law

As results from the arbitral request, the Claimant expresses its disagreement with the contested assessment act, on the grounds that, as it suffers from material unconstitutionality, the tribunal should disapply Article 135º-B of the IMI Code.

Law 42/2016, of 28 December, added to the IMI Code, among others, Article 135º-A, which provides: "taxable persons of the additional municipal property tax are natural or legal persons who are owners, usufructuaries or superficiaries of urban properties situated in Portuguese territory".

In turn, the following article – 135º-B – provides:

"1. The additional municipal property tax applies to the sum of the tax values of urban properties situated in Portuguese territory of which the taxable person is a holder.

2 – Excluded from the additional municipal property tax are urban properties classified as «commercial, industrial or for services» and «others» in accordance with paragraphs b) and d) of paragraph 1 of Article 6º of this Code".

As the Claimant states, this regime excludes from the scope of the AIMI «urban properties classified as "commercial, industrial or for services" and "others" in accordance with paragraphs b) and d) of paragraph 1 of Article 6º (…)» of the Municipal Property Tax Code (CIMI), so only urban properties intended for residential purposes and land for construction, as defined in that Article 6º, are covered.

In this case, land for construction is at issue, so it is indisputable that it is included in the objective scope of the tax, since, at least according to the letter of the law, we are not within the scope of its exclusion.

Indeed, as Baptista Machado states – Introduction to Law and Legitimizing Discourse -: "in the absence of other elements that induce the choice of the less immediate sense of the text, the interpreter should in principle opt for that sense which best and most immediately corresponds to the natural meaning of the verbal expressions used, and in particular to their technical-legal meaning, assuming (not always accurate) that the legislator knew how to express correctly his thought" (page 182).

Now, the literality of Articles 135º-A, paragraph 1, and 135º-B, paragraphs 1 and 2, of the CIMI is clear and does not appear to lend itself to interpretive doubts. As stated in Arbitral Decision no. 664/2017-T, of 26-06-2018:

  • "The exclusion from the tax covers, therefore, properties classified as commercial, industrial or for services, being understood as such the buildings or constructions licensed for those purposes or that have as their normal purpose each one of these goals. It also encompasses the residual class referred to in paragraph d) of paragraph 1 of that Article 6º, including therein the lands situated within or outside an urban agglomeration that are neither land for construction nor rustic properties and also buildings and constructions that do not fall within any of the previous classifications.

The scope of objective application, by virtue of the reference to that Article 6º, was thus defined not only by reference to a certain type of property, but also by reference to the administrative procedure through which the classification was effected or, in the absence of a license, to the normal purpose of such properties for commercial, industrial and service or other purposes.

It is true that the legislative concern to «avoid the impact of this tax on economic activity» was announced in the Proposed Law of the State Budget for 2017 and was implemented through the exclusion from the scope of application of «urban properties classified as "industrial", as well as urban properties licensed for tourism activity, the latter provided that their purpose is properly declared and proven» and the deduction from the taxable value of the amount of «€ 600,000.00, when the taxable person is a legal entity with agricultural, industrial or commercial activity, for properties directly affected by its operation".

However, from the aforementioned negative delimitation of scope, the Claimant draws the conclusion that the intention was to create a tax on real estate wealth, arguing that the AIMI, as a supplementary tax to the IMI, aims at the taxation of the accumulation of residential real estate of very high value (making a parallel with previous taxation in stamp tax through Item 28 of the General Stamp Tax Table).

Moreover, it argues that the inclusion of land for construction within the objective scope of the AIMI lacks any justification in material terms in the tax context and that, therefore, it was not issued with any sense and scope previously considered and determined, but, on the contrary, arose from an uncritical and truncated interpretation of the tax law by the ATA. From which it concludes that the tax assessment act in question, because resulting from the application of the contested rule, violates the constitutional principles of equality, proportionality and contributive capacity.

According to the various decisions already issued by the Constitutional Court, that superior Court has understood that there is no judgment of unconstitutionality on this matter. As stated in the recent Decision in case no. 307/2019, of 29-05-2019, with respect specifically to land for construction; it is stated:

  • "The value of land for construction corresponds, fundamentally, to a legal expectation, embodied in a right to build thereon a property with certain characteristics and with a certain value. It is this expectation of production of wealth materialized in a property to be built that increases the value of the asset and the wealth of the owners of the land for construction, once the land comes to be considered as being for construction. For this reason, the greater the value of the properties to be built, the greater the value of the land for construction.

  • The legislator's recognition that land for construction reflects a patrimonial position of its holder and a value of its own in the market makes it impossible to invoke the purpose and value corresponding to the property that may be built on it: land for construction and built land are not equivalent or assimilable economic realities, in the domain of taxation of real estate property. This was asserted by the Court, with emphasis on the pronouncement of the Plenary in … Decision no. 378/2018, doctrine entirely transposable to the rule of the AIMI here under review".

Regarding the parallelism with Item 28.1 of the General Stamp Tax Table it is said in the same decision:

  • "for the purposes of applying the rule of Item 28.1, it is the legal and patrimonial situation existing on the date the tax payment obligation falls due, being therefore, by reference to the concrete tax event existing on that date that one should evaluate the existence, or lack thereof, of a rational or reasonable basis to justify the legal and tax consequences that immediately emerge from it".

  • "Also within the scope of application of the AIMI, even if guided by a personal perspective, one cannot fail to recognize that land for construction is well distinct from urban properties already built and affected to a specific purpose through licensing or normal use. In fact, and based, as has been seen, on the reason for the non-taxation of urban properties, commercial, industrial, for services or others, being in the purpose of promoting the proper functioning of economic activities – which implies the creation of stimuli to the reallocation of resources to productive purposes, so as to increase economic growth –, land for construction can only contribute to that purpose in potentiality, in a hypothetical and conditional future, since even if a right to build has been formed, nothing prevents its holder from changing their mind regarding the purpose to give to the property".

  • "Land for construction constitutes an economic asset with patrimonial value, in itself revealing the contributive capacity of its holder, and therefore, it is constitutionally legitimate to include it in the overall body of assets subject to AIMI, regardless of what may actually be implemented on it".

That is, land for construction, like properties intended for housing, will reveal a higher index of wealth and, as such, of greater contributive capacity. There is, therefore, no indication of a violation of the principle of equality in the option of taxing such properties, given the reasonableness of the distinction and the purposes sought.

Furthermore, the fact that the exclusion from the scope of the AIMI was not made with a view to the possible activity to which the properties are affected, but was based solely on the types of properties indicated in Article 6º of the CIMI, with no reference whatsoever to the use or operation of companies.

Indeed, as is stated in Arbitral Decision no. 675/2017-T, of 04-05-2018:

  • "If the legislative intention to exclude the tax from the scope of properties directly affected by the operation of legal entities had been maintained in the final version of the Budget, the reference to this use that was contained in the proposal and that clearly expressed this legislative option would certainly have been maintained.

Having been deleted this reference to the use of properties, there is no legal basis for concluding that residential properties and land for construction affected by the operation of legal entities are not relevant to the scope of the AIMI".

Having regard to the contents of the State Budget Report for 2017, we can conclude that the intention with the AIMI was not to increase the taxation of luxury properties, as was the primary objective with Item 28.1 of the General Stamp Tax Table, since high-value real estate property can be constituted by a plurality of properties of reduced value. Rather, the intention was to create another means of financing the social security system, which is one of the constitutional duties of the State.

But, furthermore, the Claimant argues that the provision of Article 135º-A of the CIMI should be disapplied, invoking the unconstitutionality of the AIMI taxation regime, due to violation of the principles of equality, proportionality and contributive capacity, by making an indiscriminate taxation of all properties, arguing that those that are affected by economic activities are necessarily excluded from such taxation.

As is the case here. The Claimant argues that the circumstance that the properties in question are an integral part of its commercial activity, as this is its corporate purpose, lacks a basis and, on the contrary, it would be violative of the principle of equality to apply the AIMI to such properties, by comparison with other entities, non-real-estate, owners of properties.

It should be said from the outset that we understand that the fact that the Claimant holds the properties within its economic activity does not, however, prevent the application of the AIMI. The Claimant is incorrect when it argues that it would have been the intention of the legislator to intend to exclude from the scope of the tax properties affected by economic activities, on the pretense that the objective pursued would be not to unduly burden the taxable persons who own properties by virtue of their corporate purpose.

On the other hand, to the assertion of the Claimant that the judgment of unconstitutionality of the AIMI, based on the violation of the principle of equality, starts from premises and is based on a comparison between incomparable situations, it is opposed that we consider, in this context, that the freedom enjoyed by the legislator requires that the principle of equality and contributive capacity have some flexibility and may yield, to a certain extent, before other purposes of the State.

Hence, when an apparently or tendentially equal situation is treated in an apparently different manner, one can only speak of fiscal inequality if there are no acceptable reasons that led the legislator to make the choices it made. That is, what is constitutionally forbidden to the legislator is pure arbitrariness, which will not be the case when it has in view the pursuit of objectives to which it assigns greater value – as is the paradigmatic case of tax benefits, in which the legislator prefers to forgo tax revenue to achieve other objectives.

It is, moreover, within that spirit that the legislator, in what concerns the case, only intends to tax properties classified as residential and land for construction, refraining from applying the AIMI to the others. That is, it took a measure of differentiation of what is unequal, making a choice whose justification seems clear: not to increase the tax burden on productive sectors, with a view to the much-touted needs for investment and economic growth.

Likewise, as is also referred to in the aforementioned Arbitral Decision 675/2017: "The ownership of real estate property, for the purposes of sale and transformation, with a view to obtaining economic results, remains an asset that is revealing of an increased contributive capacity, which goes beyond the tax that applies to taxable profit by reason of the economic activity conducted. What is at issue, therefore, is not the taxation of real income earned by such entities through the activity conducted, but the additional contributive capacity that results from the ownership of the asset and which in itself can facilitate the obtaining of credit or the strengthening of its negotiating position in the conclusion of contracts".

Moreover, the contributive capacity of business legal entities, relevant for assessing the application of the principle of tax equality, is not evidenced only by income, namely by the results of the activity to which the properties are intended. In fact, «assets provide their holder with a special contributive capacity, advantages which by their nature escape the tax on personal income: thus, the ownership of assets facilitates the obtaining of credit, strengthens the negotiating position of its holder in the conclusion of various contracts, makes it easier to multiply wealth by allowing it to take risks where in principle it would not. In this perspective, the tax on assets is seen as something more than an extension of the tax on personal income - this is not about overloading income that is already subject to it but about reaching manifestations of contributive capacity that truly escape it" (Sérgio Vasques, Contributive Capacity, Income and Assets, in Tax, no. 23, page 36).

On the other hand, and as has also been touched upon above, "since the legislative objective is not the taxation of luxury housing but rather to obtain another means of financing Social Security, in keeping with the political option of diversification, through «a tax that falls on holders of larger real estate assets, reinforcing the overall progressivity of the system»" (page 57 of the State Budget Report for 2017), it is in light of these objectives that one should assess whether there is a violation of the principle of proportionality" (Arbitral Decision no. 420/2018-T, of 15-01-2019).

As also states Arbitral Decision 664/2017-T: "The ownership of real estate property, for the purposes of sale and transformation, with a view to obtaining economic results, remains an asset that is revealing of an increased contributive capacity, which goes beyond the tax that applies to taxable profit by reason of the economic activity conducted. What is at issue, therefore, is not the taxation of real income earned by such entities through the activity conducted, but the additional contributive capacity that results from the ownership of the asset and which in itself can facilitate the obtaining of credit or the strengthening of its negotiating position in the conclusion of contracts".

Moreover, the contributive capacity of business legal entities, relevant for assessing the application of the principle of tax equality, is not evidenced only by income, namely by the results of the activity to which the properties are intended. In fact, «assets provide their holder with a special contributive capacity, advantages which by their nature escape the tax on personal income: thus, the ownership of assets facilitates the obtaining of credit, strengthens the negotiating position of its holder in the conclusion of various contracts, makes it easier to multiply wealth by allowing it to take risks where in principle it would not. In this perspective, the tax on assets is seen as something more than an extension of the tax on personal income - this is not about overloading income that is already subject to it but about reaching manifestations of contributive capacity that truly escape it" (Sérgio Vasques, Contributive Capacity, Income and Assets, in Tax, no. 23, page 36).

On the other hand, and as has also been touched upon above, "since the legislative objective is not the taxation of luxury housing but rather to obtain another means of financing Social Security, in keeping with the political option of diversification, through «a tax that falls on holders of larger real estate assets, reinforcing the overall progressivity of the system»" (page 57 of the State Budget Report for 2017), it is in light of these objectives that one should assess whether there is a violation of the principle of proportionality" (Arbitral Decision no. 420/2018-T, of 15-01-2019).

"From this perspective, it appears that this new taxation is not incompatible with the principle of proportionality, since it is appropriate to the aim in view (it provides for the increase in revenues that is intended to be obtained), it is necessary (in light of the legislative option to increase Social Security revenues through diversification of sources) and a reasonable measure is not exceeded, particularly for legal entities, since the rates of the new tax are not high (and are lower for legal entities than for natural persons, in accordance with Article 135º-F), the tax paid is deductible from the taxable base of corporate income tax (Article 135º-J), considerable amounts are deducted from the taxable value (Article 135º-C) and it is not demonstrated, nor is there reason to believe, that the amounts collected exceed what is necessary for the purpose of strengthening the sustainability and stability of Social Security" (idem).

Along the same lines, we conclude that there does not appear to be any unconstitutionality, and the contested assessment act merits no censure.

IV. DECISION

Wherefore this Arbitral Tribunal decides:

a) To rule entirely without merit the arbitral claim filed, absolving the Respondent from all claims.

b) To condemn the Claimant in the costs of the proceedings.

V. VALUE OF THE CASE

The value of the case is fixed at 13,070.40 €, in accordance with Article 97º-A, paragraph 1, a), of the Tax Procedure Code, applicable by virtue of paragraphs a) and b) of Article 29º, paragraph 1, of the Legal Regime for Tax Arbitration and paragraph 2 of Article 3º of the Regulation of Costs in Tax Arbitration Proceedings.

VI. COSTS

The arbitration fee is fixed at 918.00 €, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, in accordance with Articles 12º, paragraph 2, and 22º, paragraph 4, both of the Legal Regime for Tax Arbitration, and Article 4º, paragraph 4, of the aforementioned Regulation.

Lisbon, 30 June 2019

The Arbitrator

(António Alberto Franco)

Frequently Asked Questions

Automatically Created

What is AIMI (Adicional ao Imposto Municipal sobre Imóveis) and how does it apply to real estate companies in Portugal?
AIMI (Adicional ao Imposto Municipal sobre Imóveis) is a supplementary property tax introduced in Portugal's 2017 State Budget, designed to tax accumulation of high-value residential real estate. It applies to individuals and companies owning urban properties classified as residential buildings or construction land exceeding specified thresholds. For real estate companies, AIMI applies regardless of whether properties are held as business inventory or investment assets, based solely on property classification under Article 6º of the IMI Code. The tax aims to enhance Social Security financing and increase system progressivity by targeting larger real estate portfolios.
Are construction land plots (terrenos para construção) held as inventory by real estate companies subject to AIMI taxation?
Yes, construction land plots (terrenos para construção) held as inventory by real estate development companies are subject to AIMI taxation under current Portuguese law. Article 135º-B, paragraph 2 of the IMI Code includes construction land in AIMI's taxable base without exemption for business inventory. Unlike commercial, industrial, or service properties which are exempt, construction land faces AIMI regardless of purpose. This creates controversy for developers who argue such plots are business assets generating taxable income, not wealth manifestations. The Tax Authority maintains that property classification, not intended use or accounting treatment, determines AIMI applicability, bringing development companies inevitably within the tax scope.
Can AIMI on construction land owned by property development companies be challenged on unconstitutionality grounds?
Yes, AIMI on construction land owned by property development companies can be challenged on unconstitutionality grounds through CAAD arbitration or judicial proceedings. Common arguments include violation of equality principles (Article 13º of the Portuguese Constitution), proportionality, and contributive capacity (Article 104º, paragraph 3). Claimants argue AIMI unconstitutionally taxes business assets essential for income generation—already subject to corporate taxation—rather than wealth accumulation. They cite discriminatory treatment compared to exempt commercial/industrial properties and inconsistency with AIMI's stated purpose of taxing luxury residential property accumulation. Challenges reference Constitutional Court precedents on similar taxes like Item 28 Stamp Tax. However, success depends on demonstrating AIMI lacks rational basis when applied to business inventory versus investment property holdings.
What was the outcome of CAAD arbitration process 557/2018-T regarding AIMI on real estate company assets?
While the provided excerpt does not include the final decision of CAAD case 557/2018-T, it establishes the procedural framework and substantive arguments. The claimant real estate company sought annulment of the 2017 AIMI assessment on construction land held as inventory, arguing unconstitutionality based on equality, proportionality, and contributive capacity principles. The Tax Authority defended the assessment, emphasizing that Articles 135º-A and 135º-B clearly include construction land regardless of owner type or use, with property classification under Article 6º IMI Code being determinative. The tribunal was properly constituted, with arguments heard regarding whether AIMI should be disapplied to business inventory properties. The outcome would establish important precedent for real estate developers facing similar AIMI assessments on development land.
How can Portuguese real estate companies challenge AIMI tax assessments through arbitral tribunal proceedings at CAAD?
Portuguese real estate companies can challenge AIMI assessments through CAAD (Centro de Arbitragem Administrativa) by filing an arbitration request under Decree-Law 10/2011 (RJAT) within the applicable deadlines. The process begins with submitting a request identifying the contested assessment and legal grounds, typically constitutional violations or misapplication of exemptions. Companies may contest assessments on construction land inventory by arguing unconstitutionality under equality, proportionality, and contributive capacity principles. Payment under protest preserves challenge rights while avoiding enforcement. The CAAD President appoints arbitrators if parties don't select them. Companies should present evidence that properties serve business purposes generating taxable income rather than wealth accumulation, distinguish their situation from exempt property types, and cite relevant Constitutional Court and arbitral precedents. Legal representation experienced in Portuguese tax arbitration significantly enhances prospects for successful challenges.