AIMI Constitutionality Challenge: Equality and Proportionality Principles in Additional Property Tax (Process 559/2018-T)

ARBITRAL DECISION

I. Report

1. A..., S.A., a legal entity no..., with registered office in ..., ..., ..., came pursuant to the provisions of articles 2, no. 1, paragraph a), and 10, no. 1, paragraph a), of Decree-Law no. 10/2011, of 20/01, which approved the Legal Regime of Tax Arbitration (RJAT), and articles 1 and 2 of Order no. 112-A/2011, of 22/03, to submit a request for the constitution of an Arbitral Tribunal, in which the Tax and Customs Authority (AT) appears as the Respondent.

2. The request for arbitral pronouncement, submitted on 12-11-2018, aims at the annulment of the decision issued by the Head of the Finance Department of ... through which he dismissed the amicable claim no. ...2018..., presented against the assessment of the Additional Tax on Real Property ("AIMI") no. 2017... of the year 2017, in the total amount of €6,999.64 (six thousand, nine hundred and ninety-nine euros and sixty-four cents) as well as the annulment of this assessment, with the legal consequences thereof.

3. The request for the constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority (AT).

4. The Claimant did not proceed with the appointment of an arbitrator.

5. Under the terms of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of Decree-Law no. 10/2011, of 20/01, as amended by article 228 of Law no. 66-B/2012, of 31/12, the Deontological Council appointed as arbitrator of the singular arbitral tribunal the undersigned, who communicated acceptance of the assignment within the applicable deadline and duly notified the Parties.

6. Duly notified of this appointment, the Parties did not express their will to refuse the appointment of the arbitrator, in accordance with the combined provisions of article 11, no. 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

7. Therefore, in accordance with what is prescribed in paragraph c) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31/12, the singular arbitral tribunal was constituted on 23-01-2019.

8. In response to what was requested, the Tax and Customs Authority (AT) expressed its view that the present request for arbitral pronouncement should be dismissed, expressing the understanding that the challenged acts should remain in the legal order and, accordingly, that the tribunal should pronounce itself for the absolution of the respondent entity. Should this not be the case, it requests, by appeal to the provisions of article 280, no. 3, of the CRP and article 72, no. 3, of the Constitutional Court Act, that notification of the arbitral decision to the Public Prosecutor's Office be determined.

9. Given the knowledge that results from the procedural documents submitted by the Parties, which is deemed sufficient for the decision, the Tribunal decided to dispense with the meeting referred to in article 18 of the RJAT.

10. Thus, by decision of 03-03-2019, duly notified, it was decided, absent opposition from the Parties, to dispense with the said meeting, being granted a period of 20 days for the presentation of written pleadings and fixed 30-04-2019 as the deadline for issuing and notification of the final decision.

11. Only the Respondent submitted written pleadings, reaffirming the position already previously expressed in the Response duly presented.

II. Procedural Sanction

1. The Arbitral Tribunal is regularly constituted and is materially competent, under the terms of paragraph a) of no. 1 of article 2 of Decree-Law no. 10/2011, of 20/01.

2. The Parties enjoy legal standing and capacity, are legitimate, and are legally represented (cf. article 4 and no. 2 of article 10 of Decree-Law no. 10/2011 and article 1 of Order no. 112/2011, of 22 March).

3. The proceedings do not suffer from defects that would invalidate them and no issues have been raised that impede the consideration of the merits of the case.

III. Facts

1. Based on the documentary evidence that comprises the present proceedings, the following factual elements are highlighted which, being uncontested by the Parties, are considered fully proven:

15.1. The Claimant is a commercial company that develops its activity in the real estate sector.

15.2. According to its respective property registration, the Claimant was, on 01-01-2017, the owner of several urban real properties, of the type land for construction, and the sum of their respective taxable property values was €1,749,910.00 (Doc. 3). The properties in question are recorded in the Claimant's accounts as inventory (Doc.4).

15.3. On 30-06-2017, the Tax Services issued the respective AIMI assessment no. 2017..., associated with collection note 2017..., in which the amount of €6,999.64 was determined by applying the rate of 0.4% to the taxable value of €1,749,910.00, for voluntary payment during the month of September (Doc.3).

15.4. On 29-09-2017, the Claimant effected payment of the amount contained in the above-mentioned collection note (Doc.4).

15.5. On 29-01-2018, the Claimant filed an amicable claim against the aforementioned assessment, which resulted in the proceedings no. ...2018... of the Finance Department of ...

15.6. In support of the request for annulment of the AIMI assessment referred to above, the Claimant alleges, in essence, that:

"- AIMI treats unequally, without any material basis of support, companies that own properties intended for the exercise of an economic activity, in relation to companies that for the same reason are owners of properties classified as 'commercial, industrial or service', which are exempt from AIMI.

• The construction land held by companies that pursue real estate activities does not correspond to any 'luxury real estate portfolio', but only inventory – which can be sold or where, potentially, goods intended for sale or exploitation can be built.

• The taxation in question constitutes a violation of the principles of contributive capacity, equality and proportionality – in so far as the fact of having in its inventory construction land or property for sale in no way evidences a relevant contributive capacity worthy of being taxed, which is all the more evident when it is observed that other companies holding properties of identical taxable property value equally intended for their activity are not subject to such taxation.

• When in the making of norms there are deviations from the original imperative that governs taxation – the norms in question are clearly unconstitutional, by violation of the principle of contributive capacity, since taxpayers are not taxed in accordance with their economic capacity, nor because of the facts relative to which the incidence of tax is justified.

• The principle of equality requires that equal treatment be given to situations with the same characteristics, preventing the legislative arbiter whenever it attempts to pursue purposes that, without sufficient material foundation, harm some taxpayers in relation to others.

• It is necessary to conclude that, by imposing a tax on the ownership of properties intended for the exercise of an economic activity and insofar as it is completely devoid of any foundation, article 135-B, no. 1, of the CIMI should be disapplied for material unconstitutionality, insofar as it violates the principle of tax equality enshrined in articles 13 and 104, no. 3, of the CRP, and consequently the assessment should be declared illegal.

• The legal norm in question is manifestly unbalanced, non-conforming and inadequate for the pursuit of the legal purpose, such that it is materially unconstitutional by violation of the principle of proportionality.'

15.7. The claim filed against the AIMI assessment, supported by the basis of unconstitutionality of the norm of article 135-B, no. 1, of the CIMI, as briefly referred to above, after having ensured the right to prior hearing, was the subject of a decision to dismiss by decision of 03-08-2018, issued in the exercise of delegated competence by the Director of Finance of Porto (Doc.1).

15.8. The decision in question, notified to the Claimant through office no. 2018... of the Finance Department of ..., of 09-08-2018, refers to the proposed decision, according to its terms and the grounds contained therein, from which the following is highlighted:

ASSESSMENT OF THE REQUEST

The Additional Tax on Real Property (AIMI) was introduced into the Portuguese tax legal order by Law no. 42/2016, of 28 December (State Budget for 2017) and is a personal tax that applies to real estate portfolio.

Under article 135-A of the Real Property Municipal Tax Code (CIMI), the taxpayers of the additional tax on real property are natural or legal persons who are owners, usufructuaries or holders of surface rights of urban real properties situated in Portuguese territory. No. 3 of the same article tells us that the status of taxpayer is determined in accordance with the criteria established in article 8 of this Code with the necessary adaptations, with reference to the date of 1 January of the year to which the additional tax on real property applies.

It should be noted that no. 4 of article 8 of the CIMI defines one of these established criteria by establishing the presumption that whoever is registered or should be registered in the property register as such is the owner, usufructuary or surface rights holder for tax purposes.

No. 1 of article 135-B of the CIMI provides that "The additional tax on real property applies to the sum of the taxable property values of urban real properties situated in Portuguese territory of which the taxpayer is the holder."

Article 135-C provides that: "1 - The taxable value corresponds to the sum of the taxable property values, as of 1 January of the year to which the additional tax on real property applies, of the properties listed in the property registers as held by the taxpayer."

No. 1 of article 135-G of the CIMI provides that the additional tax is assessed annually by the Tax and Customs Authority (AT), "based on the taxable property values of the properties and in relation to the taxpayers listed in the registers on 1 January of the year to which it applies."

Therefore, the calculation of the tax will be based on a register administratively maintained and which encompasses the information necessary for the assessment thereof and for the determination of the tax liability.

For this purpose, the AT gives official initiative to the assessment procedures based on data recorded in the property registers and effective as of the date of the tax event – 1 January of the year to which the tax applies – using the taxable property values (taxable matter) and the taxpayers recorded therein as holders of real property rights over the properties (subjective scope).

...

Regarding what is alleged by the claimant that the legislation invoked is manifestly unconstitutional (by violation of the principles of contributive capacity, equality and proportionality), it is important to note from the outset that it is not the AT's competence, under article 281 of the Portuguese Republic Constitution (CRP) to assess the alleged unconstitutionality defect in the norms that support the AIMI assessment – it being found that the law from which these derive was ratified and ordered to be published by the President of the Republic in accordance with paragraph b) of no. 1 of article 134 of the CRP, such that it is the AT's responsibility to assess and collect the tax in question, in its capacity as the active subject of the tax relation.

In fact, as it falls to the Courts to assess (un)constitutionality, the tax administration, which is under the hierarchical dependence of the executive, cannot substitute itself for the courts and review the constitutionality of the laws it is required to apply.

In the sense of what was referred to above, it is important to cite the Supreme Administrative Court Decision of 2009-01-21, Proc. 0811/08, which tells us that "The norm in question is contained in a Decree-Law, which is a legislative act resulting from the exercise by the Government of the legislative function. And, to that extent, there is no doubt that we are dealing with a legislative norm, such that the assessment of declaration of its possible illegality or unconstitutionality falls to the Constitutional Court (article 281, no. 1, paragraphs a) and b) of the CRP), being excluded from the jurisdiction of the administrative and tax courts.

Conversely, in light of the principle of legality, to which its actions are subordinated, the AT cannot fail to apply the law and comply with it.

In fact, being the AT subject to the principle of legality (article 266, no. 2 of the CRP and article 55 of the General Tax Act), it cannot fail to apply a norm on the grounds of unconstitutionality, unless the Constitutional Court has already declared the unconstitutionality of the same with binding general force or we are faced with a violation of constitutional norms directly applicable and binding such as those referring to rights, liberties and guarantees, see Supreme Administrative Court Decision of 04-03-2015, Proc. 01529/14.

From the foregoing, it follows that in Portuguese Constitutional Law there is no possibility for the AT to refuse to obey a norm that it might eventually consider unconstitutional by substituting itself for the organs of constitutional review.

Finally, it should also be noted that we are not aware of any intervention in terms of preventive or subsequent review of the constitutionality of AIMI that might call into question the tax acts performed by virtue thereof.

CONCLUSION

In view of the above, it is my opinion that the claim should be dismissed, given that the AIMI assessment no. 2017..., associated with collection note 2017..., of the year 2017, here claimed, complies with all legal formalities imposed by the CIMI."

1. The proven facts are based on documents attached to the proceedings, and there are no facts with relevance to the decision that should be considered unproven.

IV. Legal Matters

1. The Claimant bases its request for arbitral pronouncement on the possible unconstitutionality of the norms on which the questioned AIMI assessment is based, in the understanding that these violate the principles of contributive capacity, equality and proportionality.

2. Extracting from the norm of article 135-B, no. 1, of the CIMI that AIMI applies to properties with residential designation, as well as construction land, regardless of its designation, insofar as they are not expressly listed in the norm establishing the negative scope of application, the Claimant understands that the said norm suffers from unconstitutionality by violation of the principle of equality, in its aspect of contributive capacity, as well as by violation of the principle of proportionality.

3. For its part, the Respondent argues that "the AIMI applying to legal persons and equivalent structures has the nature of a real tax on real estate portfolio constituted by urban properties that meet the types referred to in no. 2 of article 135-B, regardless of the asset classes in which they are recorded – inventory, tangible fixed assets or non-current assets held for sale – such that the Claimant is subject to AIMI for the urban properties of which it is the owner, usufructuary or surface rights holder that meet the conditions stated in that provision of the Real Property Municipal Tax Code."

Position of the Claimant

1. In support of the position it defends, the Claimant argues, in summary, that:

• As is well known, AIMI came to replace the previous method of taxing "luxury real estate portfolio", the rate for which was provided in Item 28 of the General Stamp Tax Table, in the wording given by Law no. 55-A/2012 and Law no. 83-C/2013.

• Notwithstanding AIMI having been considered to continue the taxation of luxury properties and, likewise, to address many of the shortcomings that had been pointed out regarding Item 28 of Stamp Tax, its contours present several divergences from the initial regime.

• In fact, in creating AIMI, the legislator sought to respond to some of the criticisms that had been raised by the wording of Item 28 of the General Stamp Tax Table (TGIS) and which consequently led to its repeal.

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

• In this sense, we will examine the violation of the principle of equality, concretized in its aspect of contributive capacity, according to the jurisprudence and doctrine already advocated when discussing Item 28, duly adapted to the characteristics of AIMI.

• As already mentioned, from the outset it was intended to tax real estate portfolio of high value – and this, it should be noted, insofar as the ownership of such portfolio revealed the manifestation of significant contributive capacity.

However,

• Due to the distortion made by the AT regarding the scope and meaning of the norm in question – to which the legislator gave uncritical acceptance – taxation ceased to be just and fair, to become, furthermore, unjust and profoundly unequal.

• Hence the fact that the tax act in question also materializes, as will be demonstrated, the violation of the most basic canons of equality, proportionality and contributive capacity.

• The AIMI regime is contrary to the Constitution of the Portuguese Republic ("CRP"), and particularly to the principle of equality.

• Equality is a value and a principle inherent to the paradigm of the Rule of Law that permeates the entire Portuguese Constitution, and even becomes a component part of the very idea of Law or Legal Order as Legal Cosmos.

• The principle of equality does not prohibit the establishment of distinctions; rather it prohibits the establishment of distinctions devoid of objective and rational justification, as is the case in the present matter.

• Specifically applying the principle in the matter of taxation of portfolio, the CRP itself establishes a central orientation in no. 3 of its article 104, when it provides that "The taxation of portfolio [as is AIMI] must contribute to equality among citizens" – which is the opposite of what occurs in the present case.

• Given the spirit that presided over the Proposal for the State Budget Law for 2017, from which AIMI emerged, it can be concluded that it aimed to tax the ownership of real estate portfolio for revealing a superior contributive capacity of those who hold them, thereby implementing the principle of fair distribution and contributive capacity.

• The properties held by the now Challenging Party, and which are being subject to taxation under AIMI, are, given its corporate purpose, essential for obtaining income within the scope of its economic activity – themselves also subject to taxation.

• The ownership of the properties consists, in the case of commercial companies of this type, in the patrimonial substrate of its economic activity, and in the realization of a true means essential to the pursuit of its purpose,

• Such that the assumption that ownership of such properties may constitute a manifestation of a (or of an increased) contributive capacity that, in itself, should be subject to collection by taxation completely fails.

• Thus, without any basis of foundation, a glaring inequality is created on the material level between companies that have decided to pursue an economic activity that presupposes the ownership of properties, in relation to other companies whose activity does not result from the ownership of properties.

• More than that, the legal conditions are created for the constitution of manifest situations of material inequality between the Challenging Party and companies that, holding real properties, pursue in them a commercial, industrial or service provision activity.

• Recall that when the Proposal for the 2017 State Budget was discussed in committee, it was established that properties classified as industrial and urban properties licensed for tourism activity would be excluded from the scope of AIMI, as well as urban properties classified as "commercial, industrial or service" and "other" in accordance with paragraphs b) and d) of no. 1 of article 6 of the CIMI – as came to be provided in the law.

• The configuration of the tax event that operates the distinction between various uses and designations of properties, as a function of the corresponding economic activity of its holder – namely through the consideration of those subject to taxation in AIMI - is not minimally justified against the purpose of the fiscal measure adopted,

• And, above all, does not adequately safeguard companies that, for the development of their economic activity, need to hold properties – which contributes decisively to their negative discrimination in the tax field, without any basis for justification.

• There is no discernible material, legal, fiscal, economic or other foundation capable of justifying that taxation applies only to properties held by companies that need them for the exercise of their economic activity, and excludes from taxation properties allocated to other economic activities.

• With the tax in question, unequal treatment is given, without any material basis of support, to companies that own properties intended for the exercise of an economic activity, in relation to companies that, for the same reason, own properties classified as "commercial, industrial or service" – which are exempt from AIMI.

• With the negative, acritical, arbitrary and random differentiation between, on one hand, companies that use properties in the pursuit of their activity and, on the other hand, companies that allocate properties to industry, commerce and services, differentiated treatment is granted to situations that, from a material point of view, are in all aspects similar.

• To that extent, the taxation in question constitutes a violation of the principles of contributive capacity, equality and proportionality - insofar as the fact of the Challenging Party having construction properties, for development or sale, in its inventory in no way evidences a relevant contributive capacity worthy of being (differently and autonomously) taxed,

• Which is all the more evident when it is observed that other companies holding properties of identical or superior taxable property value, equally allocated to their economic activity, are not subject to such taxation.

• When in the making of norms there are deviations from the original imperative that governs taxation, these will be unconstitutional, by violation of the principle of contributive capacity, since taxpayers will not be taxed in accordance with their economic capacity, nor because of the facts relative to which the incidence of tax is justified.

• Contributive capacity that is not minimally safeguarded by the tax act in question, insofar as the holding of properties for the pursuit of an economic activity is not comparable, and cannot be configured, as the holding of luxury portfolio.

• In imposing a tax on the ownership of properties intended for the exercise of an economic activity, without sufficient foundation, article 135-B no. 2 of the CIMI should be disapplied for material unconstitutionality, insofar as it violates the principle of tax equality enshrined in articles 13 and 104, no. 3 of the CRP,

• The decision and assessment here challenged should be declared illegal, because, as abundantly stated, they do not take account of the different contributive capacity of the owners of the properties subject to taxation, hitting indiscriminately taxpayers with and without the necessary contributive force to bear the tax - in violation of the declared purpose of the legislator, which sought, with this rule of incidence, to impose on taxpayers with greater contributive capacity an additional sacrifice, in line with the principle of social equity.

1. In conclusion, the Claimant argues that "we are faced with the violation of two basic principles of the Portuguese Constitution, with article 135-B no. 2 of the CIMI suffering from unconstitutionality by violation of the principle of equality, in its aspect of contributive capacity, as well as by violation of the principle of proportionality." Whereby, in summary, "article 135-B no. 2 of the CIMI should be disapplied by the Tribunal, given its material unconstitutionality with the aforementioned grounds, insofar as it applies to properties held by companies that pursue a real estate activity – determining the annulment of the decision and the assessment challenged."

Position of the Respondent

1. Commenting on what was alleged, the Respondent says:

• With regard to legal persons and equivalent structures, AIMI has the nature of real taxation, thus reflecting the idea that the elements comprising the real estate portfolio held by these entities perform, as a rule, an economic function, and therefore do not represent mere wealth accumulation.

• The legislator excluded from the scope urban properties classified as "industrial, commercial or service" and "other" but expressly chose to maintain other properties that also integrate the assets of companies, such as those classified as residential or construction land, by not including them in the negative delimitation established.

• That is, it did not guarantee, nor did it intend to guarantee, in all cases that real estate portfolio allocated to the exercise of any economic activity not be affected, contrary to what the Claimant intends.

• The Claimant, at first attempt, makes a forced assimilation between Item 28.1 of the General Stamp Tax Table and AIMI, basing its argument, following the legislative sequence of the two taxes and the purposes pursued, overlooking that, notwithstanding some similarities regarding certain aspects of the delineation of the scope, these taxes reveal structural differences, first of all, because AIMI was created in differentiated economic-political circumstances and aims at its own extra-fiscal purposes.

• The intent of the legislator, as expressed in the rules of scope of AIMI, was not to exclude from taxation, in all cases, properties that integrate corporate portfolios.

• The exclusion from taxation of urban properties used for "industrial, commercial and services" and "other" purposes clearly reflects the intention to mitigate the impact of AIMI on economic activities but does not take the alleged intention to the fullest extent of eliminating all and any impact of the tax.

• Nothing in the letter of the law authorizes concluding that the intention of the legislator of AIMI was to exclude from taxation the "urban properties that are allocated to the exercise of an economic activity.

• Since, the only criterion relevant for delimiting the scope of objective scope is, only, the typology of urban property classification provided in no. 1 of article 6 of the Real Property Municipal Tax Code, to which no. 2 of article 135-B expressly refers.

• AIMI applying to legal persons and equivalent structures has the nature of a real tax on real estate portfolio constituted by urban properties that meet the types referred to in no. 2 of article 135-B, regardless of the asset classes in which they are recorded – inventory, tangible fixed assets or non-current assets held for sale –

• Therefore, the Claimant is subject to AIMI for the urban properties of which it is the owner, usufructuary or surface rights holder that meet the conditions stated in that provision of the Real Property Municipal Tax Code.

• The AT does not make any unconstitutional interpretation of the norm, since it is not the AT that decides to include in AIMI taxation the urban properties allocated to economic activities (and in such fact no unconstitutionality is discerned, it should be said),

But rather, because it is what results from article 135-B, no. 2 of the Real Property Municipal Tax Code, only urban properties classified as industrial, commercial or service and other are not taxed.

• Whereby, the challenged assessment having been effected in accordance with what is provided in the law, it is not foreseen where the illegality of the decision issued by the AT might reside.

• Nothing exists in the letter of the law that indicates that the exclusion of taxation provided for may extend to the other properties not included therein when they are allocated to determined economic activity of the tax subject, such that what is advocated by the Claimant lacks sense.

• The legislator chose in no. 2 of that provision for a negative delimitation of the scope, excluding from AIMI properties that, by their potential allocation, can be economically recognized as production factors, in the capacity of capital, that is, as intermediate goods that, combined with the remaining factors of production, produce new utilities – economic goods that satisfy needs.

• For this purpose, it used a criterion that invokes the structure of typologies of urban property provided in article 6 of the Real Property Municipal Tax Code and that operates through the subtraction from AIMI of urban properties that, as a result of the licensing of declared use by municipalities or, failing that, of their normal destination, are brought within the typologies of paragraphs b) and d) of no. 1 of that provision.

• Contrary to what the Claimant seeks to suggest, the ratio legis of the exclusion of taxation provided for in article 135-B, no. 2 of the Real Property Municipal Tax Code cannot have the scope intended by it – that is, to also encompass urban properties classified as residential and construction land, mentioned therein, when they would constitute goods subject to the economic activity of the taxpayers –

• Since the criterion chosen by the legislator – the classification of urban properties as industrial, commercial or service and other – was exactly to the detriment of others that would appeal to case-by-case verifications regarding the actual destination given to the properties.

• Contrary to what the Claimant intends, not only is there nothing in the letter of the law that permits the interpretation she advocates,

• But, being the Law the normative standard that governs its actions, it is not the AT's role to make corrective interpretations of the rules of tax scope, nor, as will be explained below, to issue judgments on the constitutionality of applicable norms, as it is not empowered to do so, contrary to what is the case with the Courts (cf. article 204 of the CRP).

• The Claimant invokes the unconstitutionality of the tax act sub judice, by violation of the constitutional principles of equality and contributive capacity, by taxing properties held for the purpose of commercialization and development of their respective economic activities.

• Now, as has already been demonstrated, the taxation in question did not result from creative interpretation by the AT but from mere application of the law, and, as is uniformly recognized in jurisprudence, the AT cannot disapply legal norms on the grounds of unconstitutionality,

• As, moreover, the unconstitutionality defect alleged by the Claimant does not occur.

• Under no. 2 of article 266 of the CRP, the Administration is obliged to act in accordance with the principle of legality, which principle is concretized at the infra-constitutional level in no. 1 of article 3 of the Code of Administrative Procedure (CPA), which in turn provides that: "The organs of Public Administration must act in obedience to the law and to law, within the limits of the powers attributed to it and in accordance with the purposes for which such powers were conferred upon it."

• That is, from such legal impositions it follows that administrative organs and agents do not have the competence to decide the non-application of norms regarding which doubts of unconstitutionality are raised,

• Contrary to the Courts which, under article 204 of the CRP, are prohibited from applying unconstitutional norms, being attributed the competence for diffuse and concrete review of constitutional conformity.

• Bound by the principle of legality, the AT cannot, by force of this, disapply norms based on the interpretation it makes as to their unconstitutionality

• Whereby, and in summary, the AT could not/cannot refuse to apply a norm or fail to comply with the law by invoking or questioning its constitutionality, since it is subject to the principle of legality, as provided in articles 266, no. 2 of the CRP, 3, no. 1 of the CPA and 55 of the General Tax Act;

Issues to be Decided

1. Having equated, in summary and by transcription, the essential of the positions expressed by the Parties, it is verified that the issues to be decided in the present proceedings are as follows:

a) To declare, or not, the illegality of the decision dismissing the amicable claim above identified, which had as its object the AIMI assessment no. 2017... of the year 2017, in the amount of €6,999.64, according to the terms and grounds on which it is based;

b) To determine, or not, the annulment of the said assessment, on the grounds of the unconstitutionality of the norm of no. 2 of article 135-B of the CIMI, by violation of the principles of equality, contributive capacity and proportionality.

Regarding the Decision Challenged

1. The amicable claim on which the decision to dismiss now challenged was based has as its foundation the unconstitutionality of article 135-B, nos. 1, by violation of the principles of equality, contributive capacity and proportionality.

2. According to the Claimant, the application of AIMI to the ownership of properties allocated to the exercise of an economic activity, insofar as the norm is devoid of any foundation, "article 135-B, no. 1, of the CIMI should be disapplied for material unconstitutionality, insofar as it violates the principle of tax equality enshrined in articles 13 and 104, no. 3, of the CRP, and consequently the assessment should be declared illegal."

3. The Claimant further alleges that "The legal norm in question is manifestly unbalanced, non-conforming and inadequate for the pursuit of the legal purpose, such that it is materially unconstitutional by violation of the principle of proportionality." Concluding that such taxation "constitutes a violation of the principles of contributive capacity, equality and proportionality – insofar as the fact of having construction land or property for sale in its inventory in no way evidences a relevant contributive capacity worthy of being taxed, which is all the more evident when it is observed that other companies holding properties of identical taxable property value equally intended for their activity are not subject to such taxation."

4. Analyzing the request for annulment of the AIMI assessment, based on the grounds referred to, the decision to dismiss, extracting the legal regime of the said tax underlying the assessment claimed, is based exclusively on the circumstance that the AT is bound by the principle of legality and must obey legal norms as long as their unconstitutionality is not declared.

5. From the information to which it refers, in terms of agreement, the challenged decision, it is extracted that "In fact, being the AT subject to the principle of legality (article 266, no. 2 of the CRP and article 55 of the General Tax Act) it cannot fail to apply a norm on the grounds of unconstitutionality, unless the Constitutional Court has already declared the unconstitutionality of the same with binding general force or we are faced with a violation of constitutional norms directly applicable and binding such as those referring to rights, liberties and guarantees...".

6. In fact, as is evident from the grounds transcribed above, the AT, regardless of the defects of possible unconstitutionality alleged by the subjects of the tax obligation, is obliged, under article 266, no. 2, of the CRP, to act in accordance with the principle of legality.

7. This principle is enshrined, at the infra-constitutional level, in articles 3, no. 1, of the Code of Administrative Procedure (CPA) according to which "The organs of Public Administration must act in obedience to the law and to law, within the limits of the powers conferred on them and in accordance with their respective purposes."

In the same sense, article 55 of the General Tax Act provides that "The tax administration exercises its duties in pursuit of the public interest, in accordance with the principles of legality, equality, proportionality, justice, impartiality and promptness, in respect of the guarantees of taxpayers and other tax-bound persons."

1. The Supreme Administrative Court has already pronounced on this matter, as is extracted from Decision of 5 April 2017, Issued in Proc. 0399/15 "I - The AT, because it is subject to the principle of legality (cf. article 266, no. 2, of the CRP and article 55 of the General Tax Act), cannot fail to apply a norm on the grounds of unconstitutionality, unless the Constitutional Court has already declared the unconstitutionality of the same with binding general force (cf. article 281 of the CRP) or we are faced with disrespect for constitutional norms directly applicable and binding, such as those referring to rights, liberties and guarantees (cf. article 18, no. 1, of the CRP).[i]

2. Following consolidated jurisprudence, this Tribunal understands that the AT, save in the situations referred to in the decision above summarized, does not have competence to assess the constitutionality of any legal norm, and cannot, on such grounds, refuse to apply it, as it is subject to the principle of legality, as provided in articles 266, no. 3, of the CPR, 55 of the General Tax Act and 3, no. 1, of the CPA.

3. From the foregoing, it is concluded that the decision to dismiss the amicable claim already identified, according to the terms and grounds on which it is based, does not merit censure.

Regarding the AIMI Regime

1. Through Law no. 42/2016, of 28/12 (State Budget Law for 2017) a new chapter XV was added to the CIMI, with articles 135-A to 135-K, creating the "Additional Tax on Real Property" (AIMI), to take effect as of 1 January 2017.

2. Of the said regime, with relevance for the assessment of the matter of the present proceedings, the following are highlighted: numbers 1 to 3 of article 135-A, which defines the subjective scope of the tax in question, as follows: "1 - The taxpayers of the additional tax on real property are natural or legal persons who are owners, usufructuaries or holders of surface rights of urban real properties situated in Portuguese territory." Establishing in no. 2 that "2 - For the purposes of no. 1, any structures or centers of collective interests without legal personality that appear in the registers as taxpayers of the real property municipal tax are equated with legal persons, as well as the undivided estate represented by the head of household."

3. According to no. 3 of the same article, "3 - The status of taxpayer is determined in accordance with the criteria established in article 8 of this Code, with the necessary adaptations, with reference to the date of 1 January of the year to which the additional tax on real property applies."

4. The objective scope of AIMI is established in article 135-B of the CIMI, of which no. 1 establishes that this tax applies "to the sum of the taxable property values of urban real properties situated in Portuguese territory of which the taxpayer is the holder".

5. As provided in no. 2 of the said article, the following are excluded from the objective scope of this Additional: "urban properties classified as 'commercial, industrial or service' and 'other' in accordance with paragraphs b) and d) of no. 1 of article 6 of this Code",

6. The applicable rate, when the taxpayer is a legal person, is, in general, 0.4% [ii] (CIMI article 135-F, no. 1).

7. As is evident from the provisions of articles 135-G and 135-H of the CIMI, the competence for the assessment of AIMI is attributed to the AT, which must be carried out annually, in the month of June, based on the taxable property values of the properties subject to tax and in relation to the taxpayers listed in the registers on 1 January of each year. Payment must be made by the end of the month of September.

8. Having set out, in its essential lines, the AIMI regime, it is verified that, in the case under analysis, the AT's procedure was carried out within its respective competence and within the applicable legal framework.

9. The question therefore lies in the assessment of the possible unconstitutionality of the norms of article 135-B of the CIMI, specifically its no. 2, which the Claimant considers should be disapplied, insofar as in the negative delimitation of the tax scope defined therein the residential properties and construction land held by legal persons in the scope of their business activity are not contained whereas, differently, all remaining urban properties "classified as 'commercial, industrial or service' and 'other'" in accordance with paragraphs b) and d) of no. 1 of article 6 of this Code" are integrated therein.

10. According to the Claimant's understanding, there is thus created, "without any basis of foundation, a glaring inequality at the material level between companies that have decided to pursue an economic activity that presupposes the ownership of properties, in relation to other companies whose activity does not result from the ownership of properties. - More than that, the legal conditions are created for the constitution of manifest situations of material inequality between the Challenging Party and companies that, holding real properties, pursue in them a commercial, industrial or service provision activity."

11. Let us therefore examine the scope of the tax exclusion established in that provision. It refers, with regard to the classification of excluded properties, to the criteria of article 6 of the CIMI.

12. This article defines the species of urban properties as follows:

1 - Urban properties are divided into:

a) Residential;

b) Commercial, industrial or service;

c) Construction land;

d) Other.

2 - Residential, commercial, industrial or service are buildings or constructions licensed for that purpose or, failing a license, which have as their normal destination each of these purposes.

3 - Construction land is considered to be land located inside or outside an urban area, for which a license or authorization has been granted, admitted prior notice or issued favorable prior information of a subdivision or construction operation, and also those that have been declared as such in the deed of acquisition, with the exception of land where the competent entities prohibit any of those operations, namely those located in green areas, protected areas or that, in accordance with municipal land planning plans, are allocated to spaces, infrastructure or public facilities.

4 - Land situated within an urban area that are not construction land nor are covered by the provision of no. 2 of article 3, as well as buildings and constructions licensed or, failing a license, which have as their normal destination other purposes than those referred to in no. 2, and also those of the exception of no. 3 are encompassed in the provision of paragraph d) of no. 1.

1. It is noted that the wording contained in the Budget Proposal, no. 2 of article 135-B, had the following wording "2 - The following are excluded from the additional real property municipal tax: urban properties classified as of the species 'industrial', as well as urban properties licensed for tourism activity, the latter provided that properly declared and proven their destination."

2. However, the wording that came to be approved does not exclude the scope of AIMI on properties allocated to housing and construction land used by legal persons in the scope of their economic activity.

3. Indeed, the regime that came to be approved by Law no. 42/2016, of 28/12, differs, in some respects, from what is contained in the initial proposal.

4. In fact, the Proposal for the 2017 State Budget states:

The revenue increase measures, in addition to the updating of IECs and ISV by 3%, focus on the introduction of two new taxes: a progressive additional tax on the IMI and an expansion of the IABA base to soft drinks. The two measures together represent only about 0.5% of total tax revenue. In both cases the revenue is dedicated.

The dedication of the taxation of real estate portfolio to the Financial Stabilization Fund of Social Security corresponds to the objective of the government program of broadening the financing base of Social Security, while introducing a tax that falls on holders of larger real estate portfolios, reinforcing the overall progressivity of the system.

(...)

The progressive taxation of real estate portfolio

The additional real property municipal tax introduces into the taxation of real estate portfolio a progressive element of personal base, taxing at a higher rate the larger portfolios, with a marginal rate of 0.3% applied to portfolios exceeding €600,000 per taxpayer.

To avoid the impact of this tax on economic activity, rural, mixed, industrial properties and those allocated to tourism activity are excluded from the scope, and companies are still allowed to deduct properties allocated to their productive activity up to €600,000. The possibility of deducting the amount of tax paid from the tax assessment relating to property income constitutes an additional incentive to the rental and productive use of the portfolio.

This tax replaces the previous 1% stamp tax on the value of the property above 1 million euros. With a much lower rate (0.3%) it is also more just as it takes into account the global value of the real estate portfolio and not, individually, the value of each property.

(...)

1. However, the negative delimitation of the scope of AIMI that came to be approved does not take as its basis the activity to which the urban properties are allocated but rather defines itself by reference to the species listed in article 6 of the CIMI, regardless of their allocation to business economic activity.

2. It is therefore manifest that the intention to exclude from AIMI the scope regarding properties allocated to the economic activity of legal persons has been abandoned, with only the classifications resulting from that provision of the CIMI being relevant for that purpose.

3. There is, therefore, no legal basis that permits concluding that, except when circumstances provided for in no. 3 of article 135-A of the CIMI, residential properties and construction land, within the meaning of article 6 of the same Code, that are allocated to economic activities of legal persons are excluded from the scope of AIMI.

4. The issues raised in the present proceedings regarding the possible unconstitutionality of the norms of the AIMI regime applicable to the present case, specifically no. 2 of article 135 of the CIMI, whose disapplication is requested, have already been the subject of numerous arbitral decisions, which, for the most part, have pronounced on the constitutionality of the norms in question.

5. Regarding the constitutionality issues raised by the Claimant, the understanding of this Tribunal follows the negative sense that, among many others, the decisions issued in proceedings nos. 291/2018-T, 306/2018-T, 310/2018-T, 324/2018-T, 356/2018-T and 420/2018-T have pronounced, particularly in the understanding expressed in the scope of this last proceeding, whose conclusions, without reservation, this Tribunal subscribes to and, with due respect, transcribes below:

"The ownership of real estate portfolio of high value, regardless of whether or not it is allocated to economic activity, is tendentially revelatory of high contributive capacity, superior to that which is to be presumed to exist when lower value portfolio is owned or when it does not exist, such that, in principle, the limitation of taxation to the first situations has justification.

However, the reasons that will underlie the distinction, for the purposes of AIMI taxation, between the property values of properties classified as residential or construction land (regardless of their actual allocation to these purposes) and those of urban properties that have other classifications, do not explicitly result from the Report on the 2017 Budget or from its parliamentary discussion, in light of article 6 of the CIMI.

With regard to properties that are classified as "other" in light of article 6, nos. 2, paragraph d), and 4, of the CIMI, a reason for distinction may be seen in the fact that these are essentially properties that are not intended for income-generating activities, namely land situated in urban agglomerations that do not meet the requirements necessary for their classification as construction land nor are being used for agricultural or forestry purposes and buildings intended for public spaces, infrastructure or facilities.

With regard to the exclusion of taxation with respect to properties intended for commerce, industry or services, an explanation may be discerned in the purpose invoked for the creation of this new tax, which is the financing of Social Security, ensured through the dedication of AIMI revenues to the Financial Stabilization Fund of Social Security, provided for in no. 2 of article 1 of the CIMI, in the wording of Law no. 42/2016, of 28 December.

It is not intended with AIMI to burden the taxation of luxury properties, as was primarily aimed at with item 28.1 of the General Stamp Tax Table, since large-value real estate portfolio may be constituted by a plurality of properties of small value, but rather to create another avenue of subsidization of the social security system, which is one of the constitutional incumbencies of the State, provided for in article 63, no. 2, of the CRP.

The sustainability and stability of Social Security, always in doubt, is a permanent concern that has justified multiple initiatives, well evidenced in the Major Policy Options for 2017 (Law no. 41/2016, of 28 December,) and for 2018 (Law no. 113/2017, of 29 December) among which is the diversification of financing sources, which is a principle long adopted in the Laws Establishing the Bases of Social Security (article 78 of Law no. 17/2000, of 8 August, article 107 of Law no. 32/2002, of 20 December and article 88 of Law no. 4/2007, of 16 January).

The essence of the principle of diversification of Social Security financing sources consists in the broadening of the bases for obtaining financial resources, aiming, namely, at the reduction of non-wage labor costs (article 79 of Law no. 17/2000, article 108 of Law no. 32/2002, and article 88 of Law no. 4/2007, of 16 January), which may explain that the new AIMI taxation is not applied to legal persons holding properties intended for commercial, industrial and service activities, as the ownership of properties of such types by legal persons is normally associated with the exercise of these activities, with the corresponding payment of contributions to Social Security, as employing entities [article 92, paragraph b), of Law no. 4/2007, and articles 3, paragraph a), and 14, paragraph a), of Decree-Law no. 367/2007, of 2 November].

From this perspective, in which the legislator, in need of financing for Social Security, privileges the position of tax collector over concern with the balance of business taxation, a foundation may be discerned for distinguishing between the ownership of real estate portfolio by persons who, presumably, will develop activities connected with the financing of Social Security (who will already contribute to that financing) and the ownership of properties not intended for those activities, whose holders will not, tendentially, be associated with that financing in the same way, at least not with the same intensity.

Article 13 of the Constitution of the Portuguese Republic proclaims the principle of equality of citizens before the law. As has been uniformly understood by the Constitutional Court, the principle of equality, as a limit to legislative discretion, does not require equal treatment of all situations, but rather implies that those in equal situations be treated equally and those in unequal situations be treated unequally, in such a way as not to create arbitrary and unreasonable discriminations, because they lack sufficient material foundation. The principle of equality does not prohibit the establishment of distinctions, but rather arbitrary distinctions, devoid of objective and rational justification. ( [4] )

Based on what was stated, the creation of a special taxation of high-value portfolio intended to ensure the financing of Social Security, limited to real estate portfolio that will not be tendentially connected with that financing, will not be completely devoid of objective and rational explanation.

On the other hand, the creation of AIMI, as a complementary tax on real estate portfolio, which aimed to introduce into taxation "a progressive element of personal base, taxing at a higher rate the larger portfolios" (Report on the 2017 Budget, page 60), is compatible with the objective that taxation of portfolio should contribute to equality among citizens, affirmed in no. 3 of article 104 of the CRP, since progressivity has as its corollary, tendentially, the imposition of greater taxation on those with greater contributive capacity.

The contributive capacity of business legal persons, relevant to the assessment of the application of the principle of tax equality, is not evidenced only by income, specifically by the results of the activity to which the properties are intended. In fact, "portfolio provides its holder with a special contributive capacity, advantages which by their nature escape personal income taxation: thus, the ownership of portfolio facilitates the raising of credit, reinforces the negotiating position of its holder in the conclusion of various contracts, makes it easier to multiply wealth allowing it to take risks where in principle it would not. In this light, property taxation is seen as something more than an extension of personal income taxation - this is not a matter of overburden income already subject to it but of reaching manifestations of contributive capacity that actually escape it" (...) Taxes on portfolio would be justified by allowing the transfer of resources for the benefit of the working class, instituting a "qualitative progressivity" complementary to the progressivity in quantity of personal income taxes."

On the other hand, if it is true that the different destinations of properties do not necessarily imply distinction in the level of contributive capacity, the exclusion of taxation of properties specially vocated for productive activity, specifically "commercial, industrial or service", will find another justification (in addition to the presumed greater contribution of these activities to Social Security by way of contributions), as it comes down, ultimately, to favoring of these activities, which harmonizes (and therefore will have constitutionally acceptable foundation) with the obligation of the State to promote the increase of economic well-being, which presupposes the good functioning of wealth-creating activities and constitutes one of its priority incumbencies within the economic sphere [article 81, paragraph a), of the CRP]. Being this a constitutionally considered priority incumbency, the first listed in this provision, certainly it will not be incompatible with the CRP to give it preferential protection when confronted with the constitutional duties of the State in the matter of housing indicated in article 65 of the CRP, which, obviously, are also protected through the good functioning of wealth-creating activities.

Thus, if it is true that the AIMI regime creates situations of discrimination in the taxation of enterprises with the same contributive capacity evidenced by portfolio, on the assumption that there is a need for money and new forms of raising it must be found (as is stated in the Report on the 2017 Budget), there will be some justification for taxation being imposed on some enterprises and not on others with the same or greater contributive capacity inherent to portfolio, especially in light of the majority jurisprudence of the Constitutional Court cited by the Tax and Customs Authority, which shows that it is constitutionally tolerable that the interests of the State collector of taxes (in this case, the sustainability of Social Security, demanded by the principles of trust and security) override strict respect for the principle of equality.

On the other hand, as the legislative objective is not the taxation of luxury housing but rather to obtain another means of financing Social Security, in line with the political option of diversification, through "a tax that falls on holders of larger real estate portfolios, reinforcing the overall progressivity of the system" (page 57 of the report on the 2017 State Budget), it is in light of these objectives that we must assess whether there is a violation of the principle of proportionality.

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

Therefore, it appears that it is not demonstrated that the principle of proportionality is violated"

1. Following, thus, the position expressed above, it is concluded that the taxation of AIMI does not violate the principles of equality, proportionality and contributive capacity invoked by the Claimant, based on articles 13, 18 and 104, no. 3, of the CRP.

VI - Decision

Therefore, and with the grounds stated, the Arbitral Tribunal decides:

a) To dismiss the request for declaration of illegality of the dismissal of the amicable claim;

b) To dismiss the request for arbitral pronouncement regarding the annulment of the AIMI assessment;

c) To condemn the Claimant in the costs of the present proceedings.

Value of proceedings: €6,999.64

Costs: Under the provisions of article 22, no. 4, of the RJAT, and in accordance with the Costs Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is fixed at €612.00, charged to the Claimant.

Lisbon, 23 April 2019,

The Arbitrator, Álvaro Caneira

[i] See in the same sense, Supreme Administrative Court, Decisions of 04-03-2015, Proc. 01529/14; of 01-06-2016, Proc. 01352/14; of 22-03-2017, Proc. 0471/14; and of 11-05-2018, Proc. 0704/14.

[ii] The rate applicable to legal persons is subject to increases when it refers to residential properties held for personal use or when these are persons subject to more favorable tax regimes (off-shores).