Summary
Full Decision
ARBITRAL DECISION
1. Report
A... Real Estate Investment Fund (Closed), tax ID number …, legally represented by B... – …, Real Estate Investment Fund Management Company, S.A., with headquarters at Rua …, Lisbon, legal entity no. ..., has submitted a request for the constitution of an Arbitral Tribunal pursuant to the corresponding Legal Framework for Tax Arbitration, for review of the legality of the assessment of Stamp Duty, item 28.1 of the General Stamp Duty Table (TGIS), no. 2014..., in the amount of € 131,971.70, relating to the year 2013, with payment deadline (for the first installment) on 30/04/2014 and relating to an urban property registered in the corresponding property matrix under article ..., located in the Municipality of ..., parish of the Union of ....
The respondent is the Tax and Customs Authority.
The request for constitution of the arbitral tribunal was presented on 29-07-2014, accepted by the President of CAAD on the 30th of that same month, and notified to the Tax and Customs Authority on the first day of the subsequent month of August.
Pursuant to the provisions of paragraph a) of section 2 of article 6 and paragraph b) of section 1 of article 11 of the Legal Framework for Tax Arbitration (RJAT), the Ethics Council designated arbitrators Judge José Poças Falcão (presiding arbitrator), Prof. Doctor Miguel Patrício, and Dr. Jaime Carvalho Esteves to form the Arbitral Tribunal, who communicated their acceptance of the appointment within the applicable timeframe.
In accordance with the provisions of paragraph c) of section 1 of article 11 of the RJAT, the collective arbitral tribunal was constituted on 01-10-2014.
The Tax and Customs Authority submitted its response.
By order of 10 February of the current year, the meeting provided for in article 18 of the RJAT was waived, as well as the parties' submissions.
The arbitral tribunal was duly constituted and is competent.
The parties possess legal personality and capacity, are legitimate, and are duly represented (articles 4 and 10, section 2, of the same legal instrument and article 1 of Order no. 112-A/2011, of 22 March).
The proceedings are not affected by nullities.
2. Subject Matter of the Dispute
The issue in the case concerns the application of the new taxation in Stamp Duty (IS) levied on urban properties with residential use and taxable patrimonial value equal to or exceeding one million euros, introduced in 2012 to strengthen budgetary control measures on the revenue side, within a context of financial emergency.
As is well known, this taxation has raised serious doubts and considerable dispute. This concerns not only specific cases of its application (e.g., vertical property, land for construction, or its application to the year 2012), but also in general terms, regarding its possible unconstitutionality (see Luís Menezes Leitão, On Stamp Duty Taxation of Luxury Properties (item 28.1 TGIS), in Tax Arbitration no. 1, pp. 44 et seq.).
The Claimant contests the application of said taxation resulting from the application of the new item 28.1 of the TGIS to urban properties corresponding to land for construction, requesting the annulment of the said Stamp Duty assessment act.
The assessment was made under the provisions of item 28.1 of the Table attached to the Stamp Duty Code, with the Claimant contending that the legal requirements necessary for application of the tax provided for in said item are not met with respect to the property in question.
The Claimant argues, in summary, that the property is land for construction and is therefore not covered by item 28.1 of the General Stamp Duty Table, in the version given by Law no. 55-A/2012, of 29 October, in force in 2013, which provides "For property with residential use – 1%".
More specifically, the Claimant contends that the applicability of said item requires, among other requirements, that the property in question have "residential use," which it contends does not exist in the factual situation at hand. Indeed, it considers that from sections 1 and 2 of article 6 of the Real Estate Tax Code (CIMI) (pursuant to article 67, section 2, of the Income Tax Code (CIS)) it follows that land for construction, as is the property in question in the proceedings, "is a type of urban property distinct from residential properties." It further adds that the expression "residential use" is used in article 41 of the CIMI for purposes of determining the taxable patrimonial value of built properties, on the understanding that there is no residential, commercial, or service use on land for construction, without prejudice to the possibility opened by article 45 of the CIMI to eventually include the intended future use of the building to be constructed in the value of the corresponding footprint area.
It further contends that the land adjacent to the planned construction site does not have, and will not have, residential use, notwithstanding having positively contributed to the taxable patrimonial value of the property in question (a land for construction, since "the built structure does not even exist") exceeding one million euros, which, as is known, pursuant to said item, is the minimum taxation requirement.
Additionally, the Claimant further contends that the taxation of land for construction in the case of companies whose object is the construction of buildings for sale or resale, and in which, therefore, the land corresponds to raw materials or merchandise, "violates the nature of the taxation," constituting a violation of the principle of contributive capacity (the retention of assets does not evidence wealth) and also of the constitutional principle of equality (other raw materials or merchandise do not occasion similar taxation).
Finally, the Claimant alleges having paid the first installment, and that it will pay the other two installments in a timely manner, thus petitioning for their reimbursement and the compensatory interest that may be due (article 43 of the General Tax Law (LGT)).
The Tax and Customs Authority contested the claim by acknowledging the factual matters invoked, but specifically refuting the alleged defects in the act, concluding that the assessment at issue constitutes a correct interpretation and application of the law to the facts, not suffering from the defect of violation of law, whether of the Constitution or of the Income Tax Code, and that, consequently, the Claimant's claim should be judged unfounded and the Respondent Entity should be absolved of the request.
To this end, the Respondent, in summary, invokes article 45, section 2, of the CIMI (applicable pursuant to article 67, section 2, of the CIS), from which it follows that in the evaluation of land for construction, the use coefficient provided for in article 41 of the CIMI shall apply.
Additionally, the Tax Authority contends that there is no unconstitutionality in the provision in question, as article 13 of the Constitution prevents only arbitrary, unreasonable discriminations that lack sufficient material justification and foundation. Which it contends does not occur in the normative provision of the applied norm and in the interpretation made thereof.
3. Matter of Fact
3.1. Established Facts
a) In the year 2013, the Claimant was the owner of the property that gave rise to the Stamp Duty assessment relating to the year 2013, with the number 2104..., in the amount of € 131,971.70, and relating to an urban property registered in the corresponding matrix under article ... and located in the Union of Parishes of ..., municipality of ...;
b) The first installment was paid within the legal timeframe by the Claimant;
c) The property corresponded to land for construction, with the planned construction partially intended for residential use;
d) The assessment is based on item 28.1 of the TGIS;
e) On 29-07-2014, the Claimant filed the request for arbitral determination that gave rise to the present proceedings.
3.2. Unproven Facts
There are no unproven facts relevant to the resolution of the case.
3.3. Rationale for the Determination of the Matter of Fact
The established facts are based on the parties' submissions and on the documents presented, whose correspondence to reality is not disputed.
4. Matter of Law
The question that is the subject of the present action is whether land for construction, on which the construction of a property intended (even if only partially) for residential use is authorized, should be considered in the evaluation of its taxable patrimonial value, are or are not within the scope of item 28.1 of the General Stamp Duty Table (TGIS), in its initial version, introduced by Law no. 55-A/2012, of 29 October.
4.1. Framework of Law no. 55-A/2012, of 29 October
Law no. 55-A/2012, of 29 October, made several amendments to the Stamp Duty Code and added item 28 to the TGIS, with the following wording:
28 – Ownership, usufruct, or right of superficies of urban properties whose taxable patrimonial value contained in the matrix, pursuant to the Real Estate Tax Code (CIMI), is equal to or exceeding € 1,000,000 – on the taxable patrimonial value used for purposes of the Real Estate Tax (IMI):
28.1 – For property with residential use – 1%;
28.2 – For property, when the taxable persons who are not natural persons are resident in a country, territory, or region subject to a clearly more favorable tax regime, contained in the list approved by order of the Minister of Finance – 7.5%.
A concept was used in said item 28.1 and in sub-items i) and ii) of paragraph f) of section 1 of article 6 of Law no. 55-A/2012 that is not used in any other tax legislation in these precise terms, which is that of "property with residential use."
Namely in the CIMI, which in several provisions of the Income Tax Code introduced by that Law is indicated as an instrument of subsidiary application with respect to the tax provided for in said item no. 28 [articles 2, section 4, 3, section 3, sub-paragraph u), 5, sub-paragraph u), 23, section 7, and 46 and 67 of the CIS], a concept with that designation is not used.
Law no. 83-C/2013, of 31 December, amended said item no. 28.1, giving it the following wording:
28.1 – For residential property or for land for construction the building of which, authorized or intended, is for residential purposes, pursuant to the provisions of the Real Estate Tax Code – 1%.
4.2. Concepts of Properties Used in the CIMI
In the Real Estate Tax (IMI), the types of properties are enumerated in articles 3 to 6 as follows:
Article 2
Concept of Property
1 – For purposes of this Code, property is any parcel of territory, encompassing waters, plantings, buildings, and constructions of any nature incorporated therein or situated thereon, with a character of permanence, provided that it forms part of the patrimony of a natural or legal person and, under normal circumstances, has economic value, as well as waters, plantings, buildings, or constructions, in the circumstances above, endowed with economic autonomy in relation to the land where they are situated, although situated on a parcel of territory that constitutes an integral part of a patrimony other than or does not have a patrimonial nature.
2 – Buildings or constructions, although movable by nature, are deemed to have a character of permanence when devoted to non-transitory purposes.
3 – The character of permanence is presumed when buildings or constructions are situated at the same location for a period exceeding one year.
4 – For purposes of this tax, each autonomous unit, under the regime of horizontal property, is deemed to constitute a property.
Article 3
Rural Properties
1 – Rural properties are land situated outside an urban agglomeration that are not to be classified as land for construction, pursuant to section 3 of article 6, provided that:
a) They are devoted to or, in the absence of concrete use, have as their normal destination an income-generating use such as are considered for purposes of the income tax on natural persons (IRS);
b) Not having the use indicated in the preceding sub-paragraph, they are not built on or have only buildings or constructions of an ancillary character, without economic autonomy and of reduced value.
2 – Also rural properties are land situated within an urban agglomeration, provided that, by virtue of legally approved provisions, they cannot have any income-generating use or can only have income-generating agricultural use and are actually being devoted to this use.
3 – Also rural properties are:
a) Buildings and constructions directly devoted to the production of agricultural income, when situated on the land referred to in the preceding sections;
b) Waters and plantings in the situations to which section 1 of article 2 refers.
4 – For purposes of this Code, urban agglomerations are considered, in addition to those situated within legally fixed perimeters, nuclei with a minimum of 10 dwellings served by public-use streets, with their perimeter delimited by points distanced 50 m from the axis of the streets, in the transverse direction, and 20 m from the last building, in the direction of the streets.
Article 4
Urban Properties
Urban properties are all those that should not be classified as rural, without prejudice to the provisions of the following article.
Article 5
Mixed Properties
1 – Whenever a property has rural and urban parts, it is classified, in its entirety, according to the principal part.
2 – If neither of the parts can be classified as principal, the property is deemed mixed.
Article 6
Types of Urban Properties
1 – Urban properties are divided into:
a) Residential;
b) Commercial, industrial, or for services;
c) Land for construction;
d) Other.
2 – Residential, commercial, industrial, or for services are buildings or constructions licensed for such purposes or, in the absence of a license, that have such purposes as their normal destination.
3 – Land for construction is considered to be land situated within or outside an urban agglomeration for which a license or authorization has been granted, prior notice admitted, or favorable prior information issued regarding a subdivision or construction operation, and also land that has been declared as such in the title of acquisition, excepting land on which the competent entities prohibit any of those operations, namely those located in green areas, protected areas, or that, in accordance with municipal territorial planning plans, are devoted to public spaces, infrastructure, or facilities. (Wording of Law no. 64-A/08, of 31-12)
4 – The provision of sub-paragraph d) of section 1 encompasses land situated within an urban agglomeration that is not land for construction nor is covered by the provision of section 2 of article 3, and also buildings and constructions licensed or, in the absence of a license, that have as their normal destination other purposes than those referred to in section 2, and also those in the exception of section 3.
4.3. Standards on Interpretation of Laws
Article 11 of the General Tax Law establishes the essential rules for interpretation of tax laws as follows:
Article 11
Interpretation
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In determining the meaning of tax norms and in qualifying the facts to which they apply, the general rules and principles of interpretation and application of laws are observed.
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Whenever tax norms employ terms proper to other branches of law, they shall be interpreted in the same sense they have therein, unless otherwise directly results from the law.
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Persisting doubt about the meaning of the norms of incidence to apply, the economic substance of the tax facts shall be heeded.
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Gaps resulting from tax norms covered by the legislative reserve of the Assembly of the Republic are not susceptible to analogical integration.
The general principles for interpretation of laws, to which section 1 of article 11 of the General Tax Law refers, are established in article 9 of the Civil Code, which establishes the following:
Article 9
Interpretation of Law
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Interpretation should not be limited to the letter of the law, but should reconstruct from the texts the legislative thought, taking especially into account the unity of the legal system, the circumstances in which the law was enacted, and the specific conditions of the time in which it is applied.
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However, the interpreter cannot consider the legislative thought that does not have in the letter of the law a minimum of verbal correspondence, albeit imperfectly expressed.
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In determining the meaning and scope of the law, the interpreter shall presume that the legislator adopted the most correct solutions and knew how to express his thought in adequate terms.
4.4. Interpretive Hypotheses of the Concept of "Property with Residential Use"
From the provisions of the CIMI transcribed above, it follows that the concept of "property with residential use" is not used in the classification of properties. Nor is this concept found, with this terminology, in any other legal instrument. Thus, given the lack of exact terminological correspondence between the concept of "property with residential use" and any other used in other instruments, several interpretive hypotheses can be advanced.
As is now settled jurisprudence, the starting point for interpretation of that expression "properties with residential use" shall be the text of the law, to reconstruct on the basis thereof the "legislative thought," as required by section 1 of article 9 of the Civil Code, applicable pursuant to the provision in article 11, section 1, of the General Tax Law.
4.5. Concept of "Property with Residential Use" as Referring to Residential Properties
The concept most closely aligned with the literal tenor of the expression used ("property with residential use") is manifestly that of "residential properties," defined in section 2 of article 6 of the CIMI as encompassing "buildings or constructions" licensed for residential purposes or, in the absence of a license, that have residential purposes as their normal destination.
If it were to be understood that the expression "property with residential use" coincides with that of "residential properties," it is clear that the assessments would be affected by error concerning the factual and legal presuppositions, for all properties with respect to which Stamp Duty was assessed under said item no. 28.1 are land for construction, without any building or construction, required by that section 2 of article 6 to fulfill that concept of "residential properties."
Therefore, if the interpretation were adopted that "property with residential use" means "residential property," the assessments whose declaration of illegality is requested would be illegal, as there would be no building or construction on any of the plots of land.
However, the non-correspondence of the terms of the expression used in item no. 28.1 of the TGIS with that extracted from section 2 of article 6 of the CIMI points toward the conclusion that it was not intended to use the same concept.
4.6. Concept of "Property with Residential Use" as a Concept Distinct from "Residential Properties"
The word "use" (afectação), in this context of property use, has the meaning of "the act of designating something for a particular use."
"When, as is usually the case, norms (legislative formulas) allow more than one meaning, then the positive function of the text is translated into giving stronger support to or more strongly suggesting one of the possible meanings. For, among the possible meanings, some will correspond to the most natural and direct significance of the expressions used, whereas others will only fit within the verbal framework of the norm in a forced, contrived manner. Now, in the absence of other elements that induce the choice of the less immediate sense of the text, the interpreter should opt in principle for that sense which best and most immediately corresponds to the natural meaning of the verbal expressions used, and especially to their technical-legal significance, on the presumption (not always exact) that the legislator knew how to express his thought correctly."
Now, the relevance of the text of the law is especially emphasized in the matter of interpretation of norms establishing the incidence of Stamp Duty, which are reducible to an amalgamation, under a common denomination, of an incongruous set of taxes of completely distinct natures (on income, on expenditure, on patrimony, on acts, etc.), which leaves no appreciable margin for application of the primary interpretive criterion, which is the unity of the legal system, which requires the global coherence thereof.
Moreover, the recognized lack of coherence of Stamp Duty is still particularly exuberant in the case of this item no. 28.1, included outside the State Budget for 2013, within a context of generalized tax increases, dictated by urgent and imperative budgetary reasons, by pressure from international institutional creditors (represented by the "troika") and also as a result of scrutiny by the Constitutional Court of successive norms intended to broaden revenue and reduce public expenditure.
Thus, although in the "Explanatory Memorandum" of Bill no. 96/XII/2nd, on which Law no. 55-A/2012 was based, reference is made to the Government's concern to "strengthen the principle of social equity in austerity, ensuring an effective sharing of the sacrifices necessary to fulfill the adjustment program" and to its commitment "to ensure that the sharing of those sacrifices will be made by all and not only by those who live from the income of their work," it is evident that the scope of item no. 28.1, by taxing in an increased manner only certain properties with residential use and not also properties that do not have such use, does not achieve that desideratum of equitable broadening of the tax base.
In this context, absent interpretive elements that would allow detection of legislative coherence in the solution adopted in said item no. 28.1 or of the correctness or incorrectness of the solution adopted (relevant for interpretive purposes in light of section 3 of article 9 of the Civil Code), the content of the legal text must be the primary element of interpretation, in accordance with the presumption imposed by the same section 3 of article 9, that the legislator knew how to express his thought in adequate terms.
In light of those meanings of the words "use" (afectação) and "to use" (afectar), which are "to give destination" or "to apply," the formula used in said item no. 28.1 of the TGIS manifestly encompasses properties that have already been given a destination for residence, properties that are already applied to residential purposes, so it is necessary to inquire whether it will also encompass properties that, although not yet applied to residential purposes, are intended for these purposes, namely in a subdivision permit.
To this end, it will be necessary to clarify when it can be understood that a property is used for residential purposes, namely whether it is when such a destination is fixed in a subdivision permit or licensing act or similar, or only when the effective assignment of that destination is concretized.
From the outset, the comparison of item no. 28.1 of the TGIS with section 2 of article 6 of the CIMI, which defines the concept of residential properties, points toward the necessity of an effective use.
In truth, a building or construction licensed for residence or, even without a license, but that has residence as its normal destination, is, in light of section 2 of that article 6, a residential property, for it is given this classification to "buildings or constructions licensed for such purposes or, in the absence of a license, that have such purposes as their normal destination."
Therefore, on the presumption that the legislator of Law no. 55-A/2012 knew how to express his thought in adequate terms (as required by article 9, section 3, of the Civil Code that is presumed), if he intended to refer to those properties already licensed for residence or that have residence as their normal destination, he would surely have used the concept of "residential properties," which would express perfectly and clearly his thought, in light of the definition given by that section 2 of article 6 of the CIMI.
Consequently, it must be presumed that the use of a different expression is intended to designate a different reality, so that, in sound interpretation, "property with residential use" cannot be a property only licensed for residence or intended for this purpose (that is, it will not be sufficient that it be a "residential property"), and must be a property that already has effective use for this purpose.
That this is the meaning of the term "use" (afectação), in the same context of property classification that the CIMI makes, is confirmed by article 3, in which, with respect to rural properties, reference is made to those "that are used or, in the absence of concrete use, have as their normal destination an income-generating use such as those generating agricultural income," which evidences that use is concrete, effective. In truth, as is seen from the final part of this text, a property may have a particular use as its destination and be or not be devoted to it, which evidences that use is, at the level of the connection of a property to a particular use, something more intense than mere destination and may or may not occur, downstream of this and not upstream.
Moreover, the text of the law by adopting the formula "property with residential use," instead of "urban properties of residential use," which appears in said "Explanatory Memorandum," points strongly toward the conclusion that effective residential use must already be concretized, for only then will the property have this use.
In the case at hand, one is faced with a reality even more distant from residential use, which is that no building or construction even exists, and therefore, one cannot consider existing a use that presupposes its existence.
Moreover, nor is it extractable from the normative text what the degree of (residential) use is relevant for purposes of incidence of the new item: the entire property, only part of it, and in the second possibility, will there be a necessary minimum to make relevant for tax purposes this merely partial "use," or will it be relevant however minimal it may be?
Additionally, the legislative intention to confine the scope of incidence to "urban properties ... residential" with exclusion of land for construction was expressly stated by the Government when presenting Bill no. 96-XII to the Plenary of the Assembly of the Republic, saying, through the voice of the Secretary of State for Tax Affairs:
"First, the Government proposes the creation of a special tax to tax high-value urban residential properties. This is the first time in Portugal that special taxation has been created on high-value properties intended for residence. This tax will be 0.5% to 0.8% in 2012, and 1% in 2013, and will apply to houses valued at € 1 million or more. With the creation of this additional tax, the tax burden required of these owners will be significantly increased in 2012 and 2013."
The express reference to "houses" as the target of the incidence of the new tax leaves no room for doubt about the legislative intention.
On the other hand, there is no reference in the discussion of said Bill to "land for construction."
As regards article 45 of the CIMI, invoked by the Respondent as the basis for the "use," it has no relationship with the classification of properties, only indicating the factors to be considered in the evaluation of land for construction. What is considered therein, by referring to the "building to be constructed," is the consideration of the destination of the land, which, as has been seen, is something that, in the context of the CIMI, does not imply use and occurs before this.
On the other hand, it should also be added that Law no. 83-C/2013, of 31 December, confirmed, at least indirectly, the interpretation that the provision in question in its initial version did not encompass land for construction.
In truth, if the original wording of that item no. 28.1, by speaking of "property with residential use," already intended to encompass buildings and constructions constituting "residential properties" (in the terms of article 6, section 2, of the CIMI), and also land for construction for which residence was authorized or intended, it would be natural that interpretive effect be given to the new wording, similar to what the same Law no. 83-C/2013 does in other provisions [article 177, section 7, regarding sub-paragraphs a) and b) of section 3 of article 17-A of the Income Tax Code, and article 185, section 1, regarding article 3-A of the Value Added Tax Code] and is customarily done in budgetary laws, when new wordings are intended to apply to situations potentially covered by prior wordings.
Therefore, the fact that interpretive effect was not given to the new wording points toward the conclusion that the intention was to alter the scope of incidence of said item no. 28.1 of the TGIS and not maintain it, clarifying it.
Based on the foregoing, the assessment whose declaration of illegality is requested by the Claimant is affected by the defect of error concerning the legal presuppositions, embodied in violation of item no. 28.1 of the TGIS, which justifies its annulment (article 135 of the Administrative Procedure Code).
Thus, the analysis of the possible unconstitutionality of the norm or of the interpretation made thereof is rendered unnecessary and therefore moot.
4.8. Compensatory Interest
The Claimant made payment of the 1st installment of the tax, so that, proceeding with the present request for annulment of the tax act, the Tax Authority should be condemned to reimburse it, for tax paid unduly, plus compensatory interest, calculated from the date of payment.
Indeed, in the case at hand, as has also been consistent jurisprudence, it is not clear how not to impute to the Tax Authority the error arising from the interpretation it itself created. It is therefore evident that compensatory interest is owed in the aforementioned terms.
If it is shown that one or more subsequent installments have actually been paid, they shall be reimbursed, plus compensatory interest, on the same terms.
5. Operative Part
In accordance with the foregoing, it is decided to judge the Claimant's request well-founded, and consequently to annul the assessment act identified above, on the ground of violation of law, further declaring the right to compensatory interest calculated on the amount or amounts disbursed and from the date of the respective disbursement, until the processing of the corresponding credit note in which they are included.
6. Value of the Case
In accordance with the provisions of article 306, sections 1 and 2, of the Code of Civil Procedure and article 97-A, section 1, sub-paragraph a), of the Code of Tax Procedure and section 3, section 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is set at € 131,971.70.
7. Costs
Pursuant to article 22, section 4, of the Legal Framework for Tax Arbitration, the amount of costs is set at € 3,060.00 (three thousand and sixty euros), in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, entirely borne by the Tax and Customs Authority.
Text prepared by computer, in accordance with the Code of Civil Procedure (CPC), applicable by referral of article 29, section 1, sub-paragraph e) of the RJAT, governed by the orthography prior to the Orthographic Agreement of 1990, with blank lines and revised by the signing arbitrators.
Lisbon, 16-03-2015
The Arbitrators
(José Poças Falcão)
(Miguel Patrício)
(Jaime Carvalho Esteves)
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