IMT and Stamp Tax Exemptions for Real Estate Investment Funds for Residential Leasing (FIIAH) - CAAD 570/2016-T

ARBITRAL DECISION

I – REPORT

Request

A…, S.A., with registered office at …, no. …, …, …-… Lisbon, registered at the Commercial Registry Office of Lisbon under the single registration and tax identification number … (hereinafter "Managing Entity"), in its capacity as managing company of the real estate investment fund "B… – CLOSED REAL ESTATE INVESTMENT FUND FOR RESIDENTIAL RENTAL" registered with the Securities Market Commission, with tax identification number … (hereinafter "Claimant"), filed, on 19-09-2016, under the provisions of paragraph a) of item 1 of article 2nd and in article 10th of Decree-Law no. 10/2011, of 20 January, which approves the Legal Framework for Arbitration in Tax Matters (RJAMT), a request for arbitral decision, in which the AT - TAX AUTHORITY AND CUSTOMS AUTHORITY is the Respondent, hereinafter referred to as Respondent, with a view to:

• The declaration of nullity or, alternatively, the annulment of the levy of Municipal Tax on Onerous Real Estate Transfers no. …, relating to the acquisition carried out on 18.12.2013, at the Notary's Office in Lisbon, of the fraction AM of the urban property registered under article … in the urban property register of the parish of …– Lisbon;

• The declaration of nullity or, alternatively, the annulment of the levy of Stamp Tax no. …, relating to the acquisition carried out on 18.12.2013, at the Notary's Office in Lisbon, of the fraction AM of the urban property registered under article … in the urban property register of the parish of …– Lisbon;

• The reimbursement of amounts wrongly paid relating to the contested levies.

The Claimant alleges, in summary, as follows:

With regard to Municipal Tax on Onerous Real Estate Transfers (IMT), article 8, item 7 of the Regime of Real Estate Investment Funds for Residential Rental (FIIAH) establishes:

1. The following are exempt from IMT:

• Acquisitions of urban properties or autonomous fractions of urban properties intended exclusively for rental for permanent housing, by the investment funds referred to in item 1;

• Acquisitions of urban properties or autonomous fractions of urban properties intended for own and permanent housing, as a result of the exercise of the purchase option referred to in item 3 of article 5 by the tenants of the properties that form part of the assets of the investment funds referred to in item 1.

• Law no. 83-C/2013, of 31 December, added to article 8 of the FIIAH Regime items 14 to 16 with the following text:

14 - For the purposes of the provisions of items 6 to 8, urban properties are considered to be intended for rental for permanent housing whenever they are the subject of a rental contract for permanent housing within a period of three years counted from the moment when they became part of the fund's assets, and the taxpayer must communicate and provide proof to the AT of the respective effective rental within 30 days following the end of the said period.

15 - When the properties have not been the subject of a rental contract within the three-year period provided for in the previous number, the exemptions provided for in items 6 to 8 shall cease to have effect, and in that case the taxpayer must request from the AT, within 30 days following the end of the said period, the levy of the respective tax.

16 - If the properties are disposed of, with the exception of the cases provided for in article 5, or if the FIIAH is subject to liquidation, before the period provided for in item 14 has elapsed, the taxpayer must also request from the AT, before the disposal of the property or the liquidation of the FIIAH, the levy of the tax due under the terms of the previous number.

• The same Law established in its article 236th the following transitional regime:

Article 236th

1 - The provisions of items 14 to 16 of article 8 of the special regime applicable to FIIAH and SIIAH, approved by articles 102nd to 104th of Law no. 64-A/2008, of 31 December, shall apply to properties that have been acquired by FIIAH as of 1 January 2014.

2 - Without prejudice to the provisions of the previous number, the provisions of items 14 to 16 of article 8 of the special regime applicable to FIIAH and SIIAH, approved by articles 102nd to 104th of Law no. 64-A/2008, of 31 December, shall also apply to properties that have been acquired by FIIAH before 1 January 2014, in which cases the three-year period provided for in item 14 shall be counted from 1 January 2014.

• Item 14 of article 8 above transcribed defined for the first time the meaning of the expression "urban properties intended for rental for permanent housing", which it did as follows: "urban properties intended for rental for permanent housing (...) are urban properties (and autonomous fractions) that are the subject of a rental contract for permanent housing within a period of three years counted from the moment when they became part of the fund's assets;

• Finally, article 236th (transitional rule within the special regime applicable to FIIAH and SIIAH) of Law no. 83-C/2013, of 31 December extended the application of the above regime "to properties that have been acquired by FIIAH before 1 January 2014, in which cases the three-year period provided for in item 14 shall be counted from 1 January 2014".

• Based exclusively on the above provisions, the Claimant requested from the Tax Authority the levy of IMT and stamp tax on the acquisition of the autonomous fraction identified by the letter AM of the urban property registered in the register under article … of the parish of …– Lisbon, resulting from this the levy of IMT no. …, in the amount of €5,101.88, and the levy of Stamp Tax no. …, in the amount of €1,516.00;

• The Levies were made under article 8, number 16, of the Tax Regime of FIIAH, (applicable by virtue of article 236 (Transitional Rule within the Special Regime applicable to FIIAH and SIIAH), number 2, of Law no. 83-C/2013, of 31 December;

• If the Tax Regime of FIIAH had not been modified (Amendment to the tax regime of funds and real estate investment companies for residential rental), and article 236 (Transitional Rule within the Special Regime applicable to FIIAH and SIIAH), of Law no. 83-C/2013, of 31 December) the Claimant would never have requested the levies.

• Both taxes were paid on 14 July 2016;

• IMT is a single-obligation tax;

• Stamp Tax, when taxing "the onerous acquisition or acquisition by donation of the right of ownership or fractional figures of such right over real property, is also a single-obligation tax.

• The exemptions from IMT and Stamp Tax, contained, respectively, in items 7, paragraph a), and 8 of article 8 of the Tax Regime of FIIAH, were recognized at the request of Fund B…, pursuant to article 10 (Recognition of exemptions) of the IMT Code, at a moment prior to the entry of the relevant properties into the assets of Fund B….

• That is, at the moment when the properties - subject of the levies - entered the assets of Fund B…, the exemptions from IMT and Stamp Tax provided for, respectively, in items 7, paragraph a), and 8 of article 8 of the Tax Regime of FIIAH were definitively crystallized in the tax legal order.

• Effectively, the fact subject to taxation is, both in the case of IMT and in the case of Stamp Tax, the acquisition of ownership of the relevant properties by Fund B….

• The exemptions from IMT and Stamp Tax were not, at the time when they entered the assets of Fund B…, conditioned to the subsequent verification of any facts or circumstances nor, likewise, subject to any regime of expiration;

• Not being legally foreseen, at the moment of recognition of the exemption, any facts or circumstances on which the expiration of the recognized exemption depends, it is manifest that the subsequent imposition of these facts or circumstances to exemptions crystallized in the tax legal order of the Claimant suffers from unconstitutionality, by violation of the principle of non-retroactivity of tax law, enshrined in article 103, item 3 of the Constitution of the Portuguese Republic;

• The invocation of the application of the principle of retroactivity now cited takes into account the understanding that has been followed by the Constitutional Court according to which the prohibition of retroactivity, in the field of tax law, is directed only to authentic retroactivity, covering only those cases in which the taxable fact that the new law intends to regulate has already produced all its effects under the old law; excluded from its scope of application are situations of retrospectivity or improper retroactivity, that is, those situations in which the law is applied to past facts but whose effects still persist in the present, as occurs when tax rules produce an increase in the tax burden of taxpayers in relation to taxable facts that did not occur entirely within the domain of the old law and continue to form themselves, still in the course of the same fiscal year, under the new law (e.g. judgments no. 128/2009, 85/2010 and 399/2010, all accessible at www.tribunalconstitucional.pt);

• Article 236 of Law no. 83-C/2013, of 31 December, in extending the application of the current Tax Regime of FIIAH "to properties that have been acquired by FIIAH before 1 January 2014, in which cases the three-year period provided for in item 14 shall be counted from 1 January 2014" is violating in a direct and unequivocal manner the principle of non-retroactivity of tax law constitutionally enshrined. Indeed, the extension established there configures a new regime of expiration of the exemptions provided for in items 7, paragraph a) and 8 of article 8 (Tax Regime) and not a mere densification of a criterion previously foreseen.

• In the case under judicial review there are no doubts whatsoever that the taxable facts that the new law intends to regulate have already produced all their effects under the old law.

• According to item 1 of article 133 of the Administrative Procedure Code in force at the time of the levies, "acts lacking any of the essential elements or for which the law expressly sanctions this form of invalidity" are null, and item 2 of the same provision exemplifies some situations in which this is considered verified, namely, with "acts that violate the essential content of a fundamental right - paragraph d) of item 2.

• Specifying: the prevailing doctrine and the learned jurisprudence of the Supreme Administrative Court understand that not all acts that harm constitutional principles are null, only those that violate the essential content of a fundamental right being so, that is, those that conflict with rights, freedoms and guarantees of citizens, and no longer those that conflict with the principle of tax legality.

• It is relevant to recall that the rule set out in article 103, item 3, of the Constitution of the Portuguese Republic determines that "no one can be compelled to pay taxes that have not been created in accordance with the Constitution (...)"

• It is also relevant that this constitutional rule has been interpreted by doctrine as enshrining a right of resistance to illegal actions by the Administration.

• Considering that the principle of non-retroactivity of tax law has the character of a fundamental right, endowed with the legal regime protective of this right, its disrespect originates the nullity of the act, in this case, the nullity of the levies.

• According to LOPES DE SOUSA, the "STA has come to understand, uniformly, that the unconstitutionality of norms on which the levy was based is framed in paragraph a), of item 1 of article 204 of the CPPT, by it affecting the validity of the norms to which it refers, which is equivalent to their non-existence in the laws in force."

• Now, pursuant to the provisions of article 102, item 3, of the CPPT, when the ground of challenge is nullity, the judicial challenge can be raised at any time.

• The admissibility of challenging the defect of nullity without dependence on a time limit does not exclude the competence of the Arbitral Tax Court, specifically, by literal interpretation of article 10 of the RJAT.

• Indeed, the cited article 10 of the RJAT should not be interpreted in the sense of being exclusively applicable to situations in which acts whose challenge is subject to a time limit are at issue.

• Admitting, alternatively, that the defect (abstract illegality) of the levies determines their annulability (and not nullity), the levies should be annulled accordingly, pursuant to articles 10, item 1, paragraph a), of the RJAT and article 102, item 1, paragraph a) of the Code of Procedure and Tax Procedure.

Response of the Respondent

In its Response, the Respondent alleges, briefly, as follows:

By exception:

• Regardless of the defect that may be considered attributable to the levies in question, the Claimant invokes that the levies suffer from abstract illegality, cfr. art. 48 of the ppa.

• However, if this thesis of the Claimant is accepted, then the Arbitral Court is materially incompetent to appreciate, in the abstract, the constitutionality of the norm in question, as petitioned.

• Indeed, given what is alleged by the Claimant, it results that the latter intends (after all) the non-application of the norm due to its alleged illegality/unconstitutionality and not due to any illegality occurring in its application to the concrete facts.

• Therefore, if the issue in the present proceedings is not a situation of possible non-application of a norm due to any illegality occurring in its application to the concrete facts, as the Claimant now argues, but rather its own (intrinsic) illegality/unconstitutionality,

• Then, it is necessary to conclude that the Arbitral Court does not have competence to appreciate this question, since it is intended to apply abstract control of the constitutionality of the norms, a matter constitutionally reserved for the Constitutional Court, pursuant to paragraph a) of item 2, of article 281 of the CRP.

• Furthermore, on the other hand, within the scope of the appreciation of abstract control of constitutionality, the Respondent would always be an illegitimate party.

• Because, as is well known, the Tax Administration cannot refuse to apply norms on the basis of their unconstitutionality or illegality, since it is subject to the principle of legality, as established in articles 266, item 2 of the CRP, 3, item 1 of the CPA and 55 of the LGT.

• From which it is concluded that the claim raised by the Claimant conflicts with the powers of the Respondent and with its binding to the law and the Constitution, in that the appreciation by 2, of article 281 of the CRP.

• Thus, being in the presence of a normative act emanated from the Assembly of the Republic in the typical form of legislative act, the Court should always declare the absolution of the Respondent from the instance, given the exception of passive illegitimacy demonstrated in the present arbitral proceedings, pursuant to articles 278, item 1, paragraph d) and 576, items 1 and 2 of the CPC, applicable by virtue of article 29, item 1, paragraph e) of the RJAT.

By challenge on the merits:

• Pursuant to item 2 of article 266 of the CRP, the Administration is obliged to act in accordance with the principle of legality, and administrative organs and agents do not have competence to decide on the non-application of norms in relation to which doubts of constitutionality are raised.

• That is, bound by the principle of legality, the AT cannot, by virtue thereof, non-apply norms based on the interpretation it makes of their unconstitutionality.

• Therefore, and in summary, the AT 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 established in articles 266, item 2 of the CRP, 3, item 1 of the CPA and 55 of the LGT.

Regarding the alleged unconstitutionality

• Article 102 of Law no. 64-A/2008, of 31 December (State Budget for 2009), approved a special regime applicable to real estate investment funds for residential rental (FIIAH) and real estate investment societies for residential rental (SIIAH).

• The regime provided for there would apply to FIIAH or SIIAH constituted during the five years following the entry into force of the said law and to real properties acquired by them in the same period.

• With regard to the tax regime then specifically provided for, it must be noted, for what now matters, the provisions of article 8, item 7, relating to the exemption from IMT and article 8, item 8, relating to the exemption from Stamp Tax.

• Pursuant to article 8, item 7, paragraph a) are exempt from IMT "Acquisitions of urban properties or autonomous fractions of urban properties intended exclusively for rental for permanent housing, by the investment funds referred to in item 1".

• Such exemption applies, by virtue of the provisions of item 1, to FIIAH constituted between 1 January 2009 and 31 December 2013, which operate in accordance with national legislation and in observance of the conditions provided for in articles 1 to 7 of their respective legal regime.

• For its part, pursuant to article 8, item 8, "All acts performed are exempt from stamp tax, provided they are connected with the transmission of urban properties intended for permanent housing that occurs by virtue of the conversion of the right of ownership of such properties into a right of rental thereon, as well as with the exercise of the purchase option provided for in item 3 of article 5."

• Law no. 83-C/2013, of 31 December gave new wording to the aforementioned article 8, relating to the tax regime applicable to FIIAH, adding to it, in particular, items 14 to 16, in the following terms:

"14 - For the purposes of the provisions of items 6 to 8, urban properties are considered to be intended for rental for permanent housing whenever they are the subject of a rental contract for permanent housing within a period of three years counted from the moment when they became part of the fund's assets, and the taxpayer must communicate and provide proof to the AT of the respective effective rental within 30 days following the end of the said period.

15 - When the properties have not been the subject of a rental contract within the three-year period provided for in the previous number, the exemptions provided for in items 6 to 8 shall cease to have effect, and in that case the taxpayer must request from the AT, within 30 days following the end of the said period, the levy of the respective tax.

16 - If the properties are disposed of, with the exception of the cases provided for in article 5, or if the FIIAH is subject to liquidation, before the period provided for in item 14 has elapsed, the taxpayer must also request from the AT, before the disposal of the property or the liquidation of the FIIAH, the levy of the tax due under the terms of the previous number".

• Furthermore, Law no. 83-C/2013, of 31 December also established, in its article 236, the following transitional rule:

"1 - The provisions of items 14 to 16 of article 8 of the special regime applicable to FIIAH and SIIAH, approved by articles 102 to 104 of Law no. 64-A/2008, of 31 December, shall apply to properties that have been acquired by FIIAH as of 1 January 2014.

2 - Without prejudice to the provisions of the previous number, the provisions of items 14 to 16 of article 8 of the special regime applicable to FIIAH and SIIAH, approved by articles 102 to 104 of Law no. 64-A/2008, of 31 December, shall also apply to properties that have been acquired by FIIAH before 1 January 2014, in which cases the three-year period provided for in item 14 shall be counted from 1 January 2014".

• Item 14 of article 8 of the Tax Regime of FIIAH came to specify the meaning of the expression "urban properties intended exclusively for rental for permanent housing", since according to its terms, "urban properties are considered to be intended for rental for permanent housing whenever they are the subject of a rental contract for permanent housing within a period of three years counted from the moment when they became part of the fund's assets";

• Alongside such specification, with the introduction of items 15 and 16 in the said article 8, a regime of cessation of the benefit was provided for in the event that the legal requirement contained in item 14 is not observed.

• With respect to the above-identified property, which was part of the Fund on the date of entry into force of Law 83-C/2013, of 31 December, the Claimant requested from the AT the levies of IMT and Stamp Tax, in light of the changes introduced to the tax regime of FIIAH, in that in 2016 it disposed of it to third parties, giving it, thus, a different purpose from that which was supposed to be: residential rental.

• Defending now the Claimant that the levies in question suffer from illegality due to violation of the provisions of article 103, item 3, of the CRP, and should, consequently, be declared null.

• It must be said immediately that the defect pointed out, by alleged violation of article 103 of the CRP, does not generate nullity.

• Indeed, the sanction that falls on an invalid administrative act is its annulability (article 135 of the [former] CPA), nullity only occurring when it lacks one of its essential elements or when the law expressly sanctions it with this form of invalidity (article 133 of the [former] CPA).

• This choice of the legislator is perfectly understandable if we consider that the regime of nullity (which generates absolute incapacity to produce effects and the possibility of its judicial challenge at any time) must be reconciled with the principles of certainty and stability, fundamental in administrative relations, in order not to jeopardize the effectiveness and security of this activity of the administration with those administered.

• It happens that, even if the violation of the normative provision invoked by the Claimant is verified, namely, article 103, item 3, of the CRP, the fact is that, as stated, the challenged acts are only capable of annulment and never of their declaration of nullity;

• And thus because, considering that the legal provision of paragraph d), of item 2 of article 133 of the CPA is only extensible to the violation of rights, freedoms and guarantees of Title II of Part I of the CRP, the case at hand does not have legal framing here – in this sense, cfr. judgment of the TCAN, of 03/02/2012, case: 00473/09.6BEPNF.

• Finally, it must be made clear that the doctrinal citation set out in the arbitral request, by reference to the regime underlying article 204, item 1, paragraph a) of the CPPT [with the heading "grounds of opposition to tax enforcement"], is manifestly decontextualized, not resulting therefrom any understanding coinciding with the "thesis of nullity" now advocated by the Claimant;

• This is because, if one looks not only at the short excerpt brought to the proceedings by the Claimant, but at the explanation of Jorge Lopes de Sousa on this matter, it appears from the outset that it is not possible to raise the defect of unconstitutionality at any time, as the Claimant intends.

• Indeed, from the citation indicated by the Claimant, which is reproduced below, it follows that unconstitutionality is not a defect capable of being invoked at all times, since the maximum time limit that is legally fixed is the time limit for filing opposition to tax enforcement:

"Thus, it must be concluded that, even with respect to null acts, it falls within the freedom of configuration of the legislator, within constitutional limits, to define their respective regime of challenge, which does not have to be that of impugnability at any time. For this reason, if it is appropriate to attribute to the defect of abstract illegality of a levying act the qualification of nullity, this does not imply that, legislatively, the possibility of its challenge at any time must be ensured, being able to be, as it was, adopted the regime resulting from the aforementioned articles 203, item 1, and 209, item 1, paragraph a), of the CPPT.

The STA has come to understand, uniformly, that the unconstitutionality of norms on which the levy was based is framed in paragraph a) of item 1 of article 204 of the CPPT, by it affecting the validity of the norms to which it refers, which is equivalent to their non-existence in the laws in force.

However, here are included all cases of norms whose validity is affected by violating rules of higher hierarchy, namely, besides constitutional norms, those of community law or international law in force in Portugal and laws with reinforced value or even legislative norms of ordinary law when application is made of regulatory norms.

In these cases, even if the interested parties do not timely challenge the levying acts, they will not be prevented from opposing any subsequent enforcement with a basis in such abstract illegality."

• However, it is also important to note that, as the Illustrious Counselor refers in annotation to article 124 of the CPPT, given that the levies are paid, as is the case in the situation under review, it does not appear possible to apply any extension of the time limit (that is, to raise the unconstitutionality within the time limit for filing opposition to tax enforcement), because:

"Indeed, from this provision it is concluded that the defect of unconstitutionality can be invoked as a ground for opposition, by being the source of illegality of the challenged act, until the end of the time limit for opposition to tax enforcement.

[...]

However, being this possibility of invocation of defects beyond the time limit provided for in article 102, derived from the provision that sets out the grounds for opposition to tax enforcement, it will only exist in cases in which tax enforcement takes place, because, obviously, only when it exists can there be opposition. For this reason, in cases in which there is no tax enforcement, because voluntary payment has occurred, there will not be this extended time limit for invocation of defects derived from unconstitutionality, so the rule that imposes the normal time limit will apply.

[...]

This provision, referring to the prohibition of coercive imposition of payment of taxes (only as to such coercive collection will someone be obliged to pay taxes) calls for the admissibility of invocation of defects of unconstitutionality during the pendency of the tax enforcement process, but does not render null the levying acts that apply unconstitutional norms, being outside its scope of application the cases in which there is no coercive obligation to pay.

Another conclusion drawn from the provision of the possibility of invocation of unconstitutionality as a ground for opposition is that, from the perspective of the legislator that presided over the drafting of paragraph a) of item 1 of article 204 of the CPPT, defects derived from unconstitutionality could not be raised at any time, but only during that period of opposition.

Indeed, there is no reference to the possibility of invocation at any time, nor is any special time limit set, so, from that perspective, the general time limit for opposition, provided for in article 203 of the CPPT, would apply."

• In short, given all the above, particularly given the jurisprudence cited, it must be concluded that, even if the defect attributed to the levies in question existed, such defect is never the source of nullity, but only of annulability.

From the non-violation of article 103, item 3 of the CRP

• First, it must be noted that, on the date of creation of the tax regime applicable to FIIAH, with Law no. 64-A/2008, of 31 December, the exemptions in question, both as regards IMT and Stamp Tax, required, respectively:

(i) that the acquisition of the properties had as exclusive purpose "rental for permanent housing" and,

(ii) that the transmission had as its object "properties intended for permanent housing that occurs by virtue of the conversion of the right of ownership of such properties into a right of rental thereon, as well as with the exercise of the purchase option provided for in item 3 of article 5".

• That is, the taxpayers who wished to benefit from the said exemptions have always had, since the beginning of the tax regime applicable to FIIAH, to fulfill the requirement that such properties were intended exclusively for rental for permanent housing.

• Therefore, the Claimant lacks grounds when it affirms that the exemptions in question were not conditioned by any facts or circumstances, and, consequently, the argumentation that it constructs based on such mistaken premise is equally afflicted by error.

• After all, the new wording introduced by Law no. 83-C/2013, of 31 December, in favor of legal certainty and the principle of protection of legitimate expectations, and in the spirit of the legislator when creating the regime, merely came to densify the criterion already required, stipulating "that urban properties are intended for rental for permanent housing whenever they are the subject of a rental contract for permanent housing within a period of three years.

• It may be concluded, thus, that, with the amendments introduced, the ratio of the established exemptions was not altered, and it should be emphasized that the immediate extinction of the benefit was not determined in the event that the said rental contract was not concluded, since a quite extended time limit (of three years) was granted for this purpose, thus respecting the principle of legal certainty and protection of legitimate expectations.

• Being certain that, in any case, given the disposal of the properties in 2016, it results unequivocally that the Claimant could not, in any way, benefit from the requested exemption.

• However, according to the Claimant, the unconstitutionality due to violation of the principle of non-retroactivity of tax law would arise from the segment of article 236, item 2, of Law 83-C/2013, of 31 December, in determining the application of the amendments introduced "to urban properties that have been acquired by FIIAH before 1 January 2014, in which cases the three-year period provided for in item 14 shall be counted from 1 January 2014".

• In truth - and noting that it is not identified what legal injury the said rule caused to the Claimant, given that, as was seen, the disposal presupposes the affecting to a purpose other than rental -, in light of the provisions of the cited normative provision, with respect to properties acquired before 1 January 2014, in order to consider the affectation for permanent housing as accomplished, rental contracts for permanent housing would have to be concluded in the three years following.

• From which it is inferred with ease that the exemptions in question did not simply cease to be in force: what occurred, only, was that criteria were established to specify a legal requirement provided for in an indeterminate manner.

• On the other hand, and contrary to what the Claimant seems to believe, it should be noted that the cessation of a tax benefit can always take place, for example, if it is found, in a specific case, by means of inspection, that its respective requirements are not met (see article 7, item 1 of the EBF).

• Being that, as follows from article 14, item 1, of the EBF, "the extinction of tax benefits has the consequence of the automatic restoration of default taxation".

• To which must also be added the provision of article 14, item 2, of the EBF in which it is determined that "when the tax benefit concerns the acquisition of assets intended for the direct implementation of the purposes of the acquirers, it ceases to have effect if those are disposed of or given another purpose without authorization of the Minister of Finance, without prejudice to other sanctions or different regimes established by law".

• Therefore, all things considered and weighed, it is manifest that, since the beginning of the regime, the tax benefits in question applicable to FIIAH have always depended on the affectation of the properties to rental for permanent housing, a legal requirement that the AT, within the scope of its inspection powers, could always assess, in order to conclude on the persistence of the benefit or, rather, on the restoration of the default taxation system.

• Thus, being in the presence of the disposal of the properties without affectation of the same to rental for permanent housing, this would always determine the expiration of the exemption, under article 14, item 2, of the EBF, and article 8, item 16 of the regime merely came to specify an anti-abuse measure, establishing that properties that do not remain in portfolio with exclusive affectation to residential rental were not acquired with such purpose.

• Furthermore, limiting such expiration to a defined time limit in the law instead of what previously occurred, by virtue of the application of the EBF.

• The disposal of the property has as a necessary consequence the expiration of the tax benefit granted for affectation to rental, immediately, by virtue of the provisions of article 14, item 3 of the EBF, whose application (explicitly or implicitly) not being raised there, for even more reason, is also not excluded.

• Because, only by ignoring the legal imperative that determines the expiration of the tax benefit inherent in that article 14, item 3 of the EBF, is it possible to conclude that "according to the 2008 law, a property could have been acquired for residential rental, benefiting from exemptions, but then could have been disposed of for unforeseen reasons" or further that "if it were not for the restriction introduced by item 16, introduced by the 2013 Law, there could be no revocation or expiration of the exemptions, not even in case of disposal of the properties".

• Indeed, being "the purpose of the law to protect rental funds and not for urban speculation", as is well stated in the aforementioned opinion (cfr. page 22), it cannot be foreseen, then, how the provisions of article 14, item 3 of the EBF can cease to be applied.

• Finally, regarding the question of unconstitutionality, article 103, item 3, of the CRP provides that "No one may be compelled to pay taxes that have not been created in accordance with the Constitution, that have a retroactive nature or whose levy and collection are not carried out in accordance with the law".

• It is an understanding upheld by doctrine and jurisprudence that the said normative provision only prohibits authentic or proper retroactivity of tax law, covering only those cases in which the taxable fact that the new law intends to regulate has already produced all its effects under the old law, excluding from its scope of application situations of retrospectivity or improper retroactivity, that is, those situations in which the law is applied to past facts but whose effects still persist in the present, as occurs when the law is approved up to the end of the year to which the tax corresponds (judgment of the Constitutional Court no. 399/2010).

• Indeed, it is true that the taxable fact as regards IMT or Stamp Tax, for what now matters, occurs at the time of acquisition of the property.

• However, this does not mean that, in the case at hand, one can conclude on the existence of a circumstance of retroactivity since the new law did not simply determine, and no more, that properties previously acquired be subject to taxation as regards IMT and Stamp Tax.

• What the new law came to do instead was only to densify criteria already provided for in the old law, namely:

(i) the concept of affectation to rental for permanent housing, stipulating a time limit more than sufficient for taxpayers to be able to adapt, gathering an unequivocal means of proof (rental contract),

(ii) as well as the clarification of the situations in which the disposal of the property intended for rental does not result in expiration of the exemption under the terms previously provided for in the EBF.

• In such terms, contrary to what the Claimant argues, there is no introduction ex novum of a regime of expiration of the benefit, and even less is there any frustration of the expectations of taxpayers or violation of the principle of non-retroactivity of tax law.

Subsequent proceedings

Invited to pronounce on the matter of an exceptional nature raised by the Respondent, the Claimant proceeded to do so in a request filed on 14-03-2017, in the following terms:

• The exception of incompetence of the Court, invoked by the AT, is based on an incorrect interpretation of the request for arbitral decision presented by the Claimant, therefore cannot proceed;

• Indeed, the claim of the Claimant, contained in the request for arbitral decision, is not to raise abstract control of the legality and constitutionality of article 236 (Transitional Rule within the Special Regime Applicable to FIIAH and SIIAH) of Law no. 83-C/2013, of 31 December, in that it, in determining the application of the current Tax Regime of FIIAH "to properties that have been acquired by FIIAH before 1 January 2014, in which cases the three-year period provided for in item 14 shall be counted from 1 January 2014" violates the principle of non-retroactivity of tax law, constitutionally set out in article 103 (Tax System, item 3, of the Constitution of the Portuguese Republic;

• The Claimant intends, rather, that the Arbitral Court declare the nullity (or, alternatively, the annulability) of the levies challenged on the ground that the same are based on the application of a norm that violates the constitution and the law;

• According to the provisions of article 204 (Appreciation of unconstitutionality) of the Constitution of the Portuguese Republic, "In cases submitted to judgment courts cannot apply norms that infringe the provisions of the Constitution or the principles set therein";

• That is precisely the objective of the Claimant: not to allow an unconstitutional norm to be applied to it;

• As Professors GOMES CANOTILHO and VITAL MOREIRA state, "the obligation not to apply unconstitutional norms applies to all courts, including arbitral courts, not excluding the Constitutional Court itself, as a court that is, both when it functions as a court of first instance, judging the matters that the Constitution and law assign to it beyond the control of unconstitutionality, and in processes of unconstitutionality, as to the respective procedural norms".

• Moreover, the Arbitral Court has already refused to apply legal norms because it considers them to be afflicted by unconstitutionality (cf. https://caad.org.pt/tributario/decisoes/decisao.php?s_selo=1&s_processo=&s_data_ini=&s_data_fim=&s_resumo=&s_artigos=&s_texto=inconstitucionalidade&listPage=2&id=252).

• In these terms, the exception of incompetence of the Arbitral Court, invoked by the Respondent, should be judged groundless as not proven.

• As for the alleged "passive illegitimacy of the Respondent" the Claimant confesses some difficulty in understanding the scope of the exception invoked by the Respondent;

• In the scope of the present request for arbitral decision, what is at issue is not the refusal (or not) of application of norms by the Respondent (on the basis of illegality or unconstitutionality);

• What is at issue, rather, is the obligation to comply with a norm afflicted by unconstitutionality on the part of the Claimant;

• It is reiterated that the Appellant would not have proceeded with the levies of IMT and IS in the absence of the norm whose unconstitutionality it timely raised;

• If the said levies were official, on the initiative of the Tax Authority, their respective foundation might, perhaps, be based on other legal provisions.

• That was not the case. The levies were at the initiative of the Appellant and were based exclusively on the norm whose unconstitutionality it invoked;

• The Respondent, in its capacity as active subject of the tax legal relationship, is naturally a legitimate party in the present request for arbitral decision.

• In these terms, the exception of incompetence of the Arbitral Court, invoked by the AT, should be judged groundless as not proven.

By order of 18 May 2017, after obtaining the consent of the Parties, the Court determined that the meeting provided for in article 18 of the RJAMT was dispensed with.

The Parties were invited by the Court to submit written arguments.

Arguments of the Claimant

In its arguments, the Claimant alleged, in summary:

(...)

• As stated in article 6 of the request for arbitral decision, the Claimant presented, in the case at hand orally, a request requesting the levy of IMT and Stamp Tax relating to the sale of the property identified in the request for arbitral decision, acquired by the Claimant on a date prior to 31 December 2013 benefiting from the exemption under "92 - FIIAH/SIIAH - Article 7, item 7) - Acquisition by FIIAH/SIIAH (article 87 of the State Budget/09)", basing such request on the provisions of article 236 (Transitional Rule within the Special Regime Applicable to FIIAH and SIIAH) provided for by Law no. 83-C/2013, of 31 December.

• As we have seen, this is a levy based on declaration of the taxpayer, not an official levy, based exclusively on the legal provision invoked in the declaration of the taxpayer, and not on any other legal provision or interpretation of the law.

• The levies of IMT and IMI state that they were requested under the "article 8, item 16, of the special regime applicable to real estate investment funds for residential rental", which, it will be recalled, orders application to properties that have been acquired before 2014, of the provisions of items 14 to 16 of article 8 (Tax Regime of the Tax Regime of FIIAH. In the specific case only item 16 of article 8 (Tax Regime of the Tax Regime of FIIAH applies.

• Naturally, without the amendments to the Special Regime Applicable to FIIAH and SIIAH of Law no. 83-C/2013, of 31 December, the Claimant would not have had to, nor would it ever have submitted any request for levy of IMT and Stamp Tax in proceeding with the sale of the property, and that is the indisputable fact of this lawsuit.

• The sole requirement of the exemption, at the time when the Claimant acquired the property in question and when such exemption was consummated, was that the properties acquired by FIIAH be intended to be rented for permanent housing (cf. article 8 (Tax Regime), items 7 and 8 of the Tax Regime of FIIAH in the wording in force at the date of recognition of the exemption).

• Now, the amendment to the Regime of FIIAH came to provide that the disposal of properties owned by FIIAH - or the liquidation of FIIAH itself - before the period of 3 (three) years has elapsed, counted from the date of entry of the relevant properties into the assets of FIIAH, under the terms of item 16 of article 8 (Tax Regime) of the Tax Regime of FIIAH, leads to the expiration of the exemption.

• These are indubitably and evidently new requirements that aim to establish a regime of expiration of exemptions nonexistent at the time when the taxable facts occurred and that come to affect an exemption already crystallized in the tax legal order of the Claimant.

(...)

• The invocation of the application of the provisions of article 14, item 3, of the Statute of Tax Benefits constitutes the basis for the expiration of the tax benefits (IMT and Stamp Tax) according to the Tax Authority (cf. article 103 and following of the Response).

• Article 14 (Extinction of tax benefits) of the Statute of Tax Benefits is part of Part I of this document, that is, in the General Principles applicable to tax benefits.

• The Special Regime applicable to FIIAH and SIIAH is, undoubtedly, a different regime established by law - it is a set of tax benefits applicable to those entities establishing in an integrated manner the terms and conditions of their application and operation, with a seat perfectly autonomous in the law of the State Budget that established it.

• The exemptions provided for in the Special Regime applicable to FIIAH and SIIAH were justified on the basis of the exclusive purpose of the entities to which they apply - a purpose established by law and subject to supervision by the Securities Market Commission.

• Article 4 (Composition of assets) of the Special Regime applicable to FIIAH and SIIAH (cf. article 104 (Legal Framework) of Law no. 83-C/2013, of 31 December), establishes that:

"With regard to the composition of the assets of FIIAH, the provisions of article 46 of the Legal Framework of Real Estate Investment Funds apply, and at least 75% of its total assets are constituted by real properties, located in Portugal, intended for rental for permanent housing."

• The properties that form part of FIIAH (within the limits fixed by law) must, therefore, be intended for rental for permanent housing; they do not need to be rented to remain in FIIAH nor are there any restrictions on their disposal.

• Nor, likewise, did the Special Regime applicable to FIIAH and SIIAH, until the amendments introduced in the State Budget of 2014 impose any regime of expiration of the benefits - given that the purpose on which they depended was verified at the moment of entry of the properties into the assets of FIIAH.

• In considering the application of article 14 (Extinction of tax benefits), item 3, of the Statute of Tax Benefits, in the context of the Special Regime applicable to FIIAH and SIIAH, the Tax Authority manifestly incurs in an incorrect application of the law, clearly disregarding the reference itself provided for the different regimes established by law of which the Special Regime applicable to FIIAH and SIIAH is, obviously, a part. As has been stated, the Special Regime applicable to FIIAH and SIIAH is an autonomous and "self-sufficient" regime that provided in detail for the terms and conditions of its application.

• To claim that such regime overlooked the establishment of a regime of expiration of the benefits, in order to have to resort to general principles provided for in the Statute of Tax Benefits, has no adhesion to reality and, if it were not so, as will be mentioned below, there would be no point in the amendment to the Special Regime applicable to FIIAH and SIIAH introduced in the State Budget of 2014.

• The Tax Authority forgets an absolutely decisive and inescapable fact: that the exemptions from IMT and Stamp Tax, from which the funds benefited, then, Real Estate Investment for residential rental at the moment of acquisition, were self-sufficient with the acquisition intended for residential rental, not depending on the consummation of effective rental within a certain time period nor on the non-disposal of the property in that same time period, not having the legislator placed on the said funds the risk of non-realization of rental.

• That is, if it were not so, there would be no need for the new law!

• The levies of IMT were effected under article 8, item 16 of the Regime of FIIAH, as amended by article 235 (Amendment to the tax regime of funds and real estate investment companies for residential rental), item 16, of Law no. 83-C/2013, of 31 December, (applicable by virtue of article 236 (Transitional Rule within the Special Regime applicable to FIIAH and SIIAH), number 2, of Law no. 83-C/2013, of 31 December).

• The Claimant invoked the unconstitutionality of article 236 (Transitional Rule within the Special Regime applicable to FIIAH and SIIAH), item 2, of Law no. 83-C/2013, of 31 December, in the context of the challenge of levies of IMT and Stamp Tax, because not being legally provided, at the moment of recognition of the exemption, any facts or circumstances on which the expiration of the recognized exemption depended (whether the time period for concluding the rental contract, whether the time period for disposal of the relevant properties or even the liquidation of FIIAH), it is manifest that the subsequent imposition of these facts or circumstances to exemptions crystallized in the tax legal order of the Claimant suffers from unconstitutionality, by violation of the rule of non-retroactivity of tax law, enshrined in article 103 (Tax System, item 3, of the CRP.

• The Claimant requested from Professors Dr. C… and Doctor D…, the issuance of a legal opinion on the constitutionality of item 2 of article 236 (Transitional Rule within the Special Regime Applicable to FIIAH and SIIAH) of Law no. 83-C/2013, of 31 December (cf. Doc. 3 of the Request for Arbitral Decision).

• The said opinion (hereinafter abbreviated as "Opinion") corroborates the thesis of unconstitutionality advocated by the Claimant, as can be inferred from the reading of the conclusions below reproduced and which must be repeated here:

Opinion of Professors Dr C… and Doctor D…

"CONCLUSIONS

We can now state, in summary, the conclusions we have reached, already duly justified and developed throughout the Opinion.

Thus:

1. The State Budget Law for 2009 approved the legal framework of Real Estate Investment Funds for Residential Rental (FIIAH) and, within it, a special tax regime in its article 8, including, for what now matters, exemptions from IMT and Stamp Tax for acquisitions by FIIAH of properties and autonomous fractions intended for permanent rental for housing and acts and contracts connected thereto.

2. The said exemptions, of taxes due at the moment of acquisition, were self-sufficient with the acquisition by FIIAH intended for residential rental, not depending on the consummation of effective rental within a certain time period nor on the non-disposal of the property in that same time period, not having the legislator placed on the FIIAH the risk of non-realization of rental.

3. Article 235 of the State Budget Law for 2014 introduced new items 14 to 16 in article 8 of the regime of FIIAH, which came to restrict the exemptions from IMT and Stamp Tax introduced by the State Budget Law for 2009, since they subordinated the qualification of the property as intended for rental for permanent housing to the fact that it is effectively the subject of a rental contract for permanent housing within a period of three years from the moment when they became part of the fund's assets, and provided that the said exemptions "cease to have effect" if the properties have not been the subject of a rental contract in that three-year period, the same occurring if the properties are disposed of before that three-year period (except if in exercise of a purchase option by the tenant who had previously rented the property to FIIAH).

4. The requirement introduced in the State Budget Law for 2014 was not provided for in the original regime, of 2008, not resulting, in particular, from the premise that these were acquisitions of urban properties or autonomous fractions "intended exclusively for rental for permanent housing", since such intention is compatible, in particular in periods of crisis in the rental market, with difficulties and delays in the implementation of rental, nothing preventing, according to the original provision of the exemption, that the property was acquired as intended exclusively for rental for permanent housing despite being rented, for example, 3 years and a half or 4 years after acquisition.

5. Similarly, the disposal, within the three-year period from the time of acquisition, of the property that had been acquired to be intended exclusively for rental did not also prevent the application of the exemption according to its original provision - being certain, moreover, that only 75% of FIIAH assets were obligatorily composed of properties intended for rental (article 4, item 1, of their respective regime).

6. The provision of a time period for the realization of rental is not only a means of proving a requirement already provided for - in which case a new law would obviously be unnecessary -, but instead represents the introduction, with the three-year period, of a new prerequisite for the exemption from IMT and Stamp Tax, with the effect of more restrictively delimiting the exception to the charge resulting from the exemption, providing that this "ceases to have effect".

7. The special transitional provision contained in article 236, item 2, of the State Budget Law for 2014, in ordering the application of the norms that restricted the exemption to acquisitions prior to its entry into force, made at a moment when the exemption was provided for without such limitations, restricts the exemption from IMT and Stamp Tax with respect to taxable facts previously exhausted, which are, for IMT and Stamp Tax, respectively, the onerous transmission of property and the act or contract connected with the acquisition.

8. The taxable facts giving rise to the obligation of IMT and Stamp Tax are exhausted at the moment of their practice, being also that moment when the respective tax obligations arise (articles 5, item 2, and 5, paragraph a), respectively of the IMT Code and the Stamp Tax Code).

9. The norm of item 2 of article 236 of the State Budget Law for 2014 altered an essential element of the taxes in question (the exemptions, and, consequently, the scope of their incidence, or field of application), since it is an element on which the very existence of the tax obligation depends (the "if" of the tax).

10. Article 103, item 3, of the Constitution of the Portuguese Republic prohibits taxes with a retroactive nature, with such a prohibition, introduced in 1997, having made it clear that it is not permitted to the legislator to provide or alter in their essential elements taxes that incide on facts already exhausted at the time of entry into force of the law - that is, that are authentically retroactive.

11. The wording of article 103, item 3, introduced in 1997 gave rise to that, subsequently to 1997, and applying the new constitutional parameter, the Constitutional Court has come to decide in the sense of unconstitutionality of norms that create or alter in their essential elements taxes for facts that were completed prior to their entry into force (authentic retroactivity, as opposed to mere retrospectivity or inauthentic retroactivity).

12. As can be read in Judgment no. 128/2009, of the Constitutional Court, "being established the general principle of non-retroactivity of tax law, the mere retroactive nature of an unfavorable tax law for private parties is automatically sanctioned by the Constitution, whatever has been, in the concrete case, the conduct of the tax administration or the taxpayer. In other words, the judgment of unconstitutionality derives only from the mere analysis of the normative data, not depending, at any moment, on the ascertainment of any circumstantial elements resulting from the condition, in the concrete case, of a certain tax legal relationship".

13. The norm of article 236, item 2, of the State Budget Law of 2014 is an authentically retroactive norm, since it orders the application of the new prerequisites of the exemptions - rental and non-disposal within a period of 3 years, under penalty of these "ceasing to have effect" - to acquisitions and acts (that is, to taxable facts) prior to its entry into force and that were completed before this.

14. To this it is not opposed the argument in the sense that the said restriction of the exemption by the provision of the time periods would have only aimed to prove the purpose of rental of the acquisitions, since such requirement of the exemption was not previously specified and set out in the law, at the moment when the relevant taxable facts (the acquisition of the properties and the acts and contracts connected) were completed.

15. For this very reason, it would be improper to qualify the norm of article 236, item 2, of the State Budget Law of 2014 as an interpretive norm, since the prerequisites that it added for the exemptions were not previously provided for.

16. It is irrelevant that article 236, item 2, of the State Budget Law of 2014 provides that the three-year period is only counted from the entry into force of that, since such requirement of the exemption (the time period) was not even required at the moment when the relevant taxable facts were practiced.

17. Article 236, item 2, of the State Budget Law for 2014 is unconstitutional, by violation of article 103, item 3, of the Constitution of the Portuguese Republic, in providing that the provisions of the new items 14 to 16 of article 8 of the legal framework of FIIAH, which alter and restrict the exemptions previously provided for in items 7 and 8 of that same article, is "equally applicable to properties that have been acquired by FIIAH before 1 January 2014"."

• The Claimant believes, thus, that there will be no doubts about the unconstitutionality of item 2 of article 236 (Transitional Rule within the Special Regime Applicable to FIIAH and SIIAH) of Law no. 83-C/2013, of 31 December, the rule on which, it will be recalled, the levies challenged in the arbitral decision are based. And, therefore, it is necessary to conclude that such levies are vitiated (abstract illegality of the levies).

• In the same sense, see the arbitral decision of CAAD in case 683/2015-T, in all respects similar to the present proceedings, which is hereby given in its entirety as reproduced.

• The Tax Authority argues in the Response that in the Portuguese legal administrative order, the default regime of invalidity of administrative acts is mere annulability citing jurisprudence established in various Judgments of the Supreme Administrative Court.

• The Claimant is aware of the learned administrative jurisprudence on the matter.

• It maintains, however, that only nullity can be seen as a consequence admitted for the practice of an administrative act based on a norm declared unconstitutional, because otherwise one would allow such a norm to produce its effects permanently in the legal order making its own unconstitutionality irrelevant.

• However, this is neither the opportunity nor the occasion to deepen this debate, since the result of the same is irrelevant to the question at hand, whether nullity or annulability is the consequence of the unconstitutionality.

• It must be said only that the application of a materially unconstitutional norm, or the maintenance of acts that have it as a basis, on the basis of the untimeliness of raising the defect, would violate the most basic principles of the legal system and would allow the gross violation of rights constitutionally enshrined (right to non-retroactivity of taxation, right to private property, etc.).

• Therefore, it appears that acts should be considered non-existent (or, at the very least, null) tax acts carried out in execution of or under unconstitutional legal norms.

Arguments of the Respondent

In its arguments, the Respondent, considering that the Claimant added nothing to what it had alleged in the request, limits itself to referring to the counter-arguments in the Response, reiterating the argumentation set out there.

II – CLEARANCE

The single Arbitral Tribunal was duly constituted on 02-12-2016, with the arbitrator being designated by the Deontological Board of CAAD, with the respective legal and regulatory formalities fulfilled (articles 11, item 1, paragraphs a) and b) of the RJAMT and articles 6 and 7 of the CAAD Code of Ethics).

The Parties have legal personality and capacity, are legitimate and are duly represented, pursuant to articles 4 and 10 of the RJAMT and article 1 of Ordinance no. 112-A/2011, of 22 March.

The joinder of claims is admissible under article 3 of the RJAT, since the judgment on the validity of both the levy of municipal tax on onerous real estate transfers and the levy of stamp tax essentially depends on the appreciation of the same factual circumstances and the interpretation and application of the same principles and rules of law.

No procedural nullities were identified.

III – QUESTIONS TO BE DECIDED

The questions to be decided by the Court are:

1. Merits of the exception of material incompetence of the arbitral tribunal

2. Merits of the exception of passive illegitimacy of the Respondent

3. The unconstitutionality of the transitional regime established in article 236, item 2 of law 83-C/2013, of 31 December, which stipulates:

"2 — Without prejudice to the provisions of the previous number, the provisions of items 14 to 16 of article 8 of the special regime applicable to FIIAH and SIIAH, approved by articles 102 to 104 of Law no. 64-A/2008, of 31 December, shall also apply to properties that have been acquired by FIIAH before 1 January 2014, in which cases the three-year period provided for in item 14 shall be counted from 1 January 2014."

1. In case of a decision in the sense of the unconstitutionality of the said norm, whether such unconstitutionality has as effect the nullity or annulability of the levies made under it.

2. In case of a decision in the sense of the unconstitutionality of the said norm and the consequent declaration of invalidity of the challenged statements, whether such invalidity originates for the Respondent AT - Tax Authority and Customs Authority the obligation to pay to the Claimant compensatory interest, under the terms of article 43 of the General Tax Law.

IV – PROVEN FACTS

The following are the proven facts considered relevant for the decision:

1. On 7 July 2016, "B… – CLOSED REAL ESTATE INVESTMENT FUND FOR RESIDENTIAL RENTAL, of which the Claimant is the manager, requested from the Respondent the levy of IMT, under the terms of article 8, item 16 of the Special Regime Applicable to Real Estate Investment Funds for Residential Rental, with reference to the purchase made by the same on 18.12.2013, of the fraction AM of the property registered in the urban property register of … under article …, located at Rua … nos … to … and Rua … nos …, … and … in Lisbon.

2. On 13 July 2016, the Respondent AT - Tax Authority and Customs Authority issued a levy of IMT on the said acquisition, having calculated the tax at the amount of 5,101.88 euros.

3. Also on 13 July 2016, the Respondent issued a levy of Stamp Tax on the said acquisition, having calculated the tax at the amount of 1,516.00 euros.

4. On 14.07.2016, the Claimant proceeded with the full payment of the IMT and Stamp Tax levied.

The proven facts were so proven on the basis of documentary evidence elements contained in the file and provided by the Parties.

There are no facts relevant to the decision of the case that must be given as not proven.

V - REASONING

On the exception of material incompetence of the arbitral tribunal

In paragraphs 47 and 48 of the request for arbitral decision, the Claimant affirms:

"there will be no doubt about the unconstitutionality of item 2 of article 236 of Law 83-C/2013, of 31 December, a norm on which, it will be recalled, the levies are based. And therefore it is necessary to conclude that such levies suffer from illegality (abstract)."

In formulating the request, the Claimant states:

"In these terms and in other applicable respects (...) it must:

• Be declared the nullity of the levies based on their unconstitutionality (abstract illegality)"

For its part, in its response, the Respondent says:

"Regardless of the defect that may be considered attributable to the levies in question (...), the Claimant further invokes that the levies suffer from abstract illegality. However, if the Claimant's thesis is accepted, then the Arbitral Court is materially incompetent to appreciate, in the abstract, the constitutionality of the norm in question, as petitioned."

Given what is alleged by the Claimant, it results that the latter intends (after all) the non-application of the norm due to its alleged illegality/unconstitutionality and not due to any illegality occurring in its application to the concrete facts.

Now, it happens that the Constitutional Court is the competent forum to know both the illegality and the unconstitutionality of legal norms [articles 280, item 2, paragraphs a) and d) and 281, item 1, paragraphs a) and b) and item 3 of the CRP and articles 6 and 66 of the Constitutional Court Law].

Therefore, if the issue in the present proceedings is not a situation of possible non-application of a norm due to any illegality occurring in its application to the concrete facts, as the Claimant now argues, but rather its own (intrinsic) illegality/unconstitutionality, then it is necessary to conclude that the Arbitral Court does not have competence to appreciate this question, since it is intended to apply abstract control of the constitutionality of the norms, a matter constitutionally reserved for the Constitutional Court, pursuant to paragraph a) of item 2, of article 281 of the CRP."

Let us see:

The concept of abstract illegality is found referred to in article 204 of the CPPT.

Doctrine and jurisprudence have developed the concept of "absolute or abstract illegality" (see among many others the STA judgments of 09-04-2014, case no. 076/14; TCAS of 12-06-2014, case 07309/14; TCAS of 27-09-2011, case 4733/11).

According to this jurisprudence, abstract illegality does not reside directly in the act that applies the law to the concrete case, but rather in the law itself whose application is made (STA 09-04-2014, case no. 076/14), the existence of a defect not being dependent on the real situation to which the law was applied nor on the circumstances in which the act was practiced (TCAS, 31-05-2005, case no. 439/05).

Included in this concept of abstract illegality are all cases of acts that apply norms that violate rules of superior hierarchy, namely, besides constitutional norms, those of community law or international law in force in Portugal or even legislative norms of ordinary law when application is made of regulatory norms (STA 09-04-2014, case no. 076/14).

On the other hand, abstract control of the constitutionality of norms, provided for in article 281 of the Constitution of the Portuguese Republic (CRP) is characterized by taking place outside any concrete case, with the question of constitutionality forming the main object of the process. This control of constitutionality falls exclusively, indeed, to the Constitutional Court.

Alongside the abstract control of the constitutionality of norms, the Portuguese system of control of constitutionality contemplates, in article 280, item 1 of the CRP, the concrete control of constitutionality. The concrete control of constitutionality, which falls to courts in general, including arbitral courts, is characterized by being incidental in relation to a litigation that focuses on a concrete case. That is, the concrete control of constitutionality is in deciding a litigation on a concrete case based on a judgment that is made on the constitutionality or unconstitutionality of a legal norm that is applicable to such litigation and on which the outcome of the same depends.

As already stated, the concrete control of constitutionality falls to any and all courts, in accordance with articles 204 and 280, item 1 of the CRP, where it is provided that any court may refuse to apply any norm on the basis of its unconstitutionality or apply a norm whose unconstitutionality has been raised during the proceedings.

Thus it is seen, without need for further elaboration, that the concrete control of constitutionality encompasses the appreciation of the abstract illegality of the administrative act insofar as this appreciation aims precisely to decide a concrete case, related to the administrative act in question, by applying or non-applying the legal norm on which it is based, by reason of a judgment on the constitutionality of such norm (and not to declare the constitutionality or unconstitutionality of the norm, as is the task in the case of abstract control of constitutionality).

There is, therefore, no possible confusion between "abstract control of constitutionality", which is the exclusive competence of the Constitutional Court, and control of "abstract illegality of the administrative act", which falls to administrative courts and arbitral courts in administrative and tax matters and which may or may not imply an appreciation of the constitutionality of the norm applied to the concrete case.

In the concrete case, the appreciation of the legality of an act of levy of a tax falls within the competence of the arbitral tax courts by virtue of article 2, item 1 paragraph a) of the RJAT.

Therefore, the exception of incompetence of the Arbitral Court is groundless.

Exception of passive illegitimacy of the Respondent

The respondent also alleges the exception of its passive illegitimacy in the following terms:

"Furthermore, on the other hand, within the scope of the appreciation of abstract control of constitutionality, the Respondent would always be an illegitimate party.

Because, as is well known, the Tax Administration cannot refuse to apply norms on the basis of their unconstitutionality or illegality, since it is subject to the principle of legality, as established in articles 266, item 2 of the CRP, 3, item 1 of the CPA and 55 of the LGT"

The exception of passive illegitimacy is also based, as can be seen from the reading of the transcribed passages, on the premise that the request for arbitral decision is aimed at abstract control of the constitutionality of a norm and that, in appreciating such request, the arbitral Court would be carrying out an abstract control of the constitutionality of a norm.

We have already demonstrated that this is not the case.

We are before a judicial proceeding (pursuant to article 97 of the Code of Procedure and Tax Procedure) for challenge of a tax act, based on its abstract illegality, which will result, if the merits of the case are appreciated, in a concrete, incidental control of constitutionality, which is the competence of all courts pursuant to article 204 of the CRP.

Being thus, the Respondent AT - Tax Authority and Customs Authority is a legitimate party in the proceeding pursuant to article 10, items 1 and 2 of the Code of Procedure in Administrative Courts, applicable to the present arbitral proceeding by virtue of article 29, item 1, paragraph c) of the RJAT.

Therefore, the exception of passive illegitimacy of the Respondent is groundless.

The unconstitutionality of the transitional regime established in article 236, item 2 of Law 83-C/2013, of 31 December

3.1) The norms in question

The State Budget Law for 2009 (Law no. 64-A/2008, of 31 December), in its article 102, approved the "Special regime applicable to real estate investment funds for residential rental and real estate investment societies for residential rental" (hereinafter Special Regime of FIIAH and SIIAH)

Article 8 of that regime established the tax regime applicable to those entities.

Items 7 and 8 of the cited article 8 established exemptions from IMT and Stamp Tax, in the following terms:

"7 — The following are exempt from IMT:

a) Acquisitions of urban properties or autonomous fractions of urban properties intended exclusively for rental for permanent housing, by the investment funds referred to in item 1;

b) Acquisitions of urban properties or autonomous fractions of urban properties intended for own and permanent housing, as a result of the exercise of the purchase option referred to in item 3 of article 5 by the tenants of the properties that form part of the assets of the investment funds referred to in item 1."

"8 - All acts performed are exempt from stamp tax, provided they are connected with the transmission of urban properties intended for permanent housing that occurs by virtue of the conversion of the right of ownership of such properties into a right of rental thereon, as well as with the exercise of the purchase option provided for in item 3 of article 5"

There is no doubt that there is in these legal norms a problem of strong indeterminacy.

Looking in particular at paragraph a) of item 7, which speaks of "acquisitions of urban properties or autonomous fractions of urban properties intended exclusively for rental for permanent housing", the interpreter of the law must ask how the expression "intended exclusively for rental for permanent housing" should be understood.

Literally, the expression means that the acquirer of the property acquires it for, i.e. with the purpose of affecting it to rent for permanent housing.

The ratio legis of this norm, which establishes a tax benefit, is to promote the rental of permanent housing, of which there is also no doubt.

Therefore, it seems obvious that only the Fund (FIIAH) that acquires a property with the purpose of renting it for permanent housing can benefit from the exemptions (from IMT and Stamp Tax).

The question that arises next is: how is this purposive condition ascertained?

How does the one who applies the norm ascertain the purpose of the acquisition at the moment when the norm must be applied – the moment immediately prior to the acquisition, pursuant to article 22 of the CIMT and article 23, item 4 of the CIS?

The legal norm, in its initial wording, did not say how to ascertain this purpose.

This specification of the legal formula was only accomplished with the State Budget Law for 2014 (Law 83-C/2013, of 31 December), which modified the said article 8 of the Special regime applicable to real estate investment funds for residential rental and real estate investment societies for residential rental, adding to it items 14 to 16, with the following wording:

"14 — For the purposes of the provisions of items 6 to 8, urban properties are considered to be intended for rental for permanent housing whenever they are the subject of a rental contract for permanent housing within a period of three years counted from the moment when they became part of the fund's assets, and the taxpayer must communicate and provide proof to the AT of the respective effective rental within 30 days following the end of the said period.

15 — When the properties have not been the subject of a rental contract within the three-year period provided for in the previous number, the exemptions provided for in items 6 to 8 shall cease to have effect, and in that case the taxpayer must request from the AT, within 30 days following the end of the said period, the levy of the respective tax.

16 — If the properties are disposed of, with the exception of the cases provided for in article 5, or if the FIIAH is subject to liquidation, before the period provided for in item 14 has elapsed, the taxpayer must also request from the AT, before the disposal of the property or the liquidation of the FIIAH, the levy of the tax due under the terms of the previous number."

From this law on, the problem of when a property acquired by a FIIAH can be considered "intended exclusively for permanent rental" was resolved.

However, since the law generally applies only prospectively, this norm did not by itself solve the problem regarding properties acquired by FIIAH before 1 January 2014, the date on which Law 83-C/2013, of 31 December would enter into force.

To solve the problem of these cases, the same Law 83-C/2013, of 31 December established, in its article 236, the following transitional regime:

"1 — The provisions of items 14 to 16 of article 8 of the special regime applicable to FIIAH and SIIAH, approved by articles 102 to 104 of Law no. 64-A/2008, of 31 December, shall apply to properties that have been acquired by FIIAH as of 1 January 2014.

2 — Without prejudice to the provisions of the previous number, the provisions of items 14 to 16 of article 8 of the special regime applicable to FIIAH and SIIAH, approved by articles 102 to 104 of Law no. 64-A/2008, of 31 December, shall also apply to properties that have been acquired by FIIAH before 1 January 2014, in which cases the three-year period provided for in item 14 shall be counted from 1 January 2014."

What the Court must appreciate is the conformity of the part of the transitional regime corresponding to item 2 of article 236 with the principle of prohibition of retroactivity of tax laws enshrined in article 103, item 3 of the CRP.

2) The various degrees of retroactivity and their regime in light of the rule prohibiting retroactivity of tax laws enshrined in article 103, item 2 of the CRP

Doctrine and jurisprudence have dealt with the question of retroactivity of tax laws based on the conception that there are various degrees of retroactivity and that not all merit the same treatment in light of the principle of legal certainty and the legality of taxes.

First-degree retroactivity (perfect or proper) occurs when the taxable fact that the new law intends to regulate has already produced all its effects under the old law at the moment when the new law enters into force (TC, judgment no. 128/2009; TC judgment no. 85/2010; STA, 14-02-2013, case no. 1375/12).

Second-degree retroactivity (imperfect or improper) occurs when the taxable fact that the new law intends to regulate occurred, in its entirety, i.e. was consolidated, under the old law, but its tax effects are produced or continue to be produced in the domain of the new law (STA, 14-02-2013, case no. 1375/12).

Third-degree retroactivity occurs when a taxable fact of successive or continued formation is involved and did not form completely under the old law, but continues to form under the new law (TC judgment no. 128/2009, TC judgment no. 85/2010 and TC judgment no. 399/2010).

The Constitutional Court has followed the understanding that the prohibition of tax retroactivity only reaches authentic retroactivity, covering only those cases in which the taxable fact that the new law intends to regulate has already produced all its effects under the old law, excluding from its scope of application situations of retrospectivity or improper retroactivity, that is, those situations in which the law is applied to past facts but whose effects still persist in the present (TC judgment no. 617/202; TC judgment no. 128/2009; TC judgment 85/2010).

It is therefore important to try to distinguish, as clearly as possible, the situations of proper retroactivity from the situations of "non-proper" retroactivity in order to apply them to the present case.

At this point, we believe that the doctrinal contribution that goes furthest continues to be that of CARDOSO DA COSTA. This Author understands that "the demarcation line of the scope of constitutionally admissible tax retroactivity will pass, first of all, through the distinction between situations that are 'permanent' and 'periodic' and 'facts' whose tax efficacy is exhausted or is established 'instantaneously', for each one of them 'per se' (especially, by the distinction between 'periodic taxes' and 'single-obligation taxes')" (CARDOSO DA COSTA, "The Constitutional Framework of Tax Law in Portugal", in Constitutional Perspectives in the 20 Years of the Constitution, Vol. II, Coimbra, 1997, p. 418).

To demarcate proper retroactivity from "non-proper" retroactivity one must look, therefore, as a starting point, to the fundamental distinction between "taxable fact of successive formation", referred to in item 2 of article 12 of the LGT, and its opposite, "taxable fact of instantaneous formation" (and not, in our opinion, and with due respect for diverse opinions

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