Summary
Full Decision
ARBITRAL DECISION
The Arbitrator Raquel Franco, designated by the Deontological Council of the Centre for Administrative Arbitration ("CAAD") to form the Arbitral Tribunal constituted on 04.02.2019, decides on the following terms and grounds:
I – REPORT
A..., S.A., a commercial company with a single identification number for legal entities and registered in the Commercial Registry under number..., with tax domicile at..., ..., ...-... Lisbon, hereinafter referred to as the Claimant, filed a request for constitution of an Arbitral Tribunal and for arbitral decision on 21.11.2018, which was accepted and automatically notified to the Tax and Customs Authority ("AT"), in its capacity as Respondent.
The Claimant contests the legality of the following acts:
Decision dismissing the administrative review which proceeded under file number ...2018..., dated 20.08.2018 (document 1 attached with the arbitral decision request);
Assessment of the Additional Municipal Property Tax – AIMI with number 2017..., relating to the year 2017, in the amount of € 14,355.99, levied on immovable properties intended for housing of which it is the owner (document 2 attached with the arbitral decision request).
The Claimant bases its request on the unconstitutionality of the AIMI regime due to violation of the principles of equality and contributory capacity (Articles 13 and 104, paragraph 3 of the Constitution).
The Claimant did not appoint an arbitrator, so in accordance with Article 6, paragraph 2, subparagraph a) and Article 11, paragraph 1, subparagraph a) of the RJAT, the President of the Deontological Council of CAAD designated the signatory as arbitrator of the Single Arbitral Tribunal, who communicated acceptance of the appointment within the applicable timeframe.
On 14.01.2019, the parties were notified of this designation and did not express any intention to challenge it.
In compliance with the provisions of Article 11, paragraph 1, subparagraph c) of the RJAT, the Single Arbitral Tribunal was constituted on 04.02.2019.
On 06.03.2019, the Respondent, duly notified for this purpose, filed its defence, in which it raised a preliminary matter and defended itself by way of challenge.
Regarding the preliminary matter, relating to the fact that the initial petition was not subscribed by an attorney and no power of attorney was presented, the Tribunal notified the Claimant to present a power of attorney dated prior to 21.11.2018, under penalty of not considering the provision of Article 6, paragraph 1 of the CPPT satisfied, pursuant to Article 29, paragraph 1, subparagraph a) of the RJAT. By way of a request dated 27.03.2019, the Claimant attached a power of attorney dated 20.11.2018, so the defect was remedied.
Summary of the Claimant's position
The Claimant is a company whose purpose is the construction, purchase, sale and leasing of immovable properties of any nature, owned or otherwise, as well as their enhancement through the preparation of urbanisation, reconstruction and recovery plans or projects and also the exercise of any and all technical activity of real estate consultancy, audit and management. Its main business code is 41100 – Real Estate Development (development of building projects).
More than 92% of the AIMI assessed relates to land for construction and resale, the remainder relates to investment properties held for leasing, enhancement or sale.
The Claimant understands, however, that the legal regime of AIMI violates the constitutional principle of equality and that of contributory capacity from the perspective of patrimony, enshrined in Articles 13 and 104, paragraph 3 of the Constitution, by the fact of burdening especially companies that engage in the activity of construction and resale of immovable properties, including land for construction. The taxation takes as an indication of contributory capacity what is merely a productive factor, that is, a mere instrument for the realisation of the Claimant's productive activity. Thus, in the application of AIMI to the immovable property held by this entity, the essential prerequisite for taxation is not met that the ownership of the immovable properties represents an indication of contributory capacity or wealth.
The Claimant filed an administrative review on 19.12.2017 in which it contested the legality of the AIMI assessment at issue in this process. The review was dismissed by decision of 20 August 2018.
The Claimant sustains the illegality of the assessment to the extent that it includes in the taxable amount the patrimonial value of the land for construction, requesting its annulment in accordance with Article 163, paragraph 1 of the Code of Administrative Procedure, applicable in accordance with Article 2, subparagraph c) of the General Tax Law. It also highlights the decisions rendered in proceedings 603/2017-T, 668/2017-T, 669/2017-T, 675/2017-T, 677/2017-T, 679/2017-T, 687/2017-T, 688/2017-T, 694/2017-T, 696/2017-T, 8/2018-T.
The Claimant also presents a request for payment of compensatory interest, given the fact that it proceeded to pay the tax assessed by the AT.
Summary of the AT's position
After establishing the legal framework of AIMI, the AT concludes that the law clearly and unequivocally establishes the incidence of the tax on land for construction, regardless of the potential allocation that may be assigned to it since they are not included in the negative definition of the tax incidence. Although it excluded from incidence urban properties classified as "industrial, commercial or services" and "other", the legislator expressly chose to maintain other properties that also integrate the assets of companies, such as those classified as residential or land for construction. The legislator did not ensure, nor intended to ensure, that "immovable property dedicated to the exercise of any economic activity" would not be affected in any case.
In the absence of other elements "the interpreter should in principle opt for that meaning which best and most immediately corresponds to the natural meaning of the verbal expressions used, and in particular to their technical-legal meaning, on the assumption that the legislator knew how to express his thought correctly." There is no reason to conclude that the legislator did not know how to express his thought in adequate terms, as must be presumed, by virtue of Article 9, paragraph 3, of the Civil Code, on the contrary, the matter was duly considered, having been abandoned in the final draft. Thus, contrary to what is alleged by the claimant, there is no illegality in the application of AIMI.
As to the unconstitutionality invoked by the Claimant, the AT defends itself by arguing that land for construction is not merely instrumental to the exercise of economic activity; on the contrary, it integrates the very core of the economic activity, with intrinsic economic value and, normally, quoted on the real estate market, i.e., can be sold, exchanged, given as security for obligations and obviously evidence a certain economic capacity. The taxation embodied in AIMI results in a specific levy on assets (cf. Article 4, paragraph 1 of the LGT) and not on income, so it is well understood that the legislative solution is to subject to taxation all taxable persons in view of the ownership of situations relevant to urban properties identified in the objective incidence, independently of the legal or economic structure that such taxable persons may possess.
In the field of asset taxation, the rule of uniformity what it imposes is a horizontal equality, that is, that all those who are holders of the same form of wealth are taxed in the same manner (SOUSA FRANCO, Public Finance and Financial Law, vol. II, 4th ed., p. 181).
Like any property tax, AIMI is dissociated from any eventual realisation of profit from the sale of immovable property, as well as from the existence or not of a negative or positive net position, being relevant, for the economy of the tax, only the patrimonial value of the land. As for land for construction, these do not reduce to mere construction rights, of future things, and all of them are autonomous assets which, even by their natural scarcity, always have intrinsic economic value and, normally, are quoted on the real estate market, i.e., can be sold, exchanged, given as security for obligations. That is, the fact that a given asset functions as a "factor of wealth production" is not sufficient to contradict the finding that the corresponding owner holds an immovable property only accessible to one with particular contributory capacity and, thus, capable of supporting an additional contribution to the desired budget consolidation. It concludes, therefore, that the holding of immovable property of high value, regardless of whether or not it is allocated to economic activity, is tendentially revealing of high contributory capacity, obviously higher than that which is to be presumed to exist when lower value property is held or when it does not exist.
It cites the arbitral jurisprudence contained in proceedings numbered 664/1017-T, 676/2017-T, 678/2017-T, 682/2017-T, 683/2017-T, 684/2017-T 690/2017-T, 6/2018-T, 310/2018-T, 324/2018-T, 401/2017-T, 420/2018-T, 438/2018-T, 342/2018-T, 291/2018-T and 521/2018-T.
In accordance with the jurisprudence cited, to which it fully adheres, it concludes that ownership of immovable property of high value by a natural person or legal person (whether real estate company, real estate fund or other) evidences, as in relation to any owner of immovable property intended for housing, a special economic capacity to be able to contribute additionally to the Financial Stabilisation Fund of Social Security, to which AIMI revenue is allocated.
As to the request for compensatory interest, the AT argues that it has no legal basis because, firstly, there is no reason for the annulment of the contested act and, secondly, because even if the tribunal considered there to be an unconstitutionality in the applicable legal regime, the AT has an obligation to apply it as a public administration body bound by the principle of legality.
For the reasons set forth, the AT concludes for the dismissal of the arbitral request.
II. PROCEDURAL REQUIREMENTS
The Arbitral Tribunal is materially competent and is duly constituted in accordance with Articles 2, paragraph 1, subparagraph a), 5 and 6, paragraph 1 of the RJAT.
The parties have legal personality and capacity, are legitimate and are legally represented, as provided in Articles 4 and 10 of the RJAT and Article 1 of Order No. 112-A/2011, of 22.03.
The action is timely and the process is free from defects.
III. REASONING
A. FACTUAL MATTER
A.1. Proven facts
The Claimant is a company whose purpose is the construction, purchase, sale and leasing of immovable properties of any nature, owned or otherwise, as well as their enhancement through the preparation of urbanisation, reconstruction and recovery plans or projects and also the exercise of any and all technical activity of real estate consultancy, audit and management.
Its main business code is 41100 – Real Estate Development (development of building projects).
The Claimant was notified of the assessment of AIMI No. 2017..., relating to the year 2017, in the amount of € 14,355.99.
The assessment was based on the taxable patrimonial value of the properties held by the Claimant for the exercise of its commercial activity.
Three of the immovable properties on whose TPV the IMI assessment was levied were classified as inventory of the Claimant, corresponding to land for construction and resale.
The other two correspond to investment properties held for leasing, appreciation and sale.
The Claimant filed an administrative review relating to the above-mentioned AIMI assessment on 19.12.2017.
The review was dismissed by decision of 20.08.2018.
The Claimant proceeded to pay the assessed tax.
A.2. Unproven facts
With relevance to the decision there are no alleged facts that should be considered unproven.
A.3. Reasoning of the proven and unproven factual matter
The facts pertinent to the judgment of the case were selected and defined according to their legal relevance, in light of the plausible solutions to the legal questions, in accordance with the combined application of Articles 123, paragraph 2, of the Code of Tax Procedure and Process ("CPPT"), and 596, paragraph 1 and 607, paragraph 3 of the Code of Civil Procedure ("CPC"), by remission of Article 29, paragraph 1, subparagraphs a) and e) of the RJAT.
Allegations made by the parties and presented as facts, consisting of strictly conclusive statements, unsusceptible to proof and whose truthfulness must be assessed in relation to the specific consolidated factual matter, were not deemed proven or unproven.
With regard to the proven facts, the conviction of the arbitrator was based on the positions assumed by the parties and on the critical analysis of the documentary evidence attached to the record.
B. ON LAW
B.1. Normative framework
In the present case, a request was presented to the tribunal for a declaration of illegality of a decision dismissing an administrative review and of an assessment of Additional IMI (AIMI) relating to the year 2017.
AIMI was created by Article 219 of Law No. 42/2016, of 28 December, which approved the State Budget for 2017, by adding Articles 135-A to 135-K to the IMI Code.
Article 135-A establishes that "passive subjects of the additional municipal property tax are natural persons or legal entities that are owners, usufructuaries or superficiary holders of urban properties located in Portuguese territory".
AIMI is levied, in accordance with paragraph 1 of Article 135-B of the IMI Code, "on the sum of the taxable patrimonial values of urban properties located in Portuguese territory of which the taxable person is the owner".
By way of paragraph 2 of Article 135-B of the IMI Code, the following were excluded from the objective incidence of AIMI: "urban properties classified as 'commercial, industrial or for services' and 'other' in accordance with subparagraphs b) and d) of paragraph 1 of Article 6 of this Code".
B.2. Application of law in the present case
In the present case, what is at issue is not the classification of the properties held by the Claimant within the legal regime of AIMI, but rather the compatibility between this legal regime and certain constitutional principles, namely those of equality and contributory capacity.
The Claimant argues that the creation of AIMI was motivated by an intention to tax real estate wealth with which the taxation of properties that are used as productive factors of a particular economic activity is incompatible. It argues that AIMI, as a complementary tax to IMI, is intended to tax the accumulation of high-value property, drawing a parallel with the now-extinct Item 28 of the General Table of Stamp Tax. In this regard, it is important to recall that the Constitutional Court, through Decision No. 378/2018, of 04-07-2018, ruled not unconstitutional Item 28.1 of the General Table of Stamp Tax, approved by Law No. 55-A/2012, of 29 October, and amended by Law No. 83-C/2013, of 31 December, to the extent that it imposed annual taxation on the ownership of land for construction where the building, authorised or envisaged, was for housing and whose taxable patrimonial value is equal to or greater than € 1,000,000.00.
On the other hand, although the tendency towards approximation between the two taxes is natural, the truth is that AIMI, although it has followed Item 28 of the TGIS, does not have the same objective of taxing luxury real estate property – it suffices to see that the sum of taxable patrimonial values subject to taxation can result from many low-value properties that will not correspond to "luxury real estate property".
On the other hand, the Claimant argues that discrimination occurs against companies that are taxed under AIMI by virtue of properties that they use as productive factors, as opposed to other taxpayers who are merely owners of properties but do not conduct any economic activity through them. In the case of companies in the real estate business, the fact that they hold properties at a given time should not be considered an indication of contributory capacity or wealth inducing taxation under AIMI because this would result in a discriminatory differentiation compared to other companies with different productive structures. It thus considers violated the principles of equality and contributory capacity, inherent in Articles 13 and 104, paragraph 3 of the Constitution.
It is true that, following the extensive discussion that had been generated by the historical predecessor of AIMI – Item 28 of TGIS – it was proclaimed, before the approval of AIMI, the intention to create a tax that would not unduly disturb economic activity. Although it is evident that any tax always creates some distortion to economic activity, it was said at the time, and was set out in the Proposal for the State Budget Law for 2017, that there was a legislative concern to "avoid the impact of this tax on economic activity", implemented through the exclusion from the scope of incidence of "urban properties classified as 'industrial', as well as urban properties licensed for tourist activity, the latter provided that their destination is duly declared and proven" and the deduction from the taxable amount of the sum of "€ 600,000.00, when the taxable person is a legal entity with agricultural, industrial or commercial activity, for properties directly allocated to its operation".
However, the translation of this concern into the legislative text occurred in perhaps more restrictive terms than those concerns anticipated in many respects. This is evidenced in the text of Arbitral Decision No. 675/2017-T, when it is stated that "If the final draft of the Budget had maintained the legislative intention to exclude the incidence on properties directly allocated to the operation of legal entities, it would certainly have maintained the reference to this allocation that was contained in the proposal and which clearly expressed this legislative choice. Since this allusion to the allocation of properties was omitted, there is no legal basis for concluding that residential properties and land for construction allocated to the operation of legal entities are not relevant to the incidence of AIMI".
On the other hand, does the taxation that occurs in cases such as that of the Claimant constitute a violation of the principles of equality and contributory capacity? The Constitutional Court has held that the task of raising revenue through the tax system occurs within a framework of relative flexibility, in which the legislator has the freedom to make choices that can result in unequal treatment of taxpayers without this constituting a violation of constitutional principles such as those cited. On this matter, the Constitutional Court pronounced itself in Decision No. 563/96, of 16 May, in the following terms: "[...] The principle does not prevent that, taking into account the legislature's freedom to configure law, different treatment, 'reasonably, rationally and objectively founded', can (should) be established, under penalty of the legislature thus incurring in arbitrariness, by disregard for compliance with solutions objectively justified by constitutionally relevant values".
In the case of AIMI, the legislator chose to treat differently the holders of residential properties and land for construction and the holders of urban properties classified as 'commercial, industrial or for services' and 'other' in accordance with subparagraphs b) and d) of paragraph 1 of Article 6 of CIMI. Does this choice result in unconstitutionality? It does not appear so to us. In fact, what is required when a differentiation of tax treatment of taxpayers is promoted is that there be a rational justification for this differential treatment, which appears to occur in this case – the justification of not increasing the tax burden on productive sectors, taking into account investment and economic growth needs, is the rationale behind the exclusion of urban properties classified as 'commercial, industrial or for services' and 'other'.
The Claimant argues that, even so, in the case of companies that hold properties that are an integral part of their commercial activity by having corporate objects related to the real estate business, the taxation constitutes discrimination. However, it appears to us that the rationale that justifies the differential treatment remains valid even in these cases insofar as, for all purposes, the actual holding of real estate property is verified which is revealing of increased contributory capacity and which justifies taxation. In this sense, and as noted in Arbitral Decision No. 420/2018-T, of 15.01.2019, the taxation of this property is inserted in the objectives that presided over the creation of AIMI and respects the economic rationale that underlies it – "it not being the legislative objective to tax luxury housing but rather to obtain another means of financing Social Security, in line with the political choice of diversification, through 'a tax that falls on those holding the largest real estate assets, reinforcing the overall progressivity of the system'" (cf. page 57 of the State Budget report for 2017). On the other hand, companies that are actually taxed under AIMI may deduct this amount from the taxable matter of Corporate Income Tax (Article 135-J of CIMI).
For the foregoing, this Tribunal considers that the legal regime of AIMI is compatible with the constitutional principles of equality and contributory capacity, for which reason the disputed assessment does not suffer from the defects attributed to it in the arbitral decision request and should, therefore, be maintained in the legal system. The same applies to the decision that dismissed the administrative review presented by the Claimant against the AIMI assessment. For the same reason, the examination of the request for payment of compensatory interest is precluded.
IV – DECISION
For these reasons, this Arbitral Tribunal decides:
To dismiss as unfounded the arbitral request for annulment of the tax act embodied in the Assessment of Additional Municipal Property Tax ("AIMI") No. 2017..., relating to the year 2017, as well as the decision dismissing the administrative review No. ...2018..., dated 20.08.2018.
To dismiss as unfounded the request for condemnation to pay compensatory interest.
To condemn the Claimant to pay the costs of the process.
V – Value of the process
The value of the process is set at € 14,355.99 (fourteen thousand three hundred and fifty-five euros and ninety-nine cents), in accordance with Article 97-A, paragraph 1, a), of the Code of Tax Procedure and Process, applicable by virtue of subparagraphs a) and b) of paragraph 1 of Article 29 of the RJAT and paragraph 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.
VI – Costs
The arbitration fee is set at € 918.00 in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Claimant.
Lisbon, 17 July 2019
The Arbitrator
(Raquel Franco)
Frequently Asked Questions
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