Summary
Full Decision
ARBITRAL DECISION
The arbitrators Counselor Maria Fernanda dos Santos Maçãs (arbitrator president), Prof. Dr. Nina Aguiar and Dr. Ricardo Rodrigues Pereira (arbitrator members), appointed by the Deontological Council of the Administrative Arbitration Center to form the Arbitral Tribunal, agree as follows:
I. REPORT
- On January 4, 2018, the commercial company A... – Empreendimentos Turísticos, S.A., NIPC …, with registered office at Urbanização A..., Sítio da …, ... (hereinafter, Claimant), filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2, no. 1, paragraph a), and 10, nos. 1, paragraph a), and 2, of Decree-Law no. 10/2011, of January 20, which approved the Legal Framework for Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of December 31 (hereinafter, briefly designated RJAT), seeking the declaration of illegality and annulment of the assessment of the Surcharge on Municipal Property Tax (hereinafter, AIMI) no. 2017 ..., issued by the Tax and Customs Authority with reference to the year 2017, in the total amount of € 178,284.25.
The Claimant attached 7 (seven) documents and did not request the production of any other evidence.
The Respondent is AT – Tax and Customs Authority (hereinafter, Respondent or AT).
1.1. In essence and in brief summary, the Claimant alleged as follows:
It is a joint-stock company, headquartered in ..., which develops its activity in the sector of urban development, construction, purchase, sale, leasing and administration of real property and infrastructure, as well as in the resale of real property acquired for that purpose, management and operation of hotel establishments and tourist villages.
In this context, it has been promoting buildings according to its financial capacities and market circumstances, and its real property assets are intended solely and exclusively for exploitation, either through sale or leasing.
Considering that the parallelism between Item 28 of the TGIS and the current configuration of the AIMI is undeniable, it understands that the AIMI suffers from the same defects as its predecessor, especially because, regarding real property essential in obtaining income within the scope of economic activity, it lacks identical material support at the tax level.
The disputed tax act materializes the violation of the most basic canons of equality, proportionality and contributory capacity, so the Claimant cannot accept the same.
The principle of equality does not prohibit establishing distinctions; rather, it prohibits establishing distinctions lacking objective and rational justification, as is the case in the present matter.
Given the spirit that presided over the State Budget Law proposal for 2017, from which the AIMI emerged, it must be concluded that the intention was to tax the ownership of rights over luxury dwellings, as it reveals superior contributory capacity of those who hold them, thus implementing the principle of fair distribution and contributory capacity.
The real property and land for construction held by the Claimant and which are subject to taxation under AIMI are essential for obtaining income within the scope of its economic activity, themselves also subject to taxation.
Property rights over real property and land for construction consist, in the case of commercial companies of this type, in the patrimonial substrate of their economic activity, the realization of a true essential means for the pursuit of their economic activity generating income, so the assumption that property over such real property could constitute a manifestation of a (or increased) contributory capacity that, by itself, should be subject to deprivation through taxation completely fails.
Given the specific situation of the Claimant, it is customary within the scope of its economic activity to choose to maintain in its current assets, for several years, both residential properties for sale or leasing and land for construction intended for building.
Indeed, while it is true that such lands were acquired with the intent to incorporate buildings intended for exploitation or resale, it is equally true that such lands may potentially be maintained in its patrimonial sphere for several years, for various reasons, including the construction period, market conditions, obtaining financing, obtaining building licenses, among other circumstances, many of them completely beyond its control.
In accordance with the jurisprudential current expressed when analyzing the constitutionality of Item 28 of the TGIS, the Claimant understands that subjecting taxation, through AIMI, for several years (and in all those years), the property of these real property would produce an aggravated effect of capital drain, potentially decisively deteriorating the economic conditions (and development of the respective activity) of the said tax subjects and, what is especially burdensome, without any nexus of causality between the contributory capacity manifested by the property of those lands, and the payment of a tax that, in a vague and generic manner, claims to strengthen the "overall progressivity of the system".
Thus, without any factual basis, a glaring inequality has been created on the material plane between companies that have decided to pursue an economic activity that presupposes the ownership of real property (including land for construction), in relation to other companies whose activity does not result from real property ownership.
More than that, the legal conditions have been created for the constitution of manifest situations of material inequality between the Claimant and companies that, holding real property, pursue thereon a commercial, industrial or service provision activity.
No material, legal, fiscal, economic or other basis is perceived capable of justifying that taxation should apply only to companies that have real property in their current assets intended for the exercise of their economic activity, and should exclude from taxation real property dedicated to other economic activities.
In this way, with the tax in question, companies owning real property intended for the exercise of an economic activity are treated unequally, without any material supporting basis, in relation to companies that, for the same reason, are owners of real property classified as "commercial, industrial or for services", which are exempt from AIMI.
The real property held by companies that pursue real property activities does not correspond to any "luxury real property assets", but merely inventories that can be sold or where, potentially, goods intended for sale or exploitation can be built.
Thus, there is no contributory capacity that can be reached by the taxation of land for construction under AIMI.
With the negative, uncritical, arbitrary and random differentiation, between, on one hand, real property held by companies that use them in the pursuit of their activity, and, on the other hand, real property held by companies that dedicate them to industry, commerce and services, a differentiated treatment is conferred to situations that, from a material point of view, are entirely similar, in that no basis or justification, however plausible and rational, is perceived to defend that companies that hold in their current assets land for construction or real property for exploitation should be fiscally penalized in relation to companies that hold in their fixed assets real property, of equal value, intended for industry, commerce or services.
In this measure, the taxation in question constitutes a violation of the principles of contributory capacity, equality and proportionality, in that the fact that the Challenger has in its inventory a plot of land for construction or real property for sale, in no way evidences relevant contributory capacity worthy of being taxed, which is all the more evident when it is found that other companies holding real property of identical or superior PVT, equally intended for their activity, are not subject to similar taxation.
The principle of contributory capacity is not minimally safeguarded by the tax act in question, in that the holding of real property for the pursuit of an economic activity is not comparable, nor can be configured, as the holding of luxury property assets.
Indeed, the unconstitutionality of this normative provision is especially serious as it concerns land for construction, so that, should it not be understood that the assessment object of the present request for arbitral pronouncement should be annulled in its entirety, it should be declared illegal, as it suffers from unconstitutionality, in the part referring to land for construction.
It is unavoidable to conclude that, by affecting the ownership of real property intended for the exercise of an economic activity, and insofar as it is completely devoid of any sufficient basis, article 135-B, no. 1, of the CIMI should be disapplied due to material unconstitutionality, insofar as it violates the principle of tax equality enshrined in articles 13 and 104, no. 3, of the Constitution, and consequently the disputed AIMI assessment should be declared illegal, since it does not take into account the different contributory capacity of the owners of the real property on which it affects, striking indiscriminately taxpayers with and without the contributory force necessary to support the tax.
In these terms, the disputed assessment violates the principle of tax equality provided for in article 13 of the Constitution and the principle of contributory capacity provided for in article 104 of the Constitution, in that: it is based on a norm that treats in very different ways taxpayers that are in identical situations, with the measure of difference not assessed by their real contributory capacity; and it is based on an arbitrary norm devoid of perceivable or rational material foundation.
In light of the intended purpose of the norm, particularly when it points to the configuration of a tax complementary to the IMI with the aim of taxing "the accumulation of residential real property assets of very high value", through "a tax that applies to holders of larger real property assets, strengthening the overall progressivity of the system", the violation of the principle of proportionality is evident.
Indeed, there is a negative, uncritical, arbitrary and random differentiation, between, on one hand, real property held by companies that use them in the pursuit of their activity, and, on the other hand, real property held by companies that dedicate them to industry, commerce and services, and it is certain that no basis or justification, however plausible and rational, is perceived to defend that "the overall progressivity of the system" is strengthened through the taxation of real property integrated in the current assets of companies of real property nature, or even those that, because they are intended to be exploited, are recorded as investment property; a conclusion supported by the finding that such tax subjects are fiscally penalized in relation to companies that hold in their fixed assets real property, of equal value, intended for industry, commerce or services.
Since the legal norm in question is manifestly unbalanced, non-compliant and inadequate to the pursuit of the legal purpose, it is materially unconstitutional due to violation of the principle of proportionality.
In conclusion, we are facing the violation of two basic principles of the Portuguese Constitution, with article 135-B, no. 1, of the CIMI suffering from unconstitutionality due to violation of the principle of equality, in its aspect of contributory capacity, as well as due to violation of the principle of proportionality.
Article 135-B, no. 1, of the CIMI should therefore be disapplied by the Tribunal, given its material unconstitutionality, insofar as it applies to real property with residential purpose and land for construction held by companies that pursue a real property activity, which determines the complete annulment of the disputed assessment.
Even if this were not understood, namely if material unconstitutionality with the aforementioned scope were not seen, the material unconstitutionality of the said provision under the same presuppositions and with the same grounds would still appear clear and inescapable, insofar as it applied to land for construction, which determines the partial annulment of the disputed assessment.
1.2. The Claimant concludes its initial pleading by petitioning as follows:
"Whereby the Challenger respectfully requests Your Excellency that, with the full merits of this challenge, and as is only elementary sense of justice, the AIMI assessment challenged herein be annulled, in whole or in part, with the legal consequences thereof."
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The request for constitution of an arbitral tribunal was accepted and automatically notified to the AT on January 8, 2018.
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The Claimant did not appoint an arbitrator, so, pursuant to the provisions of paragraph a) of no. 2 of article 6 and paragraph a) of no. 1 of article 11 of the RJAT, the President of the Deontological Council of the CAAD appointed as arbitrators of the collective Arbitral Tribunal the signatories, who communicated acceptance of the assignment within the applicable deadline.
3.1. On February 20, 2018, the Parties were duly notified of this appointment and did not manifest willingness to refuse the appointment of the arbitrators, in terms of the combined provisions of article 11, no. 1, paragraphs b) and c), of the RJAT and articles 6 and 7 of the CAAD Deontological Code.
3.2. Thus, in conformity with the provisions of paragraph c) of no. 1 of article 11 of the RJAT, the collective Arbitral Tribunal was constituted on March 12, 2018.
- On April 30, 2018, the Respondent, duly notified for this purpose, filed its Response in which it specifically contested the arguments raised by the Claimant, concluding by requesting dismissal of the present action, with its consequent absolution from the claim.
The Respondent attached no documents, did not request the production of any other evidence, nor proceeded to attach the administrative process file to the case, as it does not exist.
4.1. In essence and also briefly, it is important to glean the most relevant arguments on which the Respondent based its Response:
The AT's actions could not have been different, since administrative bodies and officials do not have competence to decide on the non-application of norms regarding which doubts of constitutionality are raised, contrary to Courts which, in terms of article 204 of the Constitution, are prevented from applying unconstitutional norms, being assigned the competence for diffuse and concrete review of constitutional conformity.
The Administration is subject to law and right and its bodies and officials should be the first to comply with it, and therefore cannot be required to pronounce on the choices of the legislator, because these, once embodied in law, are the normative discipline within which it exercises its attributions in pursuit of the public interest. That is, bound by the principle of legality, the AT cannot, for that reason, disapply norms based on the interpretation it makes regarding their unconstitutionality.
So, in summary, the AT could not/can refuse to apply a norm or fail to comply with the law invoking or questioning its constitutionality, as it is subject to the principle of legality, as stated in articles 266, no. 2, of the Constitution, 3, no. 1, of the Administrative Procedure Code and 55 of the General Tax Law.
The impossibility of different action by the AT has repercussions, namely regarding eventual requests for indemnification interest.
Regarding the AIMI affecting urban real property of which legal persons and equivalent structures are owners, usufructuaries or superficiaries (no. 2 of article 135-A of the CIMI) the tax assumes the nature of a real tax, insofar as the modeling of the amount to be paid abstracts from the economic dimension of the entities, namely the qualification as small, medium or large enterprise, as well as does not affect the totality of the net assets of the entities.
Regarding the ratio legis present in article 135-B of the Municipal Property Tax Code, that is, the objective incidence of the AIMI, it does not have the scope intended by the Claimant, as the legislator removed from incidence urban real property classified as "industrial, commercial or for services" and "others" but expressly chose to maintain other real property that also integrate the assets of companies, such as those classified as residential or land for construction, by not including them in the negative delimitation enshrined. That is, it did not guarantee, nor intended to guarantee, in all cases that "real property dedicated to economic activity" would not be subject to taxation under AIMI, contrary to what is stated by the Claimant.
The progressive character of the AIMI, evidenced by the Claimant, only manifests itself within the scope of tax subjects - natural persons and not when the tax subjects are legal persons or equivalent legal structures, as is the case with the Claimant, therefore, in highlighting that the legislator intended "taxation on manifestations of fortune" it is necessary to reconduct this expression to its real economic dimension, all the more since the concept of "fortune" proves adequate when it relates to natural persons and not to legal persons.
On the other hand, the choices inherent in the delimitation of the objective incidence of the AIMI are made within the margin of "freedom of legislative configuration".
Attempting to designate the teleology of the tax, it is interpreted that it aims, at a first moment, to affect a portion of the assets of the tax subjects, affecting real property constituting an asset, recognizable legally as capital of a certain entity (singular or collective), regardless of whether it is dedicated to any productive process or income generating, this being the purpose of no. 1 of article 135-B of the Municipal Property Tax Code.
Then the legislator, at a second moment, comes to negatively delimit the incidence of the tax, excluding from the AIMI real property that, by its potential dedication, can be economically recognized as factors of production, as capital, that is, as intermediate goods that, combined with other factors of production, produce new utilities (economic goods that satisfy needs).
For this purpose, the legislator resorted to a criterion that convokes the structure of urban real property typologies provided for in article 6 of the Municipal Property Tax Code and which operates through the subtraction from the AIMI of urban real property that, as a result of the licensing of use declared by municipalities or, failing that, of its normal destination, are reconducted to the typologies of paragraphs b) and d) of no. 1 of that provision.
So, the universe of urban real property subject to the AIMI is determined by recourse to the remaining two typologies contained in no. 1 of article 6: residential urban real property and land for construction.
It is therefore unequivocal that we are facing a general and abstract objective incidence norm, applicable indistinctly to all cases in which the respective factual and legal presuppositions are fulfilled.
The tax under scrutiny does not aim at generic taxation of assets, only a partial tax on certain manifestations of contributory capacity. From this follows that, within the framework of partial taxation of assets, in this case, affecting residential urban real property and land for construction, the terms that should adequately be taken as the basis for comparison, to assess compliance with the principle of equality, are the assets of entities with the same corporate purpose, that is, companies with real property activities, as only thus there is a confrontation between objectively equal situations, being therefore proper to rule out that the comparison be established between patrimonial realities of entities that dedicate themselves to different economic activities, as well as natural persons (who have a considerably higher rate).
In this way, the AIMI respects a partial taxation of assets without specifically aiming at companies, as it comprises all types of tax subjects that are holders of the real rights enumerated over the real property in question, regardless of whether they assume a corporate character or not, encompassing thus, beyond societies, foundations, associations, natural persons.
Contrary to what the Claimant intends, it is understood that it is not possible to configure the unconstitutionality of a fiscal norm based simply on the fact that it has significant influence on the economic decisions of taxpayers, because, by nature, this is a typical effect of fiscal rules.
Furthermore, it will not be the circumstance that other taxpayers holding identically valuable real property remain exempt from the tax that will justify a specific constitutional censure of the norm under scrutiny.
The Claimant alleges that the taxed real property and land for construction are the patrimonial substrate of its economic activity and that they are essential for obtaining income within the scope of its economic activity. If this is true because it is the classification advocated by accounting standards, this, however, does not permit the conclusion that we are dealing with goods devoid of value, since they are goods with market value and intrinsic economic value that derives from different factors, such as location, building capacity (in the case of land for construction) and, even, its potential scarcity.
Now, such goods are not merely instrumental to the exercise of the activity; on the contrary, they integrate the very nucleus of the economic activity, they are the object of commerce or industry, as they are intended for exploitation or resale or, in the case of land for construction, for transformation should buildings be erected thereon for subsequent sale.
As for the lands, these do not reduce to mere building rights, of future things, and all of them are autonomous goods that, precisely by their natural scarcity, always have intrinsic economic value and, normally, quotation in the real property market, that is, they can be sold, exchanged, given as guarantee of obligations.
Differently, the real property excluded from subjection to the AIMI, in terms of no. 2 of article 135-B of the CIMI, is that which performs an instrumental function to industrial, commercial or service provision economic activities, in that they constitute buildings that serve as support for the functioning of said activities, and are not themselves generators of income.
And even if the taxed real property may prove instrumental to real property promotion activity, the same are suitable to indicate that that legal person is the holder of assets that, in themselves, evidence a specific abundance compared to other real property owners. That is, the circumstance that a given asset values, as a "factor of production of wealth" is not sufficient to contradict the finding that the corresponding holder holds real property only accessible to a holder of peculiar wealth and thus capable of supporting an additional contribution for the desired budgetary consolidation. It would only be possible to understand otherwise if the specific quality of the tax subject and/or its nature were projected in the normative criterion under scrutiny, which is not, at all, what happens.
Like any tax on assets, the AIMI is dissociated from a possible realization of profit with the sale of real property, as well as from the existence, or not, of a negative or positive net situation, being relevant, for the economy of the tax, only the patrimonial value of land for construction and residential real property. But the fact that the real property is investment goods, dedicated to real property operations habitually developed by the owner, not affecting the manifested contributory capacity (as the Claimant wrongly alleges), will determine that the taxation under AIMI be susceptible of some attenuation within the corporate sphere, both because it constitutes a cost of the activity, and for the possibility of repercussion (on prices) that, to greater or lesser degree, always exists even in taxes on corporate income.
In another order of considerations, the principle of equality, in its sub-dimension of the principle of proportionality, requires verification by the judge that the legislative solutions do not prove indubitably, flagrantly, absolutely unreasonable, having as presupposition a differentiation that is imperative.
Thus, as the differentiated treatment between the real property excluded by the norm and those subject to incidence finds sufficient material justification, the principle of equality is shown to be respected, either per se, or in its dimension of proportional equality, that is, there is no violation of the principle of proportionality.
4.2. The Respondent concludes its pleading as follows:
"In these terms, and in all else of law, and with the most learned supplementation of Your Excellency:
The present request for arbitral pronouncement should be judged unfounded as not proven, and consequently the Respondent absolved from all claims, in the terms petitioned above, all with the due and legal consequences.
Or, if this is not understood:
It is requested, by appeal to the provisions of article 280, no. 3, of the Constitution and article 72, no. 3, of the Constitutional Court Law, that notification to the Public Ministry of the learned arbitral judgment be ordered."
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On May 13, 2018, a ruling was issued dispensing with the holding of the meeting alluded to in article 18 of the RJAT, granting a deadline for the presentation of written arguments and fixing September 12, 2018 as the final date for rendering the arbitral judgment.
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No arguments were presented by the Parties.
II. PRELIMINARY MATTERS
The Arbitral Tribunal was regularly constituted.
The process is free from nullities.
The parties enjoy legal personality and capacity, are properly represented and are legitimate.
The Respondent raises, albeit implicitly, the exception of incompetence of the Tribunal because, being the Administration subject to the principle of legality (article 262, no. 2, of the Constitution and 55 of the General Tax Law) it cannot refuse to apply a norm or fail to comply with the law invoking or questioning its constitutionality.
It is true that the Respondent is directly subordinate to the law and must act in conformity with it. However, this fact does not prejudice the right of private parties to raise, in disputes submitted concretely to the judgment of courts, the unconstitutionality of certain norms, nor can it prevent courts, including arbitral ones, from appreciating questions of unconstitutionality placed before them, applying or disapplying the norms in question, in the exercise of constitutionally conferred powers (cfr. articles 204, 209 and 280 of the Constitution).
On an identical question, we follow the arbitral decision of May 4, 2018, rendered in case no. 675/2017-T of the CAAD, in the part where it states:
"There will certainly be some misunderstanding, for, in a State of Law, it is to Courts and not to any other bodies, namely those having legislative and executive functions, that the administration of justice falls, «ensuring the defense of rights and interests legally protected of citizens, suppressing the violation of democratic legality and settling conflicts of public and private interests» (articles 202, nos. 1 and 2, of the Constitution), for which they must interpret and apply the laws to settle disputes between citizens and the Administration.
And it is also to Courts that the Constitution attributes the power to control the constitutionality of laws, issued by bodies with legislative power (article 204 of the Constitution).
The present decision is rendered by a Court, so it has a jurisdictional character, and in the exercise of its jurisdictional power it falls to it to apply the law, according to its interpretation, being only subject to the law, as it interprets it, not being obliged to adopt the interpretation adopted by the Tax and Customs Authority or that hypothetically would be adopted by bodies with legislative power if they were assigned the competence for the application of the law to disputes pending in Courts.
On the other hand, in the exercise of its interpretative activity the Arbitral Tribunal is not limited by the letter of the law, and should adopt all criteria of interpretation provided for in the law, namely those indicated in article 9 of the Civil Code and 11 of the General Tax Law: «the interpretation should not be confined to the letter of the law, but should reconstruct from the texts the legislative thought, taking especially into account the unity of the legal system, the circumstances in which the law was elaborated and the specific conditions of the time in which it is applied», only not being able to consider «the legislative thought that does not have in the letter of the law a minimum of verbal correspondence», which may even be «imperfectly expressed»".
In sum, the Respondent is not being asked to proceed with the application or disapplication of norms due to unconstitutionality. This request is directed to courts in general, including arbitral ones, in disputes submitted to judgment.
Whereby the alleged exception is unfounded, concluding therefore in favor of the Tribunal's competence.
There are no other questions or exceptions that obstruct the adjudication of the merits and which it is proper to decide.
III. GROUNDS
III.1. ON FACTS
§1. PROVEN FACTS
The following facts are considered proven:
a) The Claimant is a commercial company that develops its activity in the sector of urban development, construction, purchase, sale, leasing and administration of real property and infrastructure, as well as in the resale of real property acquired for that purpose, management and operation of hotel establishments and tourist villages.
b) The Claimant is classified under CAE 41100 – "Real property promotion (development of building projects)", holding various real property and land for construction that it exploits within the scope of its activity.
c) The Claimant has been promoting buildings according to its financial capacities and market circumstances, with its real property assets intended solely and exclusively for exploitation, through sale or leasing.
d) On January 1, 2017, the Claimant was the owner of the urban real property – residential properties and land for construction – identified in documents nos. 1 and 2 attached to the request for arbitral pronouncement and which are hereby fully reproduced.
e) The real property held by the Claimant divides into two natures: those of an exploitative nature, namely those used for its activity referring to its facilities or real property with commercial purpose, which are accounted as tangible fixed assets; and inventories, which are intended for the pursuit of its commercial activity of construction and sale of real property, in which are mostly included land for construction and residential real property. [cf. documents nos. 5 and 6 with the PI]
f) The Claimant was notified of the AIMI assessment no. 2017 ..., issued by the Tax and Customs Authority with reference to the year 2017, in the total amount of € 178,284.25, with payment deadline in September 2017. [cf. document no. 1 with the PI]
g) In the aforementioned assessment was considered the total taxable value of € 44,571,063.14, corresponding to the sum of the unit tax patrimonial values of the said urban real property, with the total tax value of residential properties amounting to € 13,075,497.91 and that of land for construction to € 31,495,565.23. [cf. documents nos. 1 and 2 with the PI]
h) On September 27, 2017, the Claimant made full payment of the said AIMI amount assessed. [cf. document no. 1 with the PI]
i) On January 4, 2018, the request for constitution of an arbitral tribunal was filed which gave rise to the present process. [cf. CAAD case management information system]
§2. UNPROVEN FACTS
With relevance to the appreciation and decision of the case, there are no facts that have not been proven.
§3. MOTIVATION REGARDING FACTUAL MATTERS
Regarding the proven factual matters, the Tribunal's conviction was based on the facts articulated by the Parties, whose correspondence to reality was not questioned, and on the documents attached to the case.
III.2. ON LAW
As we have seen, the Claimant begins by basing the request for declaration of illegality of the disputed assessment by suffering from various unconstitutionalities, especially due to violation of constitutional principles of equality, contributory capacity and proportionality, ending by requesting the disapplication of article 135-B, no. 1, of the CIMI due to material unconstitutionality.
The Claimant states that the disputed tax act materializes the violation of the most basic canons of equality, proportionality and contributory capacity, so the Claimant cannot conform to the same.
Before entering into the analysis of the said unconstitutionalities, it is important to make some considerations about the meaning and scope of the norms involved.
Framework
The Claimant is a joint-stock company that develops its activity in the sector of urban development, construction, purchase, sale, leasing and administration of real property and infrastructure, as well as in the resale of real property acquired for that purpose, management and operation of hotel establishments and tourist villages. In this context, its real property assets are intended solely and exclusively for exploitation, either through sale or leasing, constituting a true essential means for the pursuit of its economic activity.
Thus, the Claimant understands that the AIMI is not applicable to it, since with this the legislator intended to "tax the ownership of real rights over luxury dwellings, as it reveals superior contributory capacity of those who hold them, thus implementing the principle of fair distribution and contributory capacity" (article 65 of the Request). Now, in its case, since the real property and land for construction are essential for obtaining income within the scope of its economic activity they should be considered excluded from taxation.
For this purpose the Claimant invokes the jurisprudence that had been established around Item 28 of the General Stamp Tax Table and the spirit that presided over the State Budget Law Proposal for 2017.
It happens that the Claimant starts from wrong presuppositions regarding the meaning and scope of the applicable provisions, as we shall now demonstrate.
Let's see.
The Surcharge on the IMI was instituted by Law no. 42/2016, of December 28 (State Budget Law for 2017), which added to the Municipal Property Tax Code Chapter XV comprising articles 135-A to 135-K.
In article 135-A the subjective incidence of the tax is defined, establishing that "the passive tax subjects of the surcharge on municipal property tax are natural or legal persons who are owners, usufructuaries or superficiaries of urban real property situated in Portuguese territory", being "equivalent to legal persons any structures or centers of collective interests without legal personality that appear in the registers as passive tax subjects of the municipal property tax".
In turn, article 135-B defines the scope of objective incidence, stating as follows:
Article 135-B
Objective incidence
1 - The surcharge on the municipal property tax affects the sum of the tax patrimonial values of urban real property situated in Portuguese territory of which the passive tax subject is the holder.
2 - Excluded from the surcharge on the municipal property tax are urban real property classified as «commercial, industrial or for services» and «others» in terms of paragraphs b) and d) of no. 1 of article 6 of this Code.
The remission made in no. 2 of article 135-B to article 6 of the Municipal Property Tax Code aims to characterize what is understood as urban real property «commercial, industrial or for services» and «others» for purposes of the exclusion from the scope of incidence of the surcharge on the tax.
Thus, the Municipal Property Tax (IMI) affects the tax patrimonial value of rural and urban real property situated in Portuguese territory, as results from article 1 of the Municipal Property Tax Code, and the subsequent articles define, for purposes of the tax, the concepts of real property, of rural real property, of urban real property and of mixed real property (articles 2 to 5).
In turn, article 6 establishes the species of urban real property, stating as follows:
"1 - Urban real property divides into:
a) Residential;
b) Commercial, industrial or for services;
c) Land for construction;
d) Others.
2 - Residential, commercial, industrial or for services are buildings or constructions licensed for such purposes or, failing license, that have as normal destination each of these purposes.
3 - Land for construction are considered those situated inside or outside an urban agglomeration, for which license or authorization has been granted, admitted prior notification or issued favorable prior information of loteamento [subdivision] or construction operation, and also those that have been so declared in the acquisition title, excepting lands where the competent entities forbid any of those operations, namely those located in green zones, protected areas or that, in accordance with municipal territorial planning, are dedicated to spaces, infrastructure or public equipment.
4 - Included in the provision of paragraph d) of no. 1 are lands situated inside an urban agglomeration that are not land for construction nor are encompassed by the provision of no. 2 of article 3 and still buildings and constructions licensed or, failing license, that have as normal destination purposes other than those referred to in no. 2 and still those of the exception of no. 3.
Given the foregoing and as to the first question, be it said, from the start, that the literality of articles 135-A, no. 1 and 135-B, nos. 1 and 2, of the CIMI is clear and lends itself to no interpretive doubt. Being the letter of the law, or grammatical element, the first element to be invoked in legal hermeneutics, and there being reason to presume that the legislator knew how to express its thought in adequate terms (no. 3 of article 9 of the Civil Code), it will not prove necessary to invoke other elements from those available in the panoply of hermeneutics.
Indeed, it appears clear that the legislator, by defining the negative delimitation of the incidence of the tax by reference to urban real property classified as «commercial, industrial or for services» and «others» in terms of paragraphs b) and d) of no. 1 of article 6» of the Municipal Property Tax Code, is precisely intending to remit to that typology of real property according to the very characterization that the Code attributes to it.
As was established in the Arbitral Decision, rendered in case 676/2017-T, following the Arbitral Decision rendered in case no. 664/2017-T, whose jurisprudence we now follow, as we agree with it, "The exclusion from the tax encompasses, consequently, the real property classified as commercial, industrial or for services, understanding as such buildings or constructions licensed for such purposes or that have as normal destination each of these purposes. It encompasses, moreover, the residual species referred to in paragraph d) of no. 1 of that article 6, therein including lands situated inside or outside an urban agglomeration that are not land for construction nor rural real property and still buildings and constructions that do not fall under any of the previous classifications.
The scope of objective incidence, by effect of the remission to that article 6, was thus defined not only by reference to a certain species of urban real property, but also by reference to the administrative procedure through which the classification was made or, failing license, to the normal destination of those real property for commercial, industrial, services or other purposes."
It is true that the legislative concern of «avoiding the impact of this tax on economic activity» was announced in the State Budget Law Proposal for 2017 and was being implemented through the exclusion from the scope of incidence of «urban real property classified in the species "industrial", as well as urban real property licensed for tourist activity, the latter provided that their destination is duly declared and proven» and the deduction from the taxable value of the amount of «€ 600,000.00, when the passive tax subject is a legal person with agricultural, industrial or commercial activity, for real property directly dedicated to its functioning».
However, the exclusion of incidence was not defined on the basis of the activity to which the real property are dedicated, as in the approved wording, the non-incidence was defined, as we have seen, only on the basis of the types of real property indicated in article 6 of the CIMI, without any allusion to the dedication or not to the functioning of legal persons.
Thus, as was established in the Arbitral Award no. 675/2017-T, "had it been maintained, in the final wording of the Budget, the legislative intention to rule out incidence on real property directly dedicated to the functioning of legal persons, it would certainly have maintained the reference to this dedication that was in the proposal and that clearly expressed this legislative option.
(...), having been suppressed this allusion to the dedication of the real property, there is no legal support for concluding that residential real property and land for construction dedicated to the functioning of legal persons do not matter for the incidence of the AIMI.
"In the absence of other elements that induce the choice of the less immediate sense of the text, the interpreter should in principle opt for that sense which better and more immediately corresponds to the natural meaning of the verbal expressions used, and in particular to its technical-legal meaning, in the (not always exact) supposition that the legislator knew how to express its thought correctly.
In the case at hand, in light of the departure from the proposed wording in which importance was given to the dedication of the real property, there is no reason to conclude that the legislator did not know how to express its thought in adequate terms, as must be presumed, by force of the provision of article 9, no. 3, of the Civil Code."
In the same sense, it can be read in the Arbitral Decision, relating to case no. 676/2017-T, following the jurisprudence fixed in the Arbitral Decision rendered in case no. 664/2017-T, above referred to, that: "Having the law defined the scope of incidence of the tax through technical legal concepts used elsewhere in the system it is surely with that sense that the scope of application of the legal provision must be defined. Norms sometimes carry more than one meaning and then the positive function of the text translates into giving stronger support or more strongly suggesting one of the possible senses. But if the legislator resorted to a special technical-legal language, to express its thought with greater precision, it falls to the interpreter to resort to the technical-legal meaning of the expressions used, dispensing itself of circumstantial elements that could only lead to an interpretative result not intended by the legislator (cfr., in this sense, Baptista Machado, Introduction to Law and to Legitimating Discourse, Coimbra, 1993, p. 182).
As must be concluded, the intended extension of the legislative formula used to real property dedicated to the company's economic activity, regardless of the specific characterization as commercial, industrial or services real property, has no place in light of the general criteria of legal hermeneutics."
Thus, the Claimant is not right when it alleges that it would have been the intention of the legislator to intend to exclude from the scope of incidence of the tax the real property that constitute the substrate of the economic activity of real property companies, on the pretense that the objective pursued would be not to overburden tax subjects that possess real property by effect of their corporate purpose, so as not to affect the economic activity developed by them.
Indeed, such interpretation has no support in the letter of the law nor does it result from the rational and systematic element. It is clear from the reading and interpretation of the norms in question that the legislator's option was not in the direction advocated by the Claimant. Such an option would presuppose that the legislator, instead of having delimited the scope of incidence through characterized types, would have opted for a case-by-case evaluation based on the dedication of the real property, in practical terms, to an economic activity or to the functioning of a legal person. What is shown not to have happened.
In sum, it is repeated, the relevant criterion elected by the legislator, within its broad margin of configuration, was the classification of the real property in face of article 6 of the CIMI and not their dedication to the economic activity of the Claimant, whether as an element of tangible fixed assets or of current assets, as goods (real property intended for sale) or raw material (land intended for construction). It further appears that such dedication is not contained in the law nor in Law Proposal no. 37/XIII/2.A, of 13-10-2016, in the wording introduced by Proposal Amendment of 18-11-2016, contained in the statement of reasons of the political parties, namely the Socialist Party, notwithstanding that in the initial wording of the said Law Proposal as well as of Report OE2017, of October 2016 (Strategy to Promote Economic Growth and Budgetary Consolidation - IV.2.3. Fiscal Policy Guidelines) and also of item 1.4.2.1 – "Fiscal Measures for 2017" of the Budget, Finance and Administrative Modernization Committee, of 31-10-2016, provision for dedication to productive activity is foreseen.
Thus, the fact that the Claimant holds the aforementioned real property while substrate of its economic activity does not preclude the incidence of the AIMI.
On the Questions of Unconstitutionality
The questions of unconstitutionality raised by the Claimant have already been addressed in a negative sense by various arbitral decisions, whose jurisprudence we now reproduce, for ease of exposition.
Regarding the principle of equality and contributory capacity, as was established in the Arbitral Decision rendered in case no. 676/2017-T, reproducing the Arbitral Decision no. 664/2017-T "the Constitutional Court has underscored, one of the constitutionally defined essential objectives of the fiscal system, alongside the satisfaction of the financial needs of the State and other public entities, is that of fair distribution of income and wealth, as can be gathered from article 103, no. 1, of the Constitution.
It is this commitment of the fiscal system to the idea of social justice and the diminution of inequality in the social distribution of income and wealth that requires it to be progressive. This requirement is expressly enshrined within the taxation of personal income: according to no. 1 of article 104, the tax on personal income aims at «the diminution of inequalities and shall be unique and progressive, taking into account the needs and income of the family unit».
Fiscal progressivity requires that the relationship between the tax paid and the income level be more than proportional, which can only be achieved by applying to taxpayers with higher incomes a higher tax rate. In other words, there is progressivity when the value of the tax increases in a proportion superior to the increase in the taxable matter.
Consequently, the Constitution requires a progressivity with the intrinsic virtue of contributing to a diminution of income inequality (on all these aspects, the Constitutional Court judgment no. 187/13, nos. 97, 98 and 99).
The progressivity of the fiscal system also constitutes a requirement of the principle of material equality.
As Casalta Nabais states, the principle of fiscal equality has inherent above all «the idea of generality or universality, whereby all citizens are bound to the fulfillment of the duty to pay taxes, and of uniformity, requiring that such duty be assessed by a single criterion - the criterion of contributory capacity. This thus implies equal tax for those with equal contributory capacity (horizontal equality) and different tax (in qualitative or quantitative terms) for those with different contributory capacity in the proportion of this difference (vertical equality)» (Tax Law, 5th edition, Coimbra, 2009, pp. 151-152).
Configuring itself the general principle of equality as a material equality, the principle of contributory capacity – according to the same author - as the tertium comparationis of equality in the field of taxes, does not require a specific and direct constitutional provision. Its constitutional foundation is the principle of equality articulated with the other principles and provisions of the respective "fiscal constitution" and, in particular, those that derive from the structuring principles of the fiscal system that are contained in articles 103 and 104 of the Constitution (op. cit., p. 152).
As presupposition and criterion of taxation, the principle of contributory capacity – within the same line of understanding - «moves the fiscal legislator away from arbitrariness, obliging it in the selection and articulation of the tax facts, to adhere to revelations of contributory capacity, that is, to erect as object and taxable matter of each tax a certain economic presupposition that is a manifestation of this capacity and is present in the various legal hypotheses of the respective tax» (op. cit., p. 154).
Also the Constitutional Court, more recently, has analyzed the principle of fiscal equality under the prism of contributory capacity, as can be seen namely in judgment no. 142/2004, where it is established that «[t]he principle of contributory capacity expresses and concretizes the principle of fiscal or tax equality in its aspect of uniformity – the duty of all to pay taxes according to the same criterion – the contributory capacity filling the single criterion of taxation».
The recognition of the principle of contributory capacity as a criterion intended to assess the constitutional inadmissibility of certain or certain solutions adopted by the fiscal legislator has also led to the idea, expressed for example in the Constitutional Court judgment no. 348/97, that taxation in accordance with the principle of contributory capacity will imply «the existence and maintenance of an effective connection between the tax obligation and the economic presupposition selected as the object of the tax, requiring thus a minimum of logical coherence of the various concrete hypotheses of tax provided for in the law with the corresponding object of the same».
The Constitutional Court has thus been moving away from a merely negative control of tax equality, coming to adopt the principle of contributory capacity as an appropriate criterion for the distribution of taxes; but it does not cease to accept the prohibition of arbitrariness as an adjuvant element in the verification of the constitutional validity of normative solutions within the fiscal field, especially when these are dictated by considerations of legislative policy related to the rationalization of the system.
In sum, the principle of tax equality can be concretized through different facets: a first is in the generality of the tax law, in its application to all without exception; a second, in the uniformity of the tax law, in treating equally taxpayers who find themselves in equal situations and differently those who find themselves in different situations, in the measure of the difference, to be assessed by their contributory capacity; a final one, is in the prohibition of arbitrariness, in barring the introduction of discriminations between taxpayers that are devoid of rational foundation (cfr. Constitutional Court judgments nos. 306/2010 and 695/2014)".
Applying the foregoing to the case at hand, it is emphasized, in the first place, as can be read in the Report on the Budget for 2017 (p. 60), that the creation of the surcharge on the IMI, as a complementary tax on real property assets, intended to introduce into taxation «a progressive element of a personal basis, taxing more highly the most substantial assets», and in that sense, it is compatible with the principle of progressivity of the tax to which no. 3 of article 104 of the Constitution refers, which has as corollary the tending imposition of greater taxation on those with greater contributory capacity.
According to doctrine, it has also been understood that the taxation of assets, along with the taxation of income, constitutes a projection of contributory capacity, functioning as an extension of the personal income tax and as a reinforcement of qualitative discrimination (Sérgio Vasques, "Contributory capacity, income and assets", Taxation – Journal of Tax Law and Management, no. 23, Coimbra, 2005, pp. 33 and 36).
Now, in this context, it is not seen that the taxation of real property assets of the Claimant offends the principle of tax equality and contributory capacity only because the ownership of real property constitutes the very object of its economic activity.
Indeed, the real property held by it will be dedicated to activities freely accessible to the generality of real property owners and any other entities, even of a corporate nature, that dedicate themselves to real property promotion.
As can be read in the Arbitral Award, rendered in case no. 664/2017-T, "The ownership of real property assets, for purposes of sale and transformation, with a view to obtaining economic results, does not cease to constitute a patrimonial asset that is revelatory of an enhanced contributory capacity, which goes beyond the tax that affects the taxable profit due to the economic activity developed. What is at issue, therefore, is not the taxation of the real income earned by those entities through the activity developed, but the complementary contributory capacity that derives from the ownership of the asset and which by itself can facilitate the raising of credit or the reinforcement of its negotiating position in the celebration of contracts (...)"; in the same sense, the Arbitral Decision rendered in case no. 676/2017-T can also be seen.
Also as was established in the Arbitral Decision, rendered in case no. 675/2017-T, "the ownership of real property assets of high value evidences, as in relation to any owner of real property intended for housing, a special economic capacity to be able to contribute additionally to the Financial Stabilization Fund of Social Security, to which the revenue of the AIMI is assigned, and which «corresponds to the objective of the government program to expand the financing base of Social Security» (Report on the Budget for 2017, page 57).
For this reason, the imposition on the generality of holders of residential real property or land for construction of residential real property does not appear materially unconstitutional, in light of the principles of equality and contributory capacity."
Moreover, in line with what was understood in the Arbitral Award, of March 17, 2016, rendered in case no. 507/2015-T, "there must be established a distinction between the ownership of real property assets intended for housing which constitutes, in itself, a tendency-sure indication of economic abundance, superior to that of the generality of citizens, and the ownership of rights over real property intended for the exercise of commercial, industrial activities, provision of services or similar that may be recognized as factors of production and whose dimension and patrimonial value constitutes, not so much a manifestation of wealth, but a standard of adequacy to the functioning of the company.
It thus appears that there exists constitutionally acceptable foundation for the restriction of the incidence of the surcharge on the tax to residential real property by comparison with real property classified as commercial, industrial or for provision of services, with the invoked unconstitutionality based on the violation of the principles of equality and contributory capacity being ruled out."
In sum, it is possible to discover sufficient material foundation for distinguishing between these different tax facts for purposes of the taxation of assets without there being equally any disproportionate taxation.
The Claimant also makes allusion, on the subject of constitutionality questions, to the jurisprudence of the Constitutional Court affecting the norm of Item 28.1 of the General Stamp Tax Table, in the wording of Law no. 83-C/2013, of December 31, in that it imposes annual taxation on the ownership of land for construction whose building, authorized or foreseen, is for housing, whose patrimonial value is equal to or greater than € 1,000,000.00.
Here too we shall follow what is established in the Arbitral Award, rendered in case no. 664/2017-T, in the terms that follow: "It must first be said that the provision analyzed there does not have the same normative content as the disposition now under appreciation and that the jurisprudential understanding that came to be established cannot be directly transposed to the situation of the present case.
The principle of tax equality was mobilized in that judgment because it was understood that the inclusion in the scope of incidence of the norm of a plot of land for construction paired with an already built residential real property does not reflect the different contributory capacity of the respective owners, being that the determining reason for the judgment of unconstitutionality. In the present case, to the contrary, for purpose of the exclusion of the Surcharge on the IMI, it is intended to establish the equation between land for construction and urban real property classified as commercial, industrial or for services in the inverse perspective that land for construction potentially usable for such purposes does not distinguish itself from already built real property that is classified as commercial, industrial or for services."
Whereby, given the foregoing, the request formulated by the Claimant is unfounded, and the disputed assessment is to be maintained in the legal order.
IV. DECISION
Whereby this Arbitral Tribunal agrees to:
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Judge unfounded the exception raised by the Respondent;
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Judge unfounded the request for arbitral pronouncement regarding the declaration of illegality and annulment of the assessment of the Surcharge on the Municipal Property Tax no. 2017 ..., issued by the Tax and Customs Authority with reference to the year 2017, in the total amount of € 178,284.25, with the consequent absolution of the Tax and Customs Authority from this claim;
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Condemn the Claimant to the payment of the costs of the process.
VALUE OF THE CASE
In conformity with the provisions of arts. 306, no. 2, of the Code of Civil Procedure, 97-A, no. 1, paragraph a), of the Code of Tax Procedure and 3, no. 2, of the Regulations of Costs in Arbitration in Tax Matters, the value of the case is fixed at € 178,284.25 (one hundred seventy-eight thousand two hundred eighty-four euros and twenty-five cents).
COSTS
In terms of the provisions of articles 12, no. 2, and 22, no. 4, of the RJAT and article 4, no. 4, and Table I attached to the Regulations of Costs in Arbitration in Tax Matters, the amount of the costs is fixed at € 3,672.00 (three thousand six hundred seventy-two euros), in terms of Table I attached to the Regulations of Costs in Arbitration in Tax Matters, to be borne by the Claimant.
Notify.
Lisbon, July 26, 2018.
The Arbitrators,
(Maria Fernanda dos Santos Maçãs)
(Ricardo Rodrigues Pereira)
(Nina Aguiar)
[1] The Claimant refers, we believe by oversight, to no. 1 of article 135-B of the Municipal Property Tax Code, when the provision in question appears to correspond to no. 2 of the same provision.
[2] BAPTISTA MACHADO, Introduction to Law and to Legitimating Discourse, page 182.
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