Process: 614/2016-T

Date: June 12, 2017

Tax Type: IMT Selo

Source: Original CAAD Decision

Summary

CAAD arbitration Process 614/2016-T addresses whether Article 236 of Law 83-C/2013 unconstitutionally imposes retroactive tax obligations on Real Estate Investment Funds for Residential Rental (FIIAH). The fund manager challenged IMT and Stamp Duty assessments totaling €1,494 on a property sale, arguing that tax exemptions under Article 8(7)(a) and 8(8) of the FIIAH regime became permanently crystallized upon acquisition and cannot be retroactively revoked. The claimant contends Article 236 violates Article 103(3) of the Portuguese Constitution prohibiting retroactive tax legislation. The Tax Authority raised procedural defenses including arbitral tribunal incompetence to rule on constitutionality (reserved to Constitutional Court) and passive illegitimacy. On the merits, the AT argues Article 236 merely establishes a compliance period for pre-existing rental use requirements rather than creating new retroactive obligations, thus respecting constitutional principles of legal certainty and legitimate expectations. The case raises fundamental questions about the scope of FIIAH tax benefits, the temporal limits of exemption crystallization, jurisdictional boundaries of tax arbitration tribunals regarding constitutional review, and the application of non-retroactivity principles when legislation clarifies versus modifies existing tax conditions.

Full Decision

ARBITRAL DECISION

1. REPORT

1.1. A…, S. A., in its capacity as manager of B…– Closed Real Estate Investment Fund for Residential Rental, taxpayer number …, with registered office at …, number … –…, …– … Lisbon, hereinafter referred to as the Claimant, filed on 14/10/2016 a request for arbitral ruling, in which it requests that the nullity of the assessments of Municipal Tax on Onerous Property Transfers (IMT), with number … and Stamp Duty, with number…, be declared, or, alternatively, their annulment and reimbursement of the amounts of tax paid, plus indemnity interest.

1.2. His Excellency the President of the Ethics Council of the Administrative Arbitration Center (CAAD) designated on 15/12/2016 as arbitrator Francisco Nicolau Domingos.

1.3. On 30/12/2016 the arbitral tribunal was constituted.

1.4. In compliance with the provision of article 17, paragraph 1 and 2 of Decree-Law number 10/2011, of January 20 (RJAT) the Respondent was, on 02/01/2017 notified to, should it wish, present a response, request the production of additional evidence and to remit the administrative file (PA).

1.5. On 03/02/2017 the Respondent presented its response, in which it invokes the incompetence of the arbitral tribunal and its passive illegitimacy and argues for the dismissal of all claims filed by the Claimant.

1.6. The tribunal on 17/04/2017 invited the Claimant to comment on the matter of preliminary exceptions.

1.7. The Claimant commented on the dismissal of the dilatory exceptions on 17/04/2017, given that its claim consists of the declaration of nullity or alternatively the annulment of the assessments on the ground that they are based on the application of a rule that violates the Portuguese Constitution (CRP) and the law.

1.8. The tribunal on 22/05/2017 considered that the matter of preliminary exceptions could be addressed with the arbitral decision and decided to dispense with the holding of the hearing to which article 18, paragraph 1 of the RJAT refers, on the basis of the principle of the autonomy of the arbitral tribunal in conducting the proceedings and in determining the rules to be observed with a view to obtaining, within a reasonable period, a ruling on the merits of the claims filed, see article 16, paragraph c) of the RJAT, granted 8 days for the parties, should they wish, to present their final written submissions and set a deadline for issuing the arbitral decision.

1.9. The Respondent on 24/05/2017 filed a request in which it argues for recognition of the dilatory exceptions of incompetence of the arbitral tribunal and of passive illegitimacy, and alternatively, for the dismissal of all claims.

1.10. The Claimant presented its final written submissions on 26/05/2017, in which it maintained in full its initial claims.

2. POSITIONS OF THE PARTIES

The Claimant begins by alleging that, as a result of the legislative amendment undertaken by Law number 83-C/2013, of December 31 – article 236, paragraph 2, it requested from the Tax and Customs Authority (AT) the assessment of IMT and Stamp Duty arising from the sale by Fund B… of the property which is the subject matter of these proceedings, and € 830.00 was assessed as IMT and € 664.00 as Stamp Duty.

Subsequently, it invokes the illegality of the assessments, given that they apply an unconstitutional rule, which leads to its nullity, or, if that is not the case, to its annulment. To justify this claim it alleges that, with the entry of the property into the patrimony of the Claimant, the exemptions from IMT and Stamp Duty, provided for in article 8, paragraph 7, paragraph a) and paragraph 8 of the legal regime of Real Estate Investment Funds for Residential Rental (FIIAH), became permanently crystallized in the legal order, because, at the time of acquisition, they were not conditioned on the subsequent verification of any facts or circumstances, nor to any regime of expiry.

For this reason, it adds that the assessments apply an unconstitutional rule, article 236 of Law number 83-C/2013, of December 31, which violates the principle of prohibition of retroactivity of tax law, provided for in article 103, paragraph 3 of the CRP, given that it creates a regime of expiry of the exemptions provided for in article 8, paragraph 7, paragraph a) and paragraph 8 of the legal regime of FIIAH and not a densification of a criterion previously provided.

It concludes by petitioning the condemnation of the Respondent to reimburse the amounts of tax paid, plus indemnity interest.

The Respondent, in its response, defends itself by exception, arguing that the situation present in these proceedings is not a situation of possible non-application of a rule due to any illegality occurring in its application to concrete facts, but the illegality/unconstitutionality itself, a matter as to which the arbitral tribunal has no competence, given that it is reserved to the Constitutional Court, so that this dilatory exception would impede the continuation of the proceedings.

It further sustains that the claim for abstract review of constitutionality conflicts with the powers of the Respondent and with its binding to the law and the CRP and, as such, there is passive illegitimacy which should likewise determine the dismissal of the instance.

It defends itself by substantive objection when it asserts that the principle of legality to which the Administration is bound prevents administrative bodies and agents from failing to apply rules as to which doubts of constitutionality are raised, article 236 of the tax regime of FIIAH, so the AT could not proceed to its non-application.

It sustains as to the imputation of the vice of nullity to the assessments, by violation of article 103, paragraph 3 of the CRP that, as a general rule, the consequence resulting from the invalidity of acts is voidability, nullity occurring only when it lacks one of its essential elements or when the law expressly sanctions it with that form. In this connection it observes, further, that if there existed the violation of article 103, paragraph 3 of the CRP, as the Claimant argues, the acts impugned would only be annulled and not declared null.

It further adds that the property which is the subject matter of these proceedings formed part of the Fund's patrimony as of the date of entry into force of Law number 83-C/2013, of December 31 and that it was the Claimant here who requested from the AT the assessment of IMT and Stamp Duty, in that it sold it to third parties and thus gave it a destination different from that which was supposed, residential rental.

It further states that article 236 of Law number 83-C/2013, of December 31 did not establish any new requirement, it merely granted a period for its compliance, which only begins with the entry into force of the new law. That is, it argues that such provision is not altering the assumptions and conditions for the attribution or recognition of a tax benefit, but only providing the period of time for purposes of proof of compliance with a requirement previously established, respecting the principles of legal certainty and protection of legitimate expectations. In sum, no expiry regime of the benefit was introduced ex novum, for this reason it argues that, if it is so, there is no violation of the principle of prohibition of retroactivity of tax law, provided for in article 103, paragraph 3 of the CRP and, therefore, the above-mentioned provision is not unconstitutional.

In summary, the tax benefits applicable to FIIAH always depended on the allocation of the properties to rental for permanent housing, a requirement which the AT could assess, in order to conclude for the permanence or rather, for the restoration of the standard system of taxation.

Finally, it argues that, even if the above-described arguments were unsuccessful, the taxpayer would never have the right to indemnity interest, because the binding of the AT to the law obliged it to apply the rule, even if unconstitutional.

Thus, these are the issues which the tribunal must address:

i) Whether the arbitral tribunal has competence to assess the request for arbitral ruling;

ii) Whether the entity Respondent is a party with passive illegitimacy in these proceedings;

iii) Whether the assessments of IMT and Stamp Duty are illegal;

iv) Whether there is entitlement to the payment of indemnity interest.

3. PRELIMINARY ISSUES AND CASE MANAGEMENT

3.1.Incompetence of the arbitral tribunal

The Respondent argues that the tribunal has no competence to assess or declare the (un)constitutionality of article 236 of Law number 83-C/2013, of December 31, given that abstract review of legality and constitutionality is reserved to the Constitutional Court.

Invited the Claimant to comment on such exception, it came to state that the exception of incompetence of the tribunal is based on an incorrect interpretation of the request for arbitral ruling, in that, what is reflected in that procedural document is the claim that the nullity of the assessments put in issue be declared, or alternatively their annulment on the ground that they are based on the application of a rule that violates the CRP and the law.

Will the Respondent be right?

In this respect it is accepted that the application of a materially unconstitutional rule in the context of the assessment of a tax determines its annulment, because it suffers from the vice of violation of law arising from error as to the legal premises.

Now, what the Claimant puts in issue is the application of a rule which it deems unconstitutional, article 236 of Law number 83-C/2013, of December 31 and not the abstract review of legality and constitutionality.

Thus, the tribunal is materially competent, the exception invoked by the Respondent being judged unfounded.

3.2.Passive illegitimacy of the Respondent

The Respondent invokes that if the claim of the Claimant consists in abstract review of the constitutionality of article 236 of Law number 83-C/2013, of December 31, it is necessary to conclude that it is a party lacking legitimacy in the proceedings.

Will it be right?

Article 30, paragraph 1 and 2 of the Civil Procedure Code (CPC) provides that: «1. The plaintiff is a party with legitimacy when it has a direct interest in suing; the defendant is a party with legitimacy when it has a direct interest in defending. 2. The interest in suing is expressed by the utility derived from the success of the action and the interest in defending by the prejudice that may arise from that success…».

Procedural legitimacy is thus assessed by the relation and interest of the party with the object of the action.

Article 9, paragraphs 1 and 4 of the Tax Procedure and Process Code (CPPT), applicable by virtue of article 29, paragraph 1, paragraph a), of the RJAT provides that the AT, which comprises the extinct General Directorate of Taxes and General Directorate of Customs and Special Consumption Taxes, has legitimacy to intervene in the tax procedure and in the tax court proceedings.

In truth, as the doctrine sustains: «…all persons who have legitimacy to intervene in the tax procedure also have legitimacy to intervene in the tax court proceedings»[1].

Now, in the case sub judice we are in the presence of assessment acts performed by the Respondent whose legality is now in issue by the fact that the Claimant understands that they suffer from error as to the legal premises by application of a materially unconstitutional rule.

Thus, if we are not in the presence of abstract review of constitutionality, if the tribunal is materially competent to assess the request for arbitral ruling and if the Respondent performed the acts in issue, it is necessary to conclude that it has passive procedural legitimacy. In truth, if it was the Respondent who performed the acts it will be the entity that best can proceed to the judicial sustenance of their legality.

For this sum of reasons, it is declared that the Respondent has passive legitimacy in the present proceedings, the exception invoked being thus judged unfounded.

3.3.Case Management

The joinder of claims underlying the present proceedings is admissible, given that there is identity as to the matter of fact and the success of the claims depends on the interpretation of the same principles and rules of law, see article 3, paragraph 1 of the RJAT.

Thus, the proceedings do not suffer from nullities, the arbitral tribunal is regularly constituted and is materially competent to assess and decide the claims, the conditions being consequently verified for the issuance of the final decision.

4. MATTERS OF FACT

4.1. Facts deemed proven

4.1.1. The Claimant acquired on 21/06/2012 the unit «BB» of the property registered in the land register under article … of the parish union of …, … and …, municipality of Matosinhos.

4.1.2. The Claimant is a management company of a real estate investment fund called «B… – Closed Real Estate Investment Fund for Residential Rental», registered with the Securities Market Commission (CMVM) with the tax identification number … .

4.1.3. The Claimant declared on 21/07/2016 to the AT that it would celebrate a deed of purchase and sale of the unit identified in 4.1.1. and requested the assessment of IMT and Stamp Duty: «…in accordance with paragraph 16 of article 8 of the special regime applicable to FIIAH and SIIAH, approved by articles 102 to 104 of Law number 64-A/2008, of 31/12, as amended by article 235 of Law number 83-C/2013, of 31/12, applicable by virtue of article 236 of Law number 83-C/2013, of 31/12, relating to unit BB, of article … of the parish of Union of Parishes of…, … and … …».

4.1.4. Thus, the assessment of IMT was € 830.00 (number…) and of Stamp Duty € 664.00 (number…).

4.1.5. The amount of the above-mentioned assessments was paid on 22/07/2016.

4.2. Facts not deemed proven

There are no other facts with relevance to the arbitral decision that have not been deemed proven.

4.3. Reasoning of the matters of fact deemed proven

The matters of fact deemed proven have their genesis in the documents used for each of the facts alleged and whose authenticity was not put in question.

5. MATTERS OF LAW

The tribunal must assess, in the first place, the (il)legality of the assessments of IMT and Stamp Duty.

To do so it is necessary to state that the legal regime of FIIAH was approved by Law number 64-A/2008, of December 31.

Article 8 of such regime established the normative provisions of a tax nature. In particular and within the scope of taxation of patrimony, article 8, paragraph 7 provided that the following were exempt from IMT:

«a) The acquisitions of urban properties or autonomous units of urban properties intended exclusively for rental for permanent housing, by the investment funds referred to in paragraph 1;

b) The acquisitions of urban properties or autonomous units of urban properties intended for permanent housing for the person's own use, as a result of the exercise of the option to purchase referred to in paragraph 3 of article 5 by the tenants of the properties forming part of the patrimony of the investment funds referred to in paragraph 1».

And paragraph 8 of such article provided that: «The following are exempt from stamp duty all acts performed, provided they are connected with the transfer of urban properties intended for permanent housing which occurs as a result of the conversion of the right of ownership of such properties into a right of lease over the same, as well as with the exercise of the option to purchase provided for in paragraph 3 of article 5».

It transpires that Law number 83-C/2013, of December 31 added to article 8 of the legal regime of FIIAH the following paragraphs:

«14. For purposes of the provision in paragraphs 6 to 8, it is deemed that urban properties are intended for rental for permanent housing whenever they are subject to a rental agreement for permanent housing within a period of three years counted from the moment they became part of the fund's patrimony, the taxpayer being obliged to communicate and provide proof to the AT of the respective effective lease, within 30 days after the end of the said period.

15. When the properties have not been subject to a rental agreement within the three-year period provided for in the previous number, the exemptions provided for in paragraphs 6 to 8 shall lapse, in which case the taxpayer must request the AT, within 30 days after the end of the said period, to assess the respective tax.

16. If the properties are sold, except in the cases provided for in article 5, or if the FIIAH is subject to liquidation, before the expiry of the period provided for in paragraph 14, the taxpayer must also request the AT, before the sale of the property or the liquidation of the FIIAH, to assess the tax due in accordance with the previous number».

It further transpires that Law number 83-C/2013, of December 31 provided for a transitional rule (article 236) within the scope of the special regime applicable to FIIAH which provides as follows:

«1. The provision in paragraphs 14 to 16 of article 8 of the special regime applicable to FIIAH and SIIAH, approved by articles 102 to 104 of Law number 64-A/2008, of December 31, applies to properties that have been acquired by FIIAH from January 1, 2014.

2. Without prejudice to the provision in the previous number, the provision in paragraphs 14 to 16 of article 8 of the special regime applicable to FIIAH and SIIAH, approved by articles 102 to 104 of Law number 64-A/2008, of December 31, is equally applicable to properties that have been acquired by FIIAH before January 1, 2014, in which cases the three-year period provided for in paragraph 14 being counted from January 1, 2014».

The rule which the Claimant deems unconstitutional, by violation of the principle of prohibition of retroactivity of tax law is article 236 of Law number 83-C/2013, of December 31, because, in its opinion, it establishes a new regime of expiry of exemptions, when it requires proof of the allocation to residential rental of the properties forming part of the funds, within a period of 3 years, counting this period from January 1, 2014, in relation to those properties acquired before such date.

Before anything else, let us make a brief analysis of the teleology underlying the normative provision of FIIAH. Now, in view of the economic crisis that erupted in 2008 and which extended to the real estate sector, the legislator saw fit to create such instruments as vehicles for dynamizing the residential rental market and to establish an alternative solution to the problem of defaulted housing credit, thus protecting the public interest.

On the other hand, article 235 of Law number 83-C/2013, of December 31 comes to establish new requirements for the exemption, the obligation of the FIIAH to request the assessment of IMT and Stamp Duty which were not paid with the acquisition, if the allocation of the property to rental for permanent housing does not occur within the period of three years after the entry of the same into the fund and in the event the FIIAH is subject to liquidation.

In truth, the legislator, within the scope of the legal regime of FIIAH exempted from IMT and Stamp Duty urban properties intended for rental for permanent housing, that is, those which were acquired for that purpose. Strictly speaking, if the teleology underlying the institution of FIIAH consisted of the provision of instruments for dynamizing the residential rental market, it made perfect sense that its tax regime established an exemption that required that allocation and already Law number 64-A/2008, of December 31 provides that it exists in relation to properties «…intended exclusively for rental for permanent housing…».

Thus, it is not possible to conclude that the requirement to allocate the property to rental for permanent housing constitutes a requirement introduced by Law number 83-C/2013, of December 31. Such obligation already appeared expressly and concretely in article 8, paragraphs 7 and 8 of the legal regime of FIIAH in its initial version.

In truth, article 14, paragraph 3 of the Tax Benefits Statute (EBF), which in the geography of such diploma is located in the general section, similarly points in that direction in providing that: «When the tax benefit relates to the acquisition of goods intended for the direct achievement of the ends of the acquirers, it shall lapse if they are sold or given another destination without authorization of the Minister of Finance, without prejudice to the remaining sanctions or different regimes established by law».

These are the reasons which lead us to conclude that the effects resulting from the sale of the property which appear in article 8, paragraphs 15 and 16 of the legal regime of FIIAH do not have an innovative character, since they already resulted from article 8, paragraphs 7 and 8 of the said legal regime and of the EBF and thus, the unconstitutionality of such rule is not put in issue in the present case.

Moreover, the property above referred to was acquired by the Claimant on 21/06/2012, benefited from the contents of article 8, paragraph 7, paragraph a) and paragraph 8 of the legal regime of FIIAH, given the declaration at the moment of purchase that it was intended for rental for permanent housing.

Likewise, it transpires that, in this case, in the declarations made with a view to the assessments put in issue by the Claimant there is express mention that they have as their source article 8, paragraph 16 of the legal regime of FIIAH. That is, that the property above described would be sold.

In fact, if the declarations which justified the assessments of IMT and Stamp Duty (joined as document 1 in the request for arbitral ruling) had their genesis in any other ground distinct from the allocation of the property to a destination different from rental, it was up to the Claimant alone to prove the allocation to rental for permanent housing.

There being no different evidence in the proceedings, it is necessary to conclude that the basis of the assessments in issue consisted in the fact that Fund B… did not allocate the property to rental for permanent housing.

Or, put another way, what is in issue in these proceedings consists in the fact that the use which underpinned the exemption was not given, the allocation to rental for permanent housing and not a question of period. Which removes the question of violation of the principle of prohibition of retroactivity of tax law.

In summary, the attribution of the tax benefit does not require merely a declared intention, at the moment of celebration of the deed of purchase and sale, of allocation of the property to permanent residential rental, but the actual allocation. Now, if the Claimant expressed that intention, but did not proceed to such allocation, or, at least, does not prove it in these proceedings, its claim must be dismissed.

Thus, there is no violation of the principle of prohibition of retroactivity of tax law or worsening of the tax position of the Claimant.

For this sum of reasons, the assessments put in issue by the Claimant are legal and, consequently, the claims for reimbursement of the amounts of tax paid and the claim for condemnation of the Respondent to payment of indemnity interest are dismissed.

6. DECISION

In these terms and with the reasoning described above, it is decided that the request for arbitral ruling be wholly dismissed, the assessments being maintained in the legal order, with all legal consequences.

7. VALUE OF THE PROCEEDINGS

The value of the proceedings is set at € 1,494.00, in accordance with article 97-A of the CPPT, applicable by virtue of the provision of article 29, paragraph 1, paragraph a) of the RJAT and of article 3, paragraph 2 of the Costs Regulation in Tax Arbitration Proceedings (RCPAT).

8. COSTS

Costs to be borne entirely by the Claimant, in the amount of € 306, see article 22, paragraph 4 of the RJAT and Table I attached to the RCPAT.

Notify.

Lisbon, June 12, 2017.

The Arbitrator,

(Francisco Nicolau Domingos)

[1] JORGE LOPES DE SOUSA, Tax Procedure and Process Code – Annotated, 4th edition, Vislis Publishers, 2003, p. 84.

Frequently Asked Questions

Automatically Created

Are FIIAH real estate investment funds exempt from IMT and Stamp Tax on property acquisitions under Portuguese law?
Yes, under Article 8(7)(a) and 8(8) of the FIIAH legal regime, Real Estate Investment Funds for Residential Rental benefit from IMT and Stamp Duty exemptions on property acquisitions. However, these exemptions are conditional upon the properties being allocated to residential rental purposes. The dispute in this case centers on whether these exemptions become permanently acquired rights at the moment of acquisition or remain subject to subsequent compliance verification.
How does Article 236 of Law 83-C/2013 affect the tax exemptions previously granted to FIIAH funds?
Article 236 of Law 83-C/2013 established a temporal framework for compliance with FIIAH exemption requirements for properties already in fund portfolios. The Tax Authority interprets this provision as merely setting a deadline to prove compliance with the pre-existing rental use condition, not creating new requirements. The fund manager argues Article 236 unconstitutionally introduced a retroactive expiry regime for exemptions that were unconditional and crystallized at acquisition, violating the constitutional prohibition on retroactive tax laws under Article 103(3) of the Portuguese Constitution.
Can CAAD arbitral tribunals rule on the constitutionality of tax legislation applied to FIIAH funds?
The Tax Authority raised a preliminary exception arguing CAAD arbitral tribunals lack competence to rule on the constitutionality of legislation, as constitutional review is reserved exclusively to the Portuguese Constitutional Court. The tribunal indicated this competence issue would be addressed in the final decision. While tax arbitration tribunals can refuse to apply unconstitutional norms in concrete cases (diffuse constitutionality review), abstract constitutional review remains outside their jurisdiction, presenting a fundamental question about the boundaries of administrative tax arbitration powers.
What procedural defenses can the Tax Authority raise in FIIAH arbitration proceedings, including tribunal competence and standing?
In FIIAH arbitration proceedings, the Tax Authority raised two key procedural defenses: (1) incompetence of the arbitral tribunal, arguing that constitutional review of Article 236 falls exclusively within Constitutional Court jurisdiction, not CAAD competence; and (2) passive illegitimacy, contending the AT cannot be condemned for applying legally valid legislation, as the principle of legality binds administrative bodies to apply all enacted laws regardless of alleged constitutional defects. These dilatory exceptions challenge whether the proceedings can continue and whether the AT is the proper defendant.
Is retroactive application of tax law changes to FIIAH property transactions compatible with the Portuguese Constitution?
The constitutional compatibility depends on whether Article 236 of Law 83-C/2013 constitutes genuine retroactive application prohibited by Article 103(3) of the Portuguese Constitution. The claimant argues the provision retroactively creates an expiry regime for tax exemptions that were absolute and crystallized upon property acquisition. The Tax Authority counters that Article 236 does not retroactively alter substantive conditions but merely establishes prospective compliance deadlines for a pre-existing rental use requirement, thus respecting constitutional principles. The distinction between retroactive modification of tax obligations versus temporal implementation of existing conditions is central to resolving this constitutional question.