AIMI Tax on Construction Land: Constitutionality Challenge and Capacity to Pay Principle - CAAD 624/2018-T

ARBITRAL AWARD

I. REPORT

1. On 10 December 2018, A..., Lda., NIPC..., with headquarters at Rua ..., n.º ..., parish of ..., in Guimarães, (hereinafter Claimant), filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2, paragraph 1, paragraph a), and 10, paragraph 1, paragraph a), and paragraph 2, of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters (hereinafter, abbreviated as RJAT), as amended by article 228 of Law no. 66-B/2012, of 31 December, with a view to this tribunal's pronouncement regarding:

• Assessment of the legality of the tax assessment act for collection of the Additional Municipal Property Tax (AIMI) no. 2018 ..., of 30 June 2018, affecting urban properties situated in the Place of ... and ..., of the parish of ..., Guimarães, registered in the respective property matrix under articles ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ... and ..., with the consequent annulment.

• Condemnation of the Respondent to refund to the Claimant the tax paid, plus indemnity interest due pursuant to article 43 of the General Tax Law (LGT).

The Claimant attached 32 (thirty-two) documents.

The Respondent is the AT – Tax and Customs Authority (hereinafter, Respondent or AT).

1. In substance, the Claimant alleges that:

• "Such properties result from the exercise of the activity of the Claimant which, at the location referred to, proceeded to their urbanization, transforming rural soil into urban soil (plots of land for construction)";

• "Thus, the "inventories" of the Claimant are constituted by "land for construction", for which it is taxed in Corporate Income Tax, since the beginning of its constitution.";

• And that "Such taxation violates, frontally, constitutional norms and principles, (...)" namely "the principle of contributive capacity (art. 104 of the CRP) and of equality, - inasmuch as companies engaged in real estate activity and obtaining benefits therefrom, with payment of the corresponding Corporate Income Tax, are burdened with a new tax that, without sufficient material reason, taxes them, exclusively, as a function of this activity(...)".

1. The request for constitution of an arbitral tribunal was accepted by the President of the CAAD and followed its normal processing with notification to the AT, on 19 December 2018.

2. The Claimant did not appoint an arbitrator, whereupon, pursuant to the provisions of article 6, paragraph 2, paragraph a) and article 11, paragraph 1, paragraph a) of the RJAT, the President of the CAAD Deontological Council designated the undersigned as arbitrator of the Arbitral Tribunal, who communicated acceptance of the appointment within the applicable timeframe.

4.1. On 4 February 2019, the Parties were notified of such designation, having manifested no intention to refuse the designation of arbitrators, pursuant to the combined provisions of article 11, paragraph 1, paragraphs b) and c), of the RJAT and articles 6 and 7 of the CAAD Deontological Code.

4.2. Thus, in accordance with the provisions of article 11, paragraph 1, paragraph c) of the RJAT, the Arbitral Tribunal was constituted on 25 February 2019.

1. On 2 April 2019, the Respondent, duly notified for this purpose, presented its Response in which it specifically contested the arguments raised by the Claimant, having concluded for the dismissal of the present action.

5.1. In substance and also briefly, it is important to extract the most relevant arguments upon which the Respondent based its Response, namely:

The AIMI affects real estate property that possesses the characteristics indicated in article 135-B of the Property Tax Code, that is, subjecting any and all entity that is holder of real rights over urban properties in accordance with objective reality and not merely potential reality at the moment of verification of the tax assessment act.

5.2. The Respondent did not request the production of evidence.

1. By order of 10 April 2019, the Parties were notified of the Arbitral Tribunal's decision to dispense with the holding of the meeting referred to in article 18 of the RJAT, and 20 May 2019 was set as the deadline for the issuance of the arbitral award.

2. The Parties presented no further allegations.

II. SANITATION

The Arbitral Tribunal was regularly constituted and is competent ratione materiae, given the configuration of the object of the proceeding (cf. articles 2, paragraph 1, paragraph a) and 5 of the RJAT).

The request for arbitral pronouncement is timely, as it was submitted within the timeframe provided in article 10, paragraph 1, paragraph a), of the RJAT.

The parties possess legal personality and capacity, have standing and are regularly represented (cf. articles 4 and 10, paragraph 2 of the RJAT and article 1 of Administrative Order no. 112-A/2011, of 22 March).

The proceeding does not suffer from nullities, no exceptions or preliminary issues having been raised that would impede knowledge of the merits, which it is appropriate to address.

III. GROUNDS

III.1. REGARDING FACTS

§1. PROVEN FACTS

The following facts are considered proven:

a) The Claimant is a limited liability company whose object is the construction of buildings and the purchase, sale and resale of immovable property.

b) The Claimant is the legitimate owner of urban properties situated in the Place of ... and ..., of the parish of ..., Guimarães, registered in the respective property matrix under articles..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ... and ... .

c) The Respondent notified the Claimant, on 30 June 2018, of the AIMI assessment on the urban properties in question, relating to the year 2018.

d) The Claimant proceeded to payment, on 26 September 2018, of the said assessment, in its entirety.

e) The Claimant presented, on 10 December 2018, the present request for arbitral pronouncement.

§2. UNPROVEN FACTS

No facts of relevance to the assessment and decision of the case remain unproven.

§3. REASONING ON MATTERS OF FACT

The facts pertinent to the judgment of the case were selected and delimited based on their legal relevance, in light of plausible solutions to the legal questions, pursuant to the combined application of articles 123, paragraph 2, of the Tax Code of Civil Procedure (CPPT), 596, paragraph 1 and 607, paragraph 3, of the Code of Civil Procedure (CPC), applicable ex vi article 29, paragraph 1, paragraphs a) and e), of the RJAT.

Regarding the proven matters of fact, the Tribunal's conviction was based on the facts alleged by the Parties, whose adherence to reality was not contested and therefore admitted by agreement, in the critical analysis of the documentary evidence contained in the case file, including the administrative file.

III.2. REGARDING LAW

The AIMI, created by article 219 of Law no. 42/2016, of 28 December which approved the State Budget for 2017, through the addition to the Property Tax Code of articles 135-A to 135-K, emerges as a special taxation of high-value assets intended to ensure the financing of Social Security.

Article 1, paragraph 2 of the Property Tax Code was amended by Law no. 114/2017, of 29 December, which approved the State Budget for the year 2018, taking on the following wording:

"The additional municipal property tax, deducted from collection costs and the provision of deductions from the collection of personal income tax (IRS) and corporate income tax (IRC), constitutes revenue of the Financial Stabilization Fund of Social Security."

In the Report of said State Budget for the year 2018, it is stated:

"[...]

The allocation of progressive taxation of real estate property to the Financial Stabilization Fund of Social Security corresponds to the objective of the government's program to broaden the financing base of Social Security, while at the same time introducing a tax that falls on those holding larger real estate assets, strengthening the overall progressivity of the system. (...)

Progressive taxation of real estate property

The additional municipal property tax introduces into the taxation of real estate property a progressive element with a personal base, taxing more heavily the larger assets, with a marginal rate of 0.3% applied to assets exceeding €600,000 per taxpayer."

To avoid the impact of this tax on economic activity, excluded from the scope of taxation are rural properties, mixed properties, industrial properties and those dedicated to tourism activity, while also allowing companies an exemption for properties dedicated to their productive activity up to €600,000. The possibility of deducting the amount of tax paid from collection relating to property income constitutes additionally an incentive to rental and productive use of assets.

This tax replaces the previous stamp duty tax of 1% on the value of real estate above 1 million euros. With a much lower rate (0.3%), it is also fairer because it takes into account the overall value of real estate assets and not, in isolation, the value of each individual property."

As stated in arbitral award no. 420/2018-T, of 15 January 2018:

"What the legislator intended with the Additional Property Tax was to create another means of subsidizing the social security system, which is one of the constitutional duties of the State, provided for in article 63, paragraph 2, of the CRP. (...)

The essence of the principle of diversification of sources of financing of Social Security consists in the broadening of the bases for obtaining financial resources, in view of, in particular, the reduction of non-wage labor costs (article 79 of Law no. 17/2000, article 108 of Law no. 32/2002, and article 88 of Law no. 4/2007, of 16 January), which may explain why the new AIMI taxation is not applied to legal persons holding properties intended for commercial, industrial and service activities, as the holding of properties of these types by legal persons is normally associated with the exercise of these activities, with the corresponding payment of contributions to Social Security as employing entities [article 92, paragraph b), of Law no. 4/2007, and articles 3, paragraph a), and 14, paragraph a), of Decree-Law no. 367/2007, of 2 November].

From this perspective, in which the legislator, lacking financing for Social Security, privileges the role of tax collector to concern with the balance of business taxation, some basis may be seen for distinguishing between the holding of real estate assets by persons who, presumably, will engage in activities connected with the financing of Social Security (who will already be contributing to this financing) and the holding of immovable property not intended for these activities, whose holders, tendentially, will not be associated in the same way with this financing, at least with the same intensity.

For the reasons stated, the creation of a special taxation of high-value assets intended to ensure the financing of Social Security limited to real estate property that will not already be tendentially connected with this financing will not be completely lacking in objective and rational explanation.

On the other hand, the creation of the AIMI, as a supplementary tax on real estate property, which aimed to introduce into taxation "a progressive element with a personal base, taxing more heavily the larger assets," is compatible with the objective that the taxation of assets should contribute to equality among citizens, affirmed in paragraph 3 of article 104 of the CRP, as progressivity has as a corollary, tendentially, to impose greater taxation on those with greater contributive capacity."

The AIMI, as a special taxation of high-value assets intended to ensure the financing of Social Security, affects "the sum of the tax asset values of urban properties situated in Portuguese territory of which the taxpayer is holder." [cf. paragraph 1 of article 135-B of the Property Tax Code].

Similarly to the regime of the Municipal Property Tax (IMI), the taxpayers subject to the AIMI are the owners, usufructuaries or superficiaries of the respective properties, regardless of their status as natural or legal persons, equating to these "any structures or centers of collective interests without legal personality that appear in the matrices as taxpayers of municipal property tax, as well as undivided inheritance represented by the head of family," (cf. paragraph 1 and paragraph 2 of article 135-A of the Property Tax Code).

Insofar as the modeling of the amount to be paid is abstracted from the economic dimension of entities, namely the qualification as a small, medium or large enterprise, as well as by not affecting the entirety of the net assets of the entities, it may be stated that, with respect to the AIMI affecting urban properties of which legal persons and assimilated structures are owners, usufructuaries or superficiaries, it assumes the nature of a real property tax. (cf. paragraph 2 of article 135-A of the Property Tax Code).

As doctrine well states:

"Thus, with respect to legal persons, the AIMI is not actually intended to tax entities with the highest wealth indices, because all asset values of subject properties are taxed, without minimum limit or any deduction.

Also, for that reason, the AIMI affecting legal persons approaches more closely a general tax on real estate property." (JOSÉ MARIA PIRES, The Additional Property Tax and Personal Taxation of Assets, Almedina, 2017, p. 42).

Contrary to what was primarily intended with item 28.1 of the General Stamp Duty Table, it is not intended to burden the taxation of luxury real estate, as high-value real estate assets may be constituted by a plurality of low-value immovable properties.

Urban properties classified as "commercial, industrial or for services" and "other" were expressly excluded from the objective scope of the AIMI. [cf. paragraphs b) and d) of paragraph 1 and paragraph 2 of article 6 of the Property Tax Code].

Subject to the AIMI are thus properties devoted to "housing" and "land for construction" as defined in said article 6 of the Property Tax Code.

With the legal framework thus outlined, it is important to draw the simple and elementary conclusion that the law clearly and unequivocally establishes the scope of the tax on "land for construction," and this regardless of the potential use that may fall to these lands, since they do not appear in the negative delimitation of scope.

That is, the legislator did not establish the exclusion of the tax rule from land for construction on grounds related to their potential use.

Moreover, already within the scope of the Municipal Property Tax (IMI), the case law of the superior courts has come to understand that:

"In determining the tax asset value of land for construction, there is no place for consideration of the use coefficients (ca) and quality and comfort coefficients (cq) identified above."

In this sense, see the Decisions of the STA [Superior Court of Administrative Law], 18/11/2009, appeal no. 765/09, 20/4/2016, appeal no. 824/15, Decisions of the TCA SUL [Administrative Court of Appeals - Southern Section], 9/02/2017, Case no. 5366/12, Case no. 907/07.9, of 11/16/2017, the latter stating the following:

"(...)

1. The regime for evaluation of the tax asset value of land for construction is enshrined in art. 45 of the IMI Code. The evaluation model is the same as for constructed buildings, although proceeding from the building to be constructed, taking as its basis the respective project. The value of land for construction corresponds, fundamentally, to a legal expectancy, embodied in a right to construct thereon a building with certain characteristics and a certain value.

It is this expectancy of production of wealth materialized in an immovable property to be constructed that increases the value of assets and the wealth of the owner of the land for construction, once the immovable in question comes to be considered as land for construction. For this reason, the greater the value of the property to be constructed, the greater is the value of the land for construction underlying it (cf. art. 6, paragraph 3, of the IMI Code).

1. In determining the tax asset value of land for construction, there is no place for consideration of the use coefficients (ca) and quality and comfort coefficients (cq) identified above.

2. The location coefficient is not applicable in the formula for evaluating land for construction, in accordance with its definition contained in the same art. 42 of the IMI Code. This means that in determining the tax asset value of land for construction, the mathematical formula enshrined in art. 38 of the same statute does not apply."

As follows from what has been stated above, given that the law refers, without more, to article 6 of the Property Tax Code, and given that it does not expressly appear in the rule delimiting negative scope, it is concluded unequivocally that the subjection of land for construction and of properties classified as residential to the rule of scope of the AIMI is effected regardless of its potential use.

This, therefore, is the context in which the legislator moved when tracing the configuration of the subjective and objective scope of the AIMI.

The legislator's choices were also guided by the need to mitigate the impact of this taxation on the exercise of business of economic activities in general, through the exclusion of urban properties with industrial, commercial and service purposes, and "others," with the purpose of not burdening companies in fiscal terms in terms of competitiveness, especially in international markets.

Yet, despite having excluded from the scope urban properties classified as "industrial, commercial or for services" and "others," 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, by not including them in the negative delimitation enshrined.

That is, it neither guaranteed, nor intended to guarantee, in all cases that "real estate property dedicated to the exercise of any economic activity" would not be affected.

As stated in arbitral award no. 420/2018-T, of 15 January 2018, whose reasoning is adhered to and wholly subscribed:

"The wording of article 135-B of the Property Tax Code that came to be approved does not exclude the scope of the AIMI on immovable property devoted to housing and land for construction used by legal persons in the context of their economic activity.

The legislative concern to 'avoid the impact of this tax on economic activity' was announced in the Draft Bill for the State Budget for 2017 and was being concretized, to some extent, through the exclusion from the scope of 'urban properties classified as "industrial" in type, as well as urban properties licensed for tourism activity, the latter provided that their intended use is duly declared and proved' and of the deduction from the taxable amount of the sum of '€600,000.00, when the taxpayer is a legal person with agricultural, industrial or commercial activity, for properties directly dedicated to its operation.'

However, the exclusion of scope was not based on the activity to which the immovable properties are dedicated, as in the wording that came to be approved, the non-scope was defined only based on the types of properties indicated in article 6 of the Property Tax Code, without any allusion to dedication to the operation of legal persons.

The concepts of dedication of an immovable, which presupposes a use, and the purpose for which it is intended, the 'normal destination,' underlying the classifications of immovable properties, referred to in paragraph 2 of article 6 of the Property Tax Code, are distinct.

If the legislative intention to exclude scope on immovables directly dedicated to the operation of legal persons had been maintained in the final wording of the Budget, it would certainly have been maintained the reference to this dedication that appeared in the proposal and which clearly expressed this legislative choice.

Thus, given that this allusion to the dedication of immovable properties has been suppressed, there is no legal support to conclude that residential properties and land for construction dedicated to the activity of legal persons are not relevant to the scope of the AIMI.

Therefore, it is to be concluded that the dedication of immovable properties to economic activities of legal persons does not exclude taxation in AIMI (outside of cases where it is properties that previously were exempted or not subject to taxation in IMI, which are not counted for purposes of AIMI, pursuant to paragraph 3 of article 135-B of the Property Tax Code).

The holding of high-value real estate assets, regardless of dedication or not to economic activity, is tendentially revelatory of high contributive capacity, superior to that which is to be presumed to exist when low-value assets are held or when they do not exist, therefore, in principle, the limitation of taxation to the first situations has justification.

However, the reasons that may underlie the distinction, for purposes of taxation in AIMI, between the asset values of properties classified as residential or land for construction (regardless of their actual dedication to these purposes) and those of urban properties that have other classifications, in light of article 6 of the Property Tax Code, do not follow explicitly from the Report of the Budget for 2017 nor from its parliamentary discussion."

Thus, given that this allusion to the dedication of immovable properties has been suppressed in the final text of the law, it unequivocally reveals the legislator's intention to remove any relevance for purposes of exclusion from taxation.

In this delimitation of real scope, it is clear that the criterion adopted intends to be universally objective, inducing greater uniformity and equality in the treatment of properties subject to taxation, to the detriment of other criteria that would appeal to case-by-case verifications of the effective intended use of the properties.

Since in the final version approved and currently in force, the delimitation of scope and exclusion of scope was expressly established only based on the types of properties indicated in article 6 of the Property Tax Code, there must be respect for the legislator's choice!

In the absence of other elements, "the interpreter should opt in principle for that meaning which best and most immediately corresponds to the natural meaning of the verbal expressions used, and in particular to its technical-legal meaning, on the assumption that the legislator knew how to correctly express its thought."

Furthermore, 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 virtue of the provision of article 9, paragraph 3, of the Civil Code, on the contrary, the question was duly considered, having been abandoned in the final wording.

Contrary to what is alleged by the Claimant, there is no illegality in the AIMI assessments.

On the alleged violation of the principle of equality

The Claimant understands that taxation under the AIMI entails discrimination of "companies, merely because they are holders of "land for construction," fruit of their activity," considering there to be discrimination of "companies engaged in real estate activity" (like the Claimant) as against "other companies engaged in transformation of goods (like footwear, clothing, etc.)" and "remaining companies and (...) individual contributors and undivided estates."

It is necessary, therefore, to analyze whether the provisions regulating this additional tax respect the principle of equality, a principle which is, without doubt, one of the structuring principles of the Portuguese constitutional system.

Article 13 of the Constitution of the Portuguese Republic (CRP) proclaims the principle of equality of citizens before the law, and article 104, paragraph 3, of the CRP establishes that "the taxation of assets should contribute to equality among citizens."

On the principle of equality, as stated by JOSÉ CASALTA NABAIS, in addition to founding and having as a corollary the principle of contributive capacity, it also projects onto the principle of justice:

"[...] the principle of fiscal equality always has inherent therein especially the idea of generality or universality, whereby all citizens are bound to fulfill the duty to pay taxes, and of uniformity, requiring that such duty be assessed by the same criterion - the criterion of contributive capacity.

This thus implies equal tax for those who have equal contributive capacity (horizontal equality) and different tax (in qualitative and quantitative terms) for those who have different contributive capacity in proportion to that difference (vertical equality)" (cf. Tax Law, Almedina, 2012, 7th Edition, p. 155) [emphasis in original].

The principle of equality determines that equal treatment be given to what is necessarily equal and different treatment to what is essentially different, not thereby precluding, however, differentiation of treatment, but only arbitrary, unreasonable discrimination, i.e., distinctions of treatment that do not have justification and sufficient material basis.

To this end, 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 freedom of legislative configuration, differentiation of treatment may (should) be established, "reasonably, rationally and objectively founded," under pain of, should this not occur, "the legislator being incurring in arbitrariness, by failure to follow objectively justified solutions by constitutionally relevant values," in the weighing of said decision no. 335/94. Cf., Gomes Canotilho, Journal of Legislation and Case Law, year 124, p. 327, Alves Correia, The Urban Plan and the Principle of Equality, Coimbra, 1989, p. 425; decision no. 330/93)." [emphasis in original].

In light of what has been set forth, it is necessary to determine whether the choices underlying the delimitation of the objective scope of the AIMI, effected within the margin of "freedom of legislative configuration," constitute, or do not constitute, a breach of the principle of equality.

The Claimant alleges that the legal regime of the AIMI, specifically its article 135-B of the Property Tax Code – when interpreted in the sense of including within the scope of application of the AIMI "all 'land for construction,' even if classified for purposes of 'commercial, industrial or for services and others'" (being that, as aforesaid, the totality of the Claimant's immovable properties are urban properties or land for construction solely with dedication of "housing"), is manifestly contrary to the principle of equality, constitutionally enshrined, and furthermore,

The application of the AIMI regime, when interpreted in the sense of covering entities that develop real estate activity, promotes differentiated treatment and unjustified inequality among taxpayers, in manifest violation of the principle of equality, enshrined in article 13 of the CRP and of the principle of fiscal equality and contributive capacity, enshrined in article 104 of the same statute, whereby "the norms that provide for such taxation should be disapplied."

Here we arrive at a point where it is important to note that, in truth, land for construction are not merely "inventories (tradeable goods)" that "constitute solely the product of their labor," i.e., they are not merely instrumental to the exercise of economic activity, on the contrary, they integrate the very core of economic activity, with intrinsic economic value and, normally, quotation in the real estate market, i.e., they can be sold, exchanged, given as guarantee of obligations and obviously evidence a certain economic capacity.

In fact, the taxation embodied in the AIMI translates into a specific imposition on assets (cf. article 4, paragraph 1 of the LGT) and not on income.

Thus, it is well understood, then, the legislative solution of subjecting taxation to all taxpayers in consideration of the holding of relevant legal situations over the urban properties identified in the objective scope, with independence of the legal or economic structuring that such taxpayers may possess.

Precisely, in the field of asset taxation, the rule of uniformity is what imposes horizontal equality, that is, that all those who are holders of the same form of wealth be taxed in the same manner (ANTÓNIO de SOUSA FRANCO, Public Finances and Financial Law, vol. II, 4th ed., p. 181).

Therefore, any discussion of the situation of companies engaged in the marketing of land for construction, of the success (or lack thereof) of the commercial activity they develop or even of the type of real estate assets they hold, is not relevant in this case.

Because it is there a matter of invoking elements of economic consistency of highly variable and contingent character, which depend widely on the mode of management, the situational circumstances of the setting, the type of use realized of the properties, the situation in each year of the assets held, all preventing the configuration of any uniform basis capable of leading to the assertion that the normative solution object of the AIMI leads to an unjustified negative discrimination of these companies, all the more so since component property interests of the assets of the taxpayers are at issue.

Like any tax on assets, the AIMI is disassociated from any eventual realization of profit with the sale of immovable property, as well as from the existence or non-existence of negative or positive net situation, being relevant for the economy of the tax, only the asset value of the land. As for land for construction, these are not reducible to mere construction rights, of future things, and all of them are autonomous goods, which, even by their natural scarcity, always have intrinsic economic value and, normally, quotation in the real estate market, i.e., they can be sold, exchanged, given [as guarantee of obligations].

And even if the taxed immovable properties may prove to be instrumental to economic activity, we have that the same are suitable to indicate that that legal person is holder of goods which, in themselves, evidence a specific abundance in the face of the other real estate owners.

That is, the circumstance of a given asset functioning, as a "factor of production of wealth," is not sufficient to contradict the finding that the corresponding holder holds an immovable property only accessible to one with particular contributive capacity and, thus, capable of bearing an additional contribution toward the desired financing of the Financial Stabilization Fund of Social Security.

It would only be possible to understand otherwise if the specific quality of the taxpayer and/or its nature were projected into the normative criterion under scrutiny.

Which is not at all the case, as is well to be seen and interpreted in light of the letter of the Law.

It is thus concluded that the holding of high-value real estate assets, regardless of dedication or not to economic activity, is tendentially revelatory of high contributive capacity, obviously superior to that which is to be presumed to exist when low-value assets are held or when they do not exist.

As was already stated above, it was not based on the activity to which the immovable property is dedicated that the exclusion of scope came to be defined, since in the approved version the non-scope was determined only based on the types of properties indicated in article 6 of the Property Tax Code, without any allusion to dedication or not to the operation of legal persons.

Citing the arbitral award issued in case no. 664/2017-T:

"The holding of real estate 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 added contributive capacity, which goes beyond the tax that affects the taxable profit by reason of the economic activity developed. What is at issue, therefore, is not the taxation of the actual income earned by these entities through the activity developed, but the complementary contributive capacity that flows from the holding of assets and which alone may facilitate the raising of credit or the strengthening of their bargaining position in the execution of contracts."

Thus, there is no basis to see that the taxation of the real estate assets of the Claimant offends the principle of fiscal equality merely because the holding of immovable property constitutes the very object of its economic activity.

In sum, and reproducing all that has been stated above, it does not appear, therefore, that the scope of the AIMI on immovable property held by companies exercising their activity in the real estate sector, namely, land for construction acquired with the intention of promoting thereon buildings intended for sale, is discriminatory or that these companies should deserve more favorable treatment than that granted to the generality of owners of urban properties.

On this matter, the Arbitral Tribunal has already pronounced itself extensively, specifically within the scope of cases no. 664/2017-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 and 420/2018-T.

See, for example, the arbitral award issued in case no. 682/2017-T:

"(...) it has been uniformly understood by the Constitutional Court that the principle of equality, as a limit on legislative discretion, does not require equal treatment of all situations, but rather implies that those in equal situations be treated equally and those in unequal situations be treated unequally, so as not to create arbitrary and unreasonable discriminations, because lacking sufficient material basis. The principle of equality does not prohibit the establishment of distinctions, but rather distinctions lacking objective and rational justification.

The creation of the AIMI, as a supplementary tax on real estate property, aimed to introduce into taxation 'a progressive element with a personal base, taxing more heavily the larger assets' (Report of the Budget for 2017, page 60) is compatible with the objective that the taxation of assets should contribute to equality among citizens, affirmed in paragraph 3 of article 104 of the CRP, as progressivity has as a corollary, tendentially, to impose greater taxation on those with greater contributive capacity.

(...)

Whereby, to consider, as the Claimant wishes, the non-scope of the AIMI on the values of residential properties or land for construction for residential purposes belonging to real estate companies or the like would constitute, precisely, an unjustified privileged tax treatment in relation to the generality of remaining owners of immovable properties with identical characteristics. (...) There is no basis for seeing any violation of the principles of equality and contributive capacity."

In the same sense, we also cite arbitral award issued in case no. 420/2018-T presided over by Counselor Judge Jorge Lopes de Sousa:

"The contributive capacity of business legal persons, relevant to the assessment of the application of the principle of fiscal equality, is not evidenced solely by income, namely by the results of the activity to which the immovable properties are dedicated.

In truth, 'the holding of assets provides to its holder a special contributive capacity, advantages which by their nature escape from tax on personal income: thus, the holding of assets facilitates the raising of credit, strengthens the bargaining position of its holder in the execution of various contracts, makes it easier to multiply wealth allowing it to take risks where in principle it would not. From this perspective, tax on assets is seen as something more than an extension of tax on personal income - it is not a matter of over-burdening here income that is already subject to it but of reaching manifestations of contributive capacity that in truth escape it' (...) Taxes on assets would be justified by allowing the transfer of resources for the benefit of the working class, establishing a 'qualitative progressivity' complementary to the progressivity in quantity of taxes on personal income.'

Moreover, if it is certain that the different purposes of immovable properties do not necessarily imply distinction in the level of contributive capacity, the exclusion from taxation of properties especially dedicated to productive activity, namely 'commercial, industrial or for services,' will find another justification (in addition to the already-mentioned presumed greater contribution of these activities to Social Security through contributions), as it boils down, in the final analysis, to favoring of these activities, which harmonizes (and, for this reason, will have constitutionally acceptable basis) with the obligation of the State to promote the increase of economic well-being, which presupposes good functioning of the wealth-creating activities and constitutes one of its priority tasks in the economic domain [article 81, paragraph a), of the CRP]. As this is a task constitutionally considered priority, the first listed in this norm, it will surely not be incompatible with the CRP to give it preferential protection when confronted with the constitutional duties of the State regarding housing indicated in article 65 of the CRP, which, obviously, are also protected through the good functioning of the wealth-creating activities.

Thus, if it is certain that the AIMI regime creates situations of discrimination of taxation of companies with the same contributive capacity evidenced by assets, on the assumption that there is a need for money and means must be found to collect it (as is stated in the Report of the Budget for 2017), there will be some justification for taxation to be imposed on some companies and not on others with the same or greater contributive capacity inherent to assets, especially in light of the majority constitutional case law cited by the Tax and Customs Authority, which reveals that it is constitutionally tolerable that the interests of the State as tax collector (in this case, the sustainability of Social Security, demanded by the principles of trust and security) take precedence over strict respect of the principle of equality.

Moreover, if the legislative objective is not the taxation of luxury housing but rather obtaining another means of financing Social Security, in harmony with the political choice of diversification, through 'a tax that falls on holders of larger real estate assets, strengthening the overall progressivity of the system' (page 57 of the report of the State Budget for 2017), it is in function of these objectives that one must assess whether violation of the principle of proportionality occurs.

From this perspective, it appears that this new taxation is not incompatible with the principle of proportionality, as it is appropriate to the intended purpose (it proposes the increase of revenues that is intended to obtain), is necessary (in light of the legislative choice to increase the revenues of Social Security with diversification of sources) and is not exceeded by a reasonable measure, particularly with respect to legal persons, as the rates of the new tax are not high (and are lower for legal persons than for natural persons, pursuant to article 135-F), the tax paid is deductible from the taxable base for Corporate Income Tax (article 135-J), are deducted significant amounts from the taxable value (article 135-C) and is not demonstrated, nor is there reason to believe, that the amounts collected exceed what is necessary for the purpose of reinforcing the sustainability and stability of Social Security. (...)" [emphasis in original].

Thus, according to the case law cited above, it is concluded that the holding of high-value real estate assets by a natural person or by a legal person (whether real estate company, real estate fund or other) evidences, as in relation to any owner of an immovable 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 AIMI revenue is allocated.

It is not seen that the taxation of real estate assets of companies engaged in real estate activity, in the manner in which it is provided for in articles 135-A and 135-B of the Property Tax Code, conflicts with the principle of equality, justice and contributive capacity.

Equally it is concluded that the taxation of land for construction held by legal persons - which form part of their real estate assets and are dedicated to the development of their economic activity - in the manner in which it is provided for in articles 135-A and 135-B of the Property Tax Code, conflicts with the principle of equality, justice and contributive capacity.

In sum, the AIMI affects real estate assets that possess the characteristics indicated in article 135-B of the Property Tax Code, that is, subjecting any and all entity that is holder of real rights over urban properties in accordance with objective reality and not merely potential reality at the moment of verification of the tax assessment act.

Pursuant to article 135-A, paragraph 3, of the Property Tax Code, "the status of taxpayer is determined (...), having as reference the date of 1 January of the year to which the additional municipal property tax relates," being therefore irrelevant, and even natural, that "On the date of assessment of the AIMI there are 'land for construction' that the Claimant has already disposed of."

As has been fully demonstrated and according to the case law cited, contrary to what is alleged by the Claimant, taxation under the AIMI does not entail unjustified negative discrimination to the holding of companies whose economic activity is "real estate activity, transforming rural soil into urban soil" when, simultaneously, the law excludes from taxation immovable properties intended for commerce, industry or services.

In situations where real estate activity is undertaken with the holding of immovable properties, it is undeniable that the accumulated assets are indicative of a certain economic capacity of that entity, distinguishing themselves only from the remaining owners by the nature, singular or collective.

If it were otherwise, this would itself be unconstitutional by violation of the principle of equality by preferential treatment to owners who were legal persons to the detriment of owners who were natural persons, treating identical situations unequally, without any reason or material justification for this legislative choice.

In sum, even immovable properties intended for commercialization do not cease to evidence, obviously, the contributive capacity of their holder, capacity that is real, measurable and unquestionable regardless of the purpose that its holder wishes to give it.

Wherefore, the idea that immovable properties for commercialization do not evidence manifestations of contributive capacity is, without doubt, a perception error that must be demystified.

Even if one disagrees with the legislator's choices (and each person is free to do so), the thesis that the additional Property Tax violates the principle of contributive capacity has no basis whatsoever, as the holding of immovable property is, effectively and indisputably, a manifestation of wealth and of contributive capacity.

Since the request for arbitral pronouncement is not to be judged admissible, it cannot be concluded that there are undue payments and, consequently, the annulment of the assessment is not justified nor the restitution of the sum paid nor the payment of indemnity interest, pursuant to article 43, paragraph 1, of the LGT.

IV. DECISION

For these reasons, it is decided:

a) To judge the arbitral request entirely inadmissible;

b) To absolve the AT of all claims.

VALUE OF THE PROCEEDING

In accordance with the provision of articles 306, paragraph 2, of the CPC ex vi article 29, paragraph 1, paragraph e), of the RJAT, 97-A, paragraph 1, paragraph a), of the CPPT ex vi article 29, paragraph 1, paragraph a), of the RJAT and 3, paragraph 2, of the Regulation of Costs in Tax Arbitration Proceedings, the proceeding is assigned the value of €5,329.27 (five thousand three hundred twenty-nine euros and twenty-seven cents).

COSTS

Pursuant to the provision of articles 12, paragraph 2, and 22, paragraph 4, of the RJAT, 4, paragraph 4, and the Table I attached to the Regulation of Costs in Tax Arbitration Proceedings and article 527, paragraphs 1 and 2, of the CPC ex vi article 29, paragraph 1, paragraph e), of the RJAT, the amount of costs is fixed at €612.00 (six hundred twelve euros), at the charge of the Claimant.

Lisbon, 15 May 2019.

The Arbitrator,

(Hélder Faustino)