Process: 63/2016-T

Date: July 25, 2016

Tax Type: IMT Selo

Source: Original CAAD Decision

Summary

This arbitral case (Process 63/2016-T) concerns the constitutionality of transitional tax provisions affecting real estate investment funds for residential leasing (FIIAH). The claimant, a management company for a closed real estate investment fund, challenged IMT (property transfer tax) and Stamp Tax assessments totaling €36,924.75 on a property acquired before January 1, 2014. The central legal issue involves Article 236 of Law 83-C/2013 (2014 State Budget), which retroactively applied new FIIAH tax rules to properties acquired before the law's effective date, imposing a three-year exemption period counting from January 1, 2014. The claimant argued this constituted unconstitutional retroactive tax legislation violating Article 103(3) of the Portuguese Constitution, which prohibits retroactivity in tax law. The claimant contended that IMT and Stamp Tax exemptions had become permanently crystallized in its legal sphere when the property entered the fund, without any conditional requirements or lapse provisions. By subsequently imposing a time limit on previously unconditional exemptions, Article 236 allegedly engaged in 'authentic retroactivity'—regulating tax facts that had already produced full legal effects under prior law. The Tax Authority defended its position by invoking the principle of legality binding administrative bodies, arguing it cannot disapply legal norms on constitutional grounds and questioning whether the arbitral tribunal possessed competence to review constitutional issues. The case raises fundamental questions about the temporal limits of tax legislation, the protection of acquired rights and legitimate expectations in tax benefits, and the scope of tax arbitration jurisdiction in constitutional matters affecting investment fund taxation.

Full Decision

ARBITRAL DECISION

Claimant: A… – …, SA

Respondent: Tax and Customs Authority (AT)

I – REPORT

  1. A… – …, SA, with registered office at …, nº … -… ….-… …, tax identification number …, hereinafter designated as "Claimant", a management company of the real estate investment fund "B…– CLOSED REAL ESTATE INVESTMENT FUND FOR RESIDENTIAL LEASING, registered with the Securities Market Commission, with tax identification number …, filed a request for establishment of an Arbitral Tribunal, pursuant to article 2, number 1, letter a), of Decree-Law no. 10/2011, of 20 January, hereinafter designated as "RJAT" and of Order no. 112 – A/2011, of 22 March, for impugnation and declaration of illegality of two tax assessments, respectively, of IMT and IS, attached to the record.

  2. The following tax acts are at issue, relating to property U-…-… located at …, …, Block …, ..., registered in the urban property matrix of the Parish of … and …:

  • IMT Assessment, no. …, in the amount of € 32,564.75;
  • IS Assessment no. …, in the amount of € 4,360.00.

The assessments were paid on 27 November 2015.

  1. The request for establishment of the Arbitral Tribunal, presented by the Claimant on 03-02-2016, was accepted by the Honourable President of CAAD on 5-02-2016 and notified to the Tax and Customs Authority, in accordance with the legal provisions. The Claimant chose not to designate an arbitrator, wherefore, pursuant to number 1 of article 6 of RJAT, the Deontological Council of the Administrative Arbitration Centre, on 05-04-2016, designated the undersigned as arbitrator. Thus, in compliance with the provisions of letter c), number 1, article 11, of RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Singular Arbitral Tribunal was constituted on 20-04-2016. On the same date, an arbitral order was issued to the Tax and Customs Authority (AT) to submit its answer within the statutory period, in accordance with numbers 1 and 2 of article 17 of RJAT.

On 25-05-2016, the Respondent submitted its answer to the record, which is deemed to be fully reproduced herein. It did not attach the administrative file, as no procedure was conducted, whereby no administrative file exists. Simultaneously, it presented a petition requesting the waiver of the meeting provided for in article 18 of RJAT, as the matter at issue is exclusively one of law, with no evidence to be produced, and the proceeding may proceed to arguments and final decision.

On 13-06-2016 an arbitral order was issued waiving the meeting provided for in article 18 of RJAT, which also set an equal and successive period of 15 days for the parties' arguments, with a scheduled date for delivery of the arbitral award of 25-07-2016, with the claimant required to pay the subsequent arbitration fee within 10 days before the scheduled date for the decision.

The parties submitted their arguments, respectively, on 21-06-2016 by the Claimant and on 29-06-2016 by the Respondent. The Respondent attached five arbitral decisions issued on a matter identical to that of the present case, whose factual and legal matters are very similar to those of the present case, although they have not yet become final. The Claimant attached to its arguments a copy of the request for issuance of the tax assessments and a Legal Opinion, issued by Professors C… and D…, on the question of the (un)constitutionality of the norm contained in article 236 of Law no. 83- C/2013 of 31 December.

B) THE CLAIM FILED BY THE CLAIMANT:

  1. The Claimant files the present request for arbitral pronouncement, as stated in the arbitral petition filed, to "assess whether article 236 (Transitional Norm within the Scope of the Special Regime Applicable to FIIAH and SIIAH) provided for by Law no. 83 – C/2013, of 31 December - to the extent that it determines the application of the current Tax Regime of FIIAH 'to properties that have been acquired by FIIAH before 1 January 2014, counting, in such cases, the three-year period provided for in number 14 from 1 January 2014' - constitutes a new regime of lapse of the exemptions provided for in number 7, letter a) and number 8 of article 8 (Tax Regime) of the Tax Regime of FIIAH, revealing a flagrant and unequivocal violation of the principle of non-retroactivity of tax law, embodied in article 103 (Tax System), number 3, of the Constitution of the Portuguese Republic."

The claimant seeks that the Arbitral Tribunal annul the above-described assessments, on the understanding that they suffer from unconstitutionality, since they are based on article 236 (Transitional Norm within the Scope of the Special Regime Applicable to FIIAH and SIIAH) provided for by Law no. 83 – C/2013, of 31 December (State Budget for 2014) to the extent that it determines the application of the current Tax Regime of FIIAH 'to properties that have been acquired by FIIAH before 1 January 2014, counting, in such cases, the three-year period provided for in number 14 from 1 January 2014' - constitutes a new regime of lapse of the exemptions provided for in number 7, letter a) and number 8 of article 8 (Tax Regime) of the Tax Regime of FIIAH, revealing a flagrant and unequivocal violation of the principle of non-retroactivity of tax law, embodied in article 103 (Tax System), number 3, of the Constitution of the Portuguese Republic.

The Claimant further understands that the violation of this constitutional principle constitutes a fundamental guarantee of taxpayers (fundamental right), the violation of which gives rise to nullity of the tax acts performed.

The Claimant understands that at the moment the property in question entered the Fund's assets, the exemptions of IMT and Stamp Tax (IS), taxes of sole obligation, became permanently crystallized in the legal order, and that on the date the properties entered the respective real estate fund, the exemptions were not conditioned on the verification of any fact or circumstance, nor were they subject to any lapse regime. Thus, the supervenient imposition of such facts or circumstances on exemptions crystallized in the legal sphere of the Claimant is affected by unconstitutionality due to violation of the non-retroactivity of tax law. Authentic retroactivity, to the extent that the tax facts that the new law purports to regulate have already produced all their effects under the old law.

But, even if this is not understood as such, the Claimant alleges that the assessments would always have to be annulled due to a defect of illegality, which gives rise to voidability.

These are, briefly, the arguments that the Claimant invokes in its petition and which it reinforces in the arguments attached to the record, which are deemed to be fully reproduced herein.

In summary, the Claimant petitions for the nullity of the assessments based on their unconstitutionality, and, subsidiarily, should this not be understood as such, the annulment of the assessments due to illegality. It further requests the reimbursement of the total amount of tax assessed and paid and the indemnificatory interest due until such reimbursement.

C – THE RESPONDENT'S ANSWER

  1. The Respondent AT, duly notified for such purpose, timely submitted its answer in which, by impugnation, it alleged, in summary, the following:

a) The impossibility of AT disapplying the legal norm in question, on the ground of its unconstitutionality, as it is subject to the principle of legality, as provided for in articles 266, number 2 of CRP, 3, number 1 of CPA and 55 of LGT. This issue is properly addressed and treated by doctrine and the Jurisprudence of the superior Courts. It also invokes, in defense of this understanding, various Opinions of the General Prosecutor's Office. It further alleges, in the arguments phase, that any other understanding could even lead to the incompetence of the arbitral Tribunal (which does not have competence to review the constitutionality of norms) and to the illegitimacy of the respondent AT.

b) The tax acts in question did not violate any legal or constitutional provision; the assessments are a consequence of the destination given to the property being other than leasing, which already resulted objectively from the 2008 version of the law that introduced into the system the legal regime applicable to these Funds; wherefore the assessments are legal and should be maintained;

c) Notwithstanding, AT understands that the transitional norm contained in the aforementioned article 236 of Law no. 83-C/2013 of 31 December does not suffer from unconstitutionality;

d) It further understands that the reference to the underlying regime in article 204, number 1, letter a) of CPPT is manifestly decontextualized, and that it is the established jurisprudence of our superior Courts that, should the defect imputed to the assessments in question exist, it would never give rise to nullity, but merely to voidability.

e) But, it adds that, not even this defect exists, as, according to AT, there is no violation of article 103, number 3 of CRP, firstly because since the beginning, namely since the introduction of the tax regime applicable to FIIAH, fulfilling the prerequisite that such properties be destined exclusively for leasing for permanent residential occupation was required. They were always conditioned to this prerequisite, wherefore Law no. 83-C/2013, of 31 December, merely served to densify the criterion already required. It develops abundant argumentation regarding the regime applicable to tax benefits and the verification or inspection of the conditions that determined it. Wherefore, it could always cease, through inspection concluding that the respective prerequisites are not met.

It concludes with the legality of the assessments and the unfoundedness of the petition for annulment and condemnation to payment of indemnificatory interest. It also invokes some recent arbitral decisions, issued in proceedings identical to those of the present case, which it attached to its arguments.

II - PROCEDURAL REQUIREMENTS

  1. The Arbitral Tribunal is properly constituted. It is materially competent, pursuant to article 2, number 1, letter a) of RJAT, as results from the exact terms of the petition filed. Let us see: in its arguments, the Respondent came to refer, incidentally, that given the Claimant's claim, which expressly states that it files the arbitral petition to assess the unconstitutionality of the aforementioned transitional norm contained in article 236 of the State Budget for 2014, it would be necessary to conclude the incompetence of the arbitral tribunal to know of the unconstitutionality of the norm and the illegitimacy of AT being sued in these terms, issues which it had not raised in its Answer.

Having as reference the petition filed by the Claimant, it is concluded that it invokes the illegality of the assessments (based on violation of the Constitution and of the Law) and, consequently, petitions for their consequent annulment.

Thus, regardless of the grounds on which its petition is based, it is beyond doubt that this arbitral tribunal is competent to know of the matter, as provided for in article 2, number 1, letter a) of RJAT. Wherefore, given the configuration of the petition and the cause of action (legal regime applicable to FIAH) this Tribunal is competent to know of the merits of the issue. For identical reasons, as the respondent entity (AT) is the formal author of the tax assessments impugned, it is this party that is legitimate in the present arbitral proceeding.

  1. The Parties enjoy legal personality and capacity, are legitimate and are legally represented (see articles 4 and 10 number 2 of RJAT and article 1 of Order no. 112/2011, of 22 March).

  2. The proceeding does not suffer from defects that would invalidate it.

  3. Taking into account the documentary evidence attached to the record, and what has been alleged by the parties in the case, it is incumbent to fix the factual matter relevant to the understanding of the decision, which is fixed as follows.

III – Factual Matter

A) Established Facts

  1. As relevant factual matter, the present tribunal deems the following facts to be established:

a) The Claimant company, designated by A…– …, SA is a management company of the real estate fund B…- CLOSED REAL ESTATE INVESTMENT FUND FOR RESIDENTIAL LEASING, registered with the Securities Market Commission, with tax number …;

b) In the scope of its activity, the Claimant carried out an exchange of the urban property, located at property U-…-… located at …, …, Block …, …, registered in the urban property matrix of the Parish of … and …;

c) This property was acquired by the Claimant in 2013, under the legal tax regime of FIAH, Law 64- A/2008, of 31 December;

d) The Claimant, as a consequence of the exchange transaction carried out in 2015 on this property, requested that AT issue the assessments of IMT and IS;

e) Consequently the following assessments were issued:

  • IMT Assessment no. …, in the amount of € 32,564.75;
  • IS Assessment no. …, in the amount of € 4,360.00.

f) The assessments were paid on 27 November 2015;

g) Following the exchange, which occurred on 27-11-2015, a destination different from leasing for permanent residential occupation was given to the property, as stipulated at the time of its acquisition by the Real Estate Fund now Claimant.

B) FACTS NOT ESTABLISHED

  1. With relevance to the decision, there are no relevant facts to be considered as not established.

C) GROUNDS FOR ESTABLISHED FACTS

  1. The above-described facts were deemed established based on the documentary evidence that the Claimant attached to the record, confirmed by AT, which attests that the aforementioned facts are true. Thus, taking into account the positions assumed by the parties and the documentary evidence attached to the record, the aforementioned facts were considered established, with relevance to the decision, the facts listed above, which are moreover consensually recognized and accepted by the parties.

IV – ON THE LAW: grounds for the merits decision

  1. Having fixed, as above stated, the factual matter, it is incumbent to address the legal issue raised by the Claimant, which consists in determining whether the IMT and IS assessments subject to the arbitral pronouncement petition suffer from the alleged illegalities.

It must be decided.

  1. As we have seen above, the Claimant bases its petition for annulment of the assessments on their illegality arising from the application of the norm of article 236 of Law no. 83-C/2013 of 31 December, which it understands to be unconstitutional, for which reason AT should not apply such legal provision.

It is true that the Claimant is not right on this point, as will be demonstrated.

The Claimant alleges that the tax assessments impugned result exclusively from the provisions of article 236 of Law no. 83-C/2013. However, it is undeniable that from the application of the legal tax regime applicable to FIAH, the exemptions of IMT and IS were, since 2008, subject to one single and exclusive condition: that of properties being destined for leasing for permanent residential occupation, which leads us to conclude that, regardless of the regime introduced by the aforementioned normative, they would always be required to pay the taxes in question, if and when they gave the property a different destination than that provided for in law. This is exactly what occurred in the present case.

Yet, the claimant alleges that AT should not have assessed the taxes in question, under penalty of violation of the principle of non-retroactivity, which constitutes a violation of a fundamental right, giving rise to nullity of the tax assessment act.

The Respondent, on the other hand, understands that such argument does not proceed because, in the exercise of its functions, it is obliged to comply with the law and the law, and does not have competence to decide on the non-application of norms regarding which doubts are raised about their conformity with the Constitution. To which is added, according to AT, that there is no violation of the principle of non-retroactivity, the assessments originating in the fact that the destination given to the properties (alienation) was not leasing for residential occupation, the prerequisite on which the tax benefit granted was based.

  1. The jurisprudence of the superior courts has been quite unanimous in recognizing that the administration is subject to the principle of legality and, therefore, cannot disapply a certain legal norm on the ground of unconstitutionality. In a recent decision the Supreme Administrative Court ruled on this issue in the following terms:

"(...) unless it is a matter of disrespect for constitutional norms directly applicable and binding, such as those referring to rights, freedoms and guarantees (see article 18, number 1, of CRP, AT cannot refuse to apply the norm on the ground of unconstitutionality (Of interest on the issue, see the opinions of the Consultative Council of the General Prosecutor's Office referred to in the Collection of Opinions of the General Prosecutor's Office, volume V, items 10, 3, 3.2 – respectively, with the headings 'Review of constitutionality', 'Successive review' and '(Non-)Application of unconstitutional norm (powers and duties of Public Administration)' –, whose doctrine we follow.). For the Administration in general is subject to the principle of legality, constitutionally enshrined and AT is bound by force of the provision in article 55 of LGT. In our opinion, AT should await the declaration of unconstitutionality with general binding force, to be issued by the Constitutional Court (TC), pursuant to article 281 of CRP. For, as VIEIRA DE ANDRADE says, 'This conflict [between constitutionality and the principle of legality] cannot be resolved through the automatic prevalence of constitutional law over legal law. This is not what is at issue, because what is at issue is not the constitutionality of the law, but the judgment that administrative bodies may make on that constitutionality. On the one hand, the Administration is not an organ for review of constitutionality; on the other hand, the Administration's submission to the law is not intended only to protect the rights of individuals, but also the defense and pursuit of public interests [...]. Granting the administrative power unlimited powers to control the unconstitutionality of the laws to be applied would lead to administrative anarchy, would reverse the Law-Administration relationship and would directly violate the principle of separation of powers, as embodied in our Constitution' (Constitutional Law, Almedina, 1977, p. 270.). Similarly, JOÃO CAUPERS states that 'the Administration does not, in principle, have competence to decide the non-application of norms whose constitutionality raises doubts for it, unlike the courts, to whom falls the diffuse and concrete review of constitutional conformity, as demonstrated by the differences between articles 207 [now 204] and 266, number 2, of the Constitution. While the former prevents the courts from applying unconstitutional norms, the latter stipulates the subordination of administrative organs and agents to the Constitution and to law.

It appears clear that the essential difference between the two provisions results exactly from the fact that it was not intended to entrust the Administration with the task of reviewing the constitutionality of laws. The performance of such function by it must be seen as exceptional' (Fundamental Rights of Workers and the Constitution, Almedina, 1985, p. 157.).

We conclude, thus, that in Portuguese Constitutional Law there is no possibility of the Administration refusing to comply with a norm which it considers unconstitutional, substituting itself for the organs of constitutionality review, unless it is a matter of violation of rights, freedoms and guarantees constitutionally enshrined, which is manifestly not the case when it comes to the application of a norm allegedly violating the principle of non-retroactivity of tax law...", see, among others, the recent judgments dated 26/02/2014, appeal no. 0481/13 and of 12/03/2014, appeal no. 01916/13." [1]

On this point, the Respondent's allegation proceeds when it invokes its submission to law and, by force thereof, the impossibility of disapplying a norm in function of the interpretation it makes regarding its unconstitutionality. Faced with this issue, it remains to verify whether, in truth, what is at issue in the present matter is or is not the assessment of IMT and IS by force of the application of the provisions of article 236 of the State Budget for 2014, to assess the relevance of the question of alleged unconstitutionality due to violation of the principle of non-retroactivity of tax law.

  1. Having set this out, it is incumbent to examine the legal issues raised in the case and which relate to the legal regime applicable to real estate investment funds for residential leasing (FIIAH) and to real estate investment companies for residential leasing (SIIAH), and the prerequisites of the tax benefits granted. From the answer to this issue will be evident the legal cause or legal ground underlying the assessments impugned. Let us see then.

The regime applicable to real estate investment funds for residential leasing (hereinafter "FIIAH") and to real estate investment companies for residential leasing was established by Law no. 64-A/2008, of 31 December (State Budget for 2009), which in its article 8, established the tax regime applicable to FIIAH.

With regard to Municipal Tax on Onerous Transmission of Property (IMT), the Tax Regime of FIIAH defined, in number 7, of the aforementioned article 8, the following:

Article 8

(Tax regime)

(...)

"7 — The following are exempt from IMT:

a) The acquisition of urban properties or autonomous units of urban properties intended exclusively for leasing for permanent residential occupation, by the investment funds referred to in number 1;

b) The acquisition of urban properties or autonomous units of urban properties intended for own and permanent residential occupation, as a result of the exercise of the purchase option provided for in number 3 of article 5 by tenants of properties forming part of the assets of the investment funds referred to in number 1."

Law no. 83-C/2013, of 31 December (State Budget for 2014) added to this article 8 numbers 14 to 16, which provide as follows:

"14 - For purposes of the provisions of numbers 6 to 8, urban properties are considered to be destined for leasing for permanent residential occupation whenever they are subject to a leasing contract for permanent residential occupation within three years of the date they became part of the fund's assets, and the taxpayer must communicate and provide proof to AT of the respective effective leasing, within 30 days following the end of said period.

15 - When properties have not been subject to a leasing contract within the three-year period provided for in the preceding number, the exemptions provided for in numbers 6 to 8 cease to have effect, and in such case the taxpayer must request from AT, within 30 days following the end of said period, the assessment of the respective tax.

16 - If the properties are alienated, with the exception of cases provided for in article 5, or if the FIIAH is subject to liquidation, before the period provided for in number 14 has elapsed, the taxpayer must likewise request from AT, prior to the alienation of the property or the liquidation of the FIIAH, the assessment of the tax due under the preceding number."

Law no. 83-C/2013, of 31 December (State Budget for 2014) further established in its article 236 a transitional regime within the scope of the special regime applicable to FIIAH and SIIAH as follows:

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

2 - Notwithstanding the provisions of the preceding number, the provisions of numbers 14 to 16 of article 8 of the special regime applicable to FIIAH and SIIAH, approved by articles 102 to 104 of Law no. 64-A/2008, of 31 December, also apply to properties that have been acquired by FIIAH before 1 January 2014, with the three-year period provided for in number 14 counting from 1 January 2014."

  1. The special regime applicable to FIIAH and SIIAH, contained in Law no. 64-A/2008 of 31 December (State Budget for 2009) which approved the special regime applicable to these investment funds and real estate investment companies, provided that this regime "applies to FIIAH or SIIAH constituted during the five years following the entry into force of this law and to real estate properties acquired by them in the same period", that is, between 1 January and 31 December 2013. The constitution and operation of FIIAH are governed by the provisions of the Legal Regime of Real Estate Investment Funds, approved by Decree-Law no. 60/2002 of 20 March.

Thus, it results from this special regime that borrowers under residential credit contracts who proceed to alienate the real estate property subject to the contract to a FIIAH, may enter into a leasing contract with the fund's managing entity, and prior to the celebration of the contract for transmission of the property to the FIIAH, the information on the essential elements of the transaction must be provided.

It further results from this legal regime that the leasing constitutes the lessee in a right to purchase the property from the fund, susceptible of being exercised until 31- 12- 2020, which is only transmissible by death of the holder.

It is clear that the legislator's objective with this regime was to provide alternative solutions for mortgage creditors, in times of acute economic crisis, encouraging the alienation of properties and the celebration of a leasing contract with a purchase option at the end of the contract.

But the legislator did not grant this exemption unconditionally. The exemption presupposed, in the original version of the Law (2008) a specific destination of the property: leasing for residential occupation, under the conditions legally provided for. Thus, any other subsequent destination, different from that provided for in law, had to have as a consequence the production of the respective tax assessments. Indeed, if it were otherwise, the legislator would have granted an unconditional tax benefit, susceptible of use, perhaps, in an abusive and unfair manner due to the inequalities it would generate compared to all situations in which the same business acts are subject to tax.

  1. Having set this out, the legislator granted certain tax exemptions to this type of real estate funds, as a measure to encourage leasing for permanent residential occupation, with the leasing contract possibly having a clause with a purchase option in favor of the tenant. The exemptions granted are the following:

a) exemption from IRC, as regards the income of FIIAH (of any nature) constituted between 1 January 2009 and 31 December 2013;

b) exemption from IRS and IRC as regards income relating to participation units;

c) exemption from IRS on capital gains resulting from the transmission of properties intended for own residential occupation in favor of real estate investment funds which occurs by force of the conversion of the right of ownership of such properties into a leasing contract;

d) exemption from IMI on properties intended for leasing for permanent residential occupation, while these remain in the ownership of the FIIAH;

e) exemption from IMT as regards the acquisitions of urban properties or autonomous units of urban properties intended exclusively for leasing for permanent residential occupation by the investment fund, as well as acquisitions by force of the exercise of the purchase option by tenants of properties forming part of the assets of real estate investment funds;

f) Exemption from Stamp Tax as regards all acts performed, provided they are connected with the transmission of urban properties intended for permanent residential occupation which occurs by force of the conversion of the right of ownership into the right to lease over the same properties, as well as the exercise of the purchase option provided for in the contract.

  1. The regime described above applies, with the necessary adaptations, to real estate investment companies that come to be constituted under the special law and which comply with the provisions of the special regime applicable to FIIAH. The aforementioned exemptions are configured and fall within the concept of tax benefits, as provided for in the EBF, as they assume the nature of exceptional measures, instituted for the protection of relevant public extrafiscal interests that are superior to those of the taxation they prevent. Tax benefits translate into facts which, while subject to taxation, are impeditive of the birth of the tax obligation.

Having set this out, it is clear that the special regime described above, created in 2008 to be in force from 2009, had a clear purpose of responding to a crisis situation, safeguarding the interests of families with difficulties in paying residential credit installments, encouraging the use of leasing, with a purchase option by the tenant, freeing the related business transactions from the tax burden to which they would be subject under normal circumstances. For this reason, these special regimes may be granted for a determined period of time.

It is equally clear that the operationality of the tax benefits provided for in this special regime is conditioned to a prerequisite, which is that properties be subject to a leasing contract for own permanent residential occupation.

Should it be verified that the urban properties or units are or come to be destined for another purpose than leasing, then the aforementioned tax benefits cannot be maintained. And, note that this conclusion is imposed by itself without needing to resort to the transitional norm of article 236 of the State Budget for 2014. The only novelty that this law introduces as regards properties acquired prior to its entry into force is the introduction of a deadline beyond which, if the property is not given the destination prescribed by law, then, regardless of whether they come to be alienated or not, destined for another purpose or not, they will become subject to assessment of the taxes from which they were exempted at the time of their acquisition. This application could possibly raise questions of unconstitutionality, which this tribunal will not address, given that in the concrete case of the present case, it was not this reason that triggered the assessments impugned.

The truth is that, from the legal regime in question results (as it already resulted in light of the version introduced in 2008), whenever the urban property comes to have a destination different from leasing for own residential occupation, then, one of the prerequisites for the application of the tax benefit fails. In other words, what was subject to exemption may cease to be and become subject to taxation, whenever the prerequisite(s) of the exemption legally provided and its future condition are not verified. Thus, if one of these urban properties comes to be alienated or subject to another type of legal transaction different from that which is provided for in law as exempt from taxation (leasing for own residential occupation) it is to be concluded that the tax exemption granted ceases. Nor could it be otherwise, under penalty of total frustration of the extrafiscal objectives that the legislator intended to safeguard with the regime introduced in 2008. As to the nature of the taxes in question, which are characterized as taxes of sole obligation, this in no way prevents the exemption granted from being subject to the future condition imposed by law, in this case, the destination of the property for leasing for permanent residential occupation.

  1. It is certain that, in the State Budget for 2014, numbers 14, 15 and 16 were added to article 8 (tax regime) of the regime applicable to FIIAH, with the following content:

"(...) 14 – For purposes of the provisions of numbers 6 to 8, urban properties are considered to be destined for leasing for permanent residential occupation whenever they are subject to a leasing contract for permanent residential occupation within three years of the date they became part of the fund's assets, and the taxpayer must communicate and provide proof to AT of the respective effective leasing, within 30 days following the end of said period.

15- When properties have not been subject to a leasing contract within the three-year period provided for in the preceding number, the exemptions provided for in numbers 6 to 8 cease to have effect, and in such case the taxpayer must request from AT, within 30 days following the end of said period, the assessment of the respective tax.

16 – If the properties are alienated, with the exception of cases provided for in article 5, or if the FIIAH is subject to liquidation, before the period provided for in number 14 has elapsed, the taxpayer must likewise request from AT, prior to the alienation of the property or the liquidation of the FIIAH, the assessment of the tax due under the preceding number."

Lastly, the State Budget for 2014 provides for a transitional norm, in its article 236, which establishes the following transitional regime:

"1 - The provisions of numbers 14 to 16 of article 8 of the special regime applicable to FIIAH and SIIAH (...) apply to properties that have been acquired by FIIAH from 1 January 2014 onwards

2- Notwithstanding the provisions of the preceding number, the provisions of numbers 14 to 16 of article 8 of the special regime of FIIAH and SIIAH (...) also apply to properties that have been acquired by FIIAH before 1 January 2014, with the three-year period provided for in number 14 counting from 1 January 2014."

  1. With the aforementioned norms, the legislator came to clarify some concepts underlying the special regime, which the law of 2008 had not clarified in such an explicit manner.

Thus, it came to clarify the meaning of "urban properties intended exclusively for leasing for permanent residential occupation" (a concept which was not even innovative), as well as to specify the circumstances in which the benefits of the tax exemptions granted by the special regime cease. But, it should be noted that, in light of the special regime provided for in article 8, in its original wording, the essential condition was already expressly and unequivocally established for properties integrated into FIIAH and SIIAH to be able to benefit from the exemptions, and that was exactly what is currently provided for in the version introduced by the State Budget for 2014: being destined for leasing for permanent residential occupation.

Any other destination given to the properties in question, in particular their alienation, already implied the cessation of the tax benefits resulting from the special regime.

In other words, the introduction of the aforementioned provisions merely served to clarify some concepts, introduce a time limit for FIIAH and SIIAH to enter into leasing contracts for own permanent residential occupation, already previously presupposed as a condition to cause the tax benefits legally provided to operate.

It is not apparent that the introduction of these provisions results in anything truly innovative that would alter or call into question the legitimate expectations of these investment funds and investment companies, which were created specifically to resolve a particular problem, related to the economic crisis that affected many families at risk of losing their home without any alternative solution. For this reason, the legislator created this special taxation regime in 2008 (State Budget for 2009) to prevent social and economic harm that would damage families and credit institutions, the former by the dramatic loss of their right to housing and the latter by the impossibility of recovering their credits.

Under the provisions of the norms introduced by the State Budget for 2014, it also results that in the case of properties forming part of FIIAH and SIIAH not being subject to a leasing contract within the 3-year period, counting from the date of their entry into the fund's assets, the exemptions provided, in respect of IMI, IMT and Stamp Tax, lapse (cease to have effect) and constitute the taxpayer in the obligation to request AT to assess the respective tax, within 30 days following the end of that period. Whereupon it also results that, if the properties are alienated before the three years they are mandatorily subject to the taxes due.

The only circumstance in which this will not occur is, precisely, that which is and has always been (since 2008) provided for in law as a condition for the exemptions: properties being subject to a leasing contract for permanent residential occupation, or alienated as a consequence of the performance of this leasing contract with a purchase option, exercised as it may be this option by the respective tenant.

  1. Returning to the concrete case under examination in the present case, it remains to analyze the circumstances which determined the assessments impugned. The Claimant alleges that the amendments introduced by Law no. 83-C/2013, of 31 December (State Budget for 2014) to the Tax Regime of FIIAH raise legitimate perplexities and questions for the managing companies of FIIAH that intend to comply with their obligations before AT. It further understands that the assessments impugned suffer from illegality due to violation of the principle of non-retroactivity provided for in article 103, number 3 of CRP, given that on the date the properties became part of the fund's assets, the exemptions of IMT and IS enshrined did not depend on the verification of any subsequent fact or circumstance, nor were they subject to any lapse regime.

Now, while it is true that the State Budget for 2014 came to introduce the aforementioned provisions with the innovations already referred to, it does not appear that the reason underlying the assessments impugned results from the application of any of the newly introduced provisions, but rather from the fact that a different destination was given to the property, different from that provided for in law since its original version. The truth is that the exemptions enshrined in this special regime required, since its introduction in 2008, that the acquisition of properties be destined exclusively for leasing for permanent residential occupation and that the transmission be for properties destined for permanent residential occupation. Since its original version, taxpayers wishing to benefit from these exemptions have had to comply with the legal prerequisite: that properties be destined exclusively for leasing for permanent residential occupation.

  1. In the case of the present case, as is proven by the documentary evidence attached, in particular from the notes of assessment attached to the arbitral petition, the assessments impugned were based on the fact that the property was exchanged by the Claimant, and its destination from then on would have ceased to be what the law provides as a condition for the exemptions granted. It did not comply with the destination provided for in the special regime, that is, leasing for permanent residential occupation. Wherefore, the assessments in question do not result from any requirement or prerequisite inserted ex novo by the State Budget for 2014, but rather from the non-dedication of the property to the destination specifically provided for in law as fostering the tax exemptions enshrined.

The Claimant always knew that this was the legal condition to be met in order to be able to benefit from the exemptions. Naturally, the decision to alienate or exchange the property, rather than dedicate it to the specific purpose of leasing for permanent residential occupation, would have as a consequence the lapse of the exemptions of IMT and IS provided for in article 8, number 7, letter b), number 8 and article 5, number 3 of the special regime of FIIAH. The alienation, whether by exchange, purchase and sale or any other legal transaction different from that which results in the framework of the exercise of the right to purchase arising from the leasing contract for own and permanent residential occupation (sole situation capable of benefiting from the exemptions provided), would always be subject to taxation in respect of IMT and Stamp Tax.

  1. The tax benefits that the legislator provides when it understands that weighty reasons justify it, prevent taxation, but always conditioned on the verification of legal requirements. The fact that we are dealing with taxes of sole obligation does not prevent this from being the case.

Tax benefits are by nature exceptional and as they prevent taxation that would normally apply to the tax facts in question, they must be carefully weighed and regulated with detail and balance, under penalty of allowing abusive use contrary to the extrafiscal purpose they aim to achieve. For this reason, the legislator never grants tax benefits without imposing conditions or prerequisites to which the taxpayer is obliged, under penalty of being subject to normal taxation as provided for.

As they constitute derogations from the general rules of taxation provided for in law, tax benefits naturally raise questions of compliance with the imperatives arising from the principles of ability to pay and equality. Their supporting ground is, in any case, the social, economic or other purpose it aims to achieve. For this very reason it is never unconditional or granted without a clear definition of factual and legal prerequisites, from which the tax benefit can be recognized.

As refers Benjamin da Silva Rodrigues on this point, notwithstanding being "exceptional measures instituted for the protection of relevant public extrafiscal interests that are superior to the taxation they prevent", the said tax benefits paralyze, to a certain extent, the juridical generating potential of the tax fact." [2]

In this sense, according to Alberto Xavier, "exemptions can further be distinguished into pure and conditional, the latter being those in which the efficacy of the impeditive fact is subordinated to the realization of an ancillary fact which is a 'conditio iuris' (...) conditional benefits translate into making the right to the benefit subject to counterparts of public interest in the form of duties or burdens imposed on the beneficiaries." [3]

For this reason, the legislator does not grant tax benefits without imposing requirements or prerequisites and conditions to which the taxpayer is obliged, under penalty of being subject to normal taxation as provided for.

In the case of the legal regime under analysis we are dealing with a conditional tax benefit, that is, the benefit depends on certain prerequisites provided for in law being verified. [4]

As they constitute derogations from the general rules of taxation provided for in law, tax benefits naturally raise questions of compliance with the imperatives arising from the principles of ability to pay and equality, wherefore they must be weighed in function of the purposes to be safeguarded. Their supporting ground is the social, economic or other purpose it aims to achieve. For this very reason it is never unconditional or granted without a clear definition of factual and legal prerequisites.

Wherefore, should those prerequisites not be verified the tax benefit cannot operate, whether they are automatic benefits or dependent on recognition.

As results from the provisions of articles 12 of the EBF "the right to tax benefits must be reported to the date of verification of the respective prerequisites, even if it is dependent on recognition". From this it can be inferred that the rule is that the right to tax benefits is constituted with the verification of the respective prerequisites provided for in law.

Indeed, in reinforcement of this understanding, article 5 of the EBF provides that tax benefits may be "automatic and dependent on recognition", the former resulting directly and immediately from law, while the latter presuppose one or more subsequent acts of recognition.

  1. To all of this is added that pursuant to article 65 of CPPT "the recognition of tax benefits depends on the initiative of those interested, by means of a request specifically addressed to that purpose, the calculation, when obligatory, of the benefit requested and the proof of the verification of the prerequisites of recognition in accordance with law".

For the case examined in the present case it is particularly relevant, the latter part of this legal provision, given that the right to the tax benefits in question depends exclusively on the proof of the verification of the prerequisites provided for in law.

Lastly, pursuant to article 7 of the EBF "all natural and legal persons, of public or private law, to whom tax benefits are granted, automatic or dependent on recognition, are subject to inspection by the Tax and Customs Authority."

  1. Having set this out, it is concluded that the State Budget for 2014 came, effectively, to clarify and establish a new condition to the legal prerequisite already previously provided for the right to the exemption, namely: should the dedication to leasing for permanent residential occupation not occur within 3 years after the entry of the property into the fund, the fund has to request AT to assess the IMT that was not assessed ab initio.

However, it was not the application of this deadline, introduced in the version of the State Budget for 2014, that originated the assessments impugned. These were a consequence arising from the fact that a destination was given to the urban property in question different from that which, since the introduction in the legal order of this special tax regime (2008), was required as a prerequisite for the right to the exemption of IMT and IS.

As is proven by the content of the assessments impugned the property was alienated by exchange, and it was for this reason that the tax benefit lapsed, due to non-compliance with the prerequisite for the right to the exemption.

In the arguments attached to the record, the parties renew what they had already alleged previously. However, the Claimant came to attach to its arguments a legal opinion which, with due consideration for the legal opinions expressed and developed therein, centers on the analysis of the unconstitutionality of the norm of article 236, when applied to cases constituted before its entry into force.[5] All due recognition that may be given to the opinion attached does not allow us to reach a different conclusion from that which is set out, since, even admitting that the application of the normative of article 236 of the State Budget for 2014 implies a degree of retroactivity in its application possibly incompatible with the provisions of article 103 of CRP, even so, this thesis in no way would modify the correct decision of the present case. For the assessments impugned were not generated by consequence of the application of that normative, as has been abundantly explained.

Now, for all that is set out above, it is our understanding that the origin of the assessments in question does not result from the retroactive application of that normative, but rather from the different destination given to the property, which would always have as a consequence the necessary assessment of the taxes due by lapse of the exemptions granted under the condition that the property be destined for leasing for permanent residential occupation.

It is proven that the urban property in question was not destined for leasing for permanent residential occupation nor does the alienation which occurred (referenced in the assessment notes as exchange) occur by exercise of the right to purchase by the tenant.

  1. Now, as is demonstrated by all that is set out, what is not at issue is the retroactivity or not of the provisions introduced by the State Budget for 2014, nor does it appear that there is any injury to the expectations of the Claimant or aggravation of his tax position, since he well knew that the prerequisite for the exemptions of IMT and IS to operate, established since the 2008 version, was that the acquisitions of urban properties or autonomous units of urban properties be destined, exclusively, for leasing for permanent residential occupation. Lastly, the new regime established by the transitional norm contained in article 236 of the State Budget for 2014 has no causal relationship with the reason for being of the assessments in question, and the provisions introduced do not alter the requirements of the exemption established by the special taxation regime applicable to SIIAH and FIIAH, in effect since 01-01- 2009.

  2. In this respect, this Tribunal understands that the IMT and Stamp Tax assessments, impugned in the present case, appear to be legal, as they are in accordance with the provisions of article 8, number 7, letter a) of the legal regime of FIIAH.

Being so, the present arbitral petition is deemed unfounded.

As to the request for indemnificatory interest:

  1. In light of the unfoundedness of the arbitral petition, the remaining petitions are also unfounded, in particular the request for reimbursement of the amounts paid, as well as the request for indemnificatory interest.

V - DECISION

Therefore, it is decided:

a) To declare the arbitral petition entirely unfounded and, consequently, to maintain the tax acts impugned and to absolve the Respondent of all petitions filed;

b) To condemn the claimant to payment of procedural costs, in the amount of €1,836.00.

VALUE OF THE PROCEEDING

The value of the proceeding is fixed at €36,924.75 pursuant to article 97-A, number 1, a), of CPPT, made applicable by force of letters a) and b) of number 1 of article 29 of RJAT and of number 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

COSTS

The amount of the arbitration fee is fixed at €1,836.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Claimant, pursuant to articles 12, number 2, and 22, number 4, both of RJAT, and article 4, number 4, of the aforementioned Regulation.

Let notification be made.

Lisbon, 25 July 2016

The Singular Arbitral Tribunal,

(Maria do Rosário Anjos)

[1] See Decision of STA of 21-01-2015, in proceeding 0703/2014, available at www.dgsi.pt.

[2] See Benjamin da Silva Rodrigues, in Guarantees of Taxpayers in the Tax System, Tribute to Diogo Leite de Campos, Saraiva Publishing House, 2013, São Paulo, Brazil, pages 55 et seq.

[3] See: Alberto Xavier, in Manual of Tax Law, Manuals of FDL, 1974, pages 290 et seq.

[5] Legal Opinion issued by Professors C… and D…, attached by the Claimant to the record, in appendix to its Arguments.

Frequently Asked Questions

Automatically Created

Are real estate investment funds (FIIAH) exempt from IMT and Stamp Tax on property acquisitions for residential leasing?
Yes, under the original FIIAH regime, real estate investment funds for residential leasing were exempt from IMT (Municipal Property Transfer Tax) and Stamp Tax on property acquisitions intended for residential leasing purposes. These exemptions were provided under Article 8(7)(a) and 8(8) of the FIIAH Tax Regime and were initially granted without temporal limitations or conditions. However, Law 83-C/2013 (2014 State Budget) introduced Article 236, which modified this regime by imposing a three-year exemption period even for properties acquired before the law's enactment, fundamentally altering the nature of previously granted unconditional tax benefits.
Can the Tax Arbitration Tribunal rule on the unconstitutionality of Article 236 of Law 83-C/2013 regarding FIIAH tax exemptions?
The competence of Tax Arbitration Tribunals (CAAD) to rule on constitutional issues is limited and contentious. Under Portuguese law, the Constitutional Court has exclusive jurisdiction to declare norms unconstitutional with general binding effect. However, arbitral tribunals can refuse to apply legal provisions they consider unconstitutional in the specific case before them, without making formal declarations of unconstitutionality. The Tax Authority argued that administrative bodies, including tax arbitration tribunals, are bound by the principle of legality and cannot disapply enacted legislation. This raises questions about the tribunal's jurisdiction and whether constitutional challenges should be referred to the Constitutional Court rather than decided directly by the arbitral tribunal.
Is the retroactive application of tax law removing FIIAH exemptions unconstitutional under Portuguese law?
The claimant argued that the retroactive application constitutes a clear violation of Article 103(3) of the Portuguese Constitution, which enshrines the principle of non-retroactivity of tax laws as a fundamental taxpayer guarantee. The constitutional issue centers on whether Article 236 of Law 83-C/2013 engaged in 'authentic retroactivity' by imposing new conditions and time limits on tax exemptions that had already been definitively acquired under prior law. When the property entered the fund before 2014, the exemptions were absolute and unconditional. The subsequent imposition of a three-year limitation period counting from 2014 allegedly regulated completed tax facts, interfering with crystallized rights. This type of retroactive modification of acquired tax benefits is generally prohibited under Portuguese constitutional law, which protects legitimate expectations and legal certainty in taxation.
What is the procedure for challenging IMT and Stamp Tax assessments through CAAD arbitration?
To challenge IMT and Stamp Tax assessments through CAAD (Administrative Arbitration Centre), taxpayers must file a request for establishment of an arbitral tribunal within the statutory limitation period, pursuant to Article 2(1)(a) of Decree-Law 10/2011 (RJAT). The procedure involves: (1) submitting the arbitration request identifying the contested tax acts; (2) acceptance by the CAAD President; (3) notification to the Tax Authority; (4) appointment of arbitrator(s)—parties may designate their arbitrator or the CAAD Deontological Council appoints one; (5) constitution of the arbitral tribunal; (6) the Tax Authority's answer; (7) possible waiver of hearings when only legal issues are involved; (8) written arguments by both parties; (9) payment of arbitration fees; and (10) issuance of the arbitral award. This case followed the standard procedure for singular arbitral tribunals addressing purely legal questions without factual evidence requiring oral hearings.
How does the transitional regime under Law 83-C/2013 affect previously granted tax benefits for FIIAH and SIIAH funds?
The transitional regime under Article 236 of Law 83-C/2013 fundamentally altered the treatment of tax benefits for FIIAH (Real Estate Investment Funds for Residential Leasing) and SIIAH (Real Estate Investment Companies for Residential Leasing). For properties acquired before January 1, 2014, which had enjoyed unconditional IMT and Stamp Tax exemptions, Article 236 imposed a retroactive three-year limitation period beginning on January 1, 2014. This meant that if properties were sold or otherwise transferred before completing three years from that date, the previously exempt taxes would become due. The transitional provision converted absolute exemptions into conditional, time-limited benefits, triggering taxation on disposals that would have been permanently exempt under the prior regime. This created significant financial and legal uncertainty for funds that had acquired properties relying on the permanence of the original tax benefits, potentially undermining investment decisions made under the earlier legislative framework.