Summary
Full Decision
ARBITRAL DECISION
1. REPORT
A... – INVESTMENT FUND MANAGEMENT COMPANY, SA, with registered office at ..., no. ...–..., ...-... Lisbon, sole registration and tax identification number ... (hereinafter also referred to as "Claimant"), in its capacity as managing company of the closed real estate investment fund B... – CLOSED REAL ESTATE INVESTMENT FUND FOR RESIDENTIAL RENTAL, registered with the Securities Market Commission, with tax identification number ..., came, pursuant to the provisions of articles 2, no. 1, letter a), and 13, no. 1, of Decree-Law no. 10/2011, of 20 January, a law that approved the Legal Regime for Tax Arbitration ("RJAT"), to submit a request for constitution of an arbitral tribunal, with the intervention of a single arbitrator, for review of the legality of the decision by the Tax Authority, of the assessment of Municipal Tax on the Onerous Transfer of Real Estate (IMT) with no. ..., in the amount of €1,509.53 and Stamp Duty (IS) with no. ..., in the amount of €973.44.
The Tax Authority and Customs Authority (hereinafter "TA") is the respondent.
The request for constitution of the arbitral tribunal was accepted by the Honorable President of CAAD and automatically notified to the Tax and Customs Authority.
Pursuant to the provisions of letter a) of no. 2 of article 6 and letter b) of no. 1 of article 11 of the RJAT, the Deontological Council appointed the undersigned as arbitrator, who communicated acceptance of the appointment within the applicable deadline, and notified the parties of such appointment on 19-01-2017, with the Parties having manifested no intention to refuse the arbitrator's appointment, pursuant to the combined provisions of article 11, no. 1, letters a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.
In conformity with the provision of letter c) of no. 1 of article 11 of Decree-Law no. 10/2011, of 20 January, as amended by article 228 of Law no. 66-B/2012, of 31 December, the single arbitral tribunal was constituted on 19-01-2017.
The Claimant grounds its request on the following arguments:
a) Law no. 64-A/2008, of 31 December (State Budget for 2009), approved the special regime applicable to real estate investment funds for residential rental (hereinafter "FIIAH") and real estate investment companies for residential rental.
b) Law no. 83-C/2013, of 31 December (State Budget for 2014) added to article 8 of the Tax Regime of FIIAH numbers 14 to 16.
c) Law no. 83-C/2013, of 31 December further enshrined in its article 238 a transitional rule within the scope of the Tax Regime of the Claimant presented on 15 March 2016, requests for official review of the self-assessment corporate income tax deed, for the periods of 2011 and 2012;
d) Article 238 of Law no. 83-C/2013, of 31 December, by extending the application of the current tax regime of FIIAH "to real estate that has been acquired by FIIAH before 1 January 2014, with the three-year period provided for in no. 14 being counted from 1 January 2014" is directly and unequivocally violating the principle of non-retroactivity of tax law constitutionally enshrined.
e) The amendment of the tax regime of FIIAH provided that the sale of real estate owned by FIIAH – or the liquidation of FIIAH – before the expiration of the 3-year period, counted from the date the relevant real estate entered the assets of FIIAH, leads to the lapse of the exemption, these being new requirements aimed at establishing a regime of lapse of exemptions at the date when the tax events occurred and which affect an exemption already crystallized in the legal order of the Claimant.
f) It supports its thesis by reference to an opinion prepared by Professors Dr. C... and Doctor D..., on the constitutionality of no. 2 of article 238 of Law 83-C/2013, which corroborates the unconstitutionality thesis defended by the Claimant.
g) It seeks the declaration of nullity of the assessments based on their abstract unconstitutionality, subsidiarily, should that not be upheld, the IMT and IS assessments in question be annulled, as well as the refund by the Claimant of the full amount paid and of the compensatory interest that may be due.
The Tax and Customs Authority responded, raising (1) exceptions: (A) the material incompetence of the Arbitral Tribunal to review the abstract illegality of the assessments; and (B) the passive illegitimacy of the Respondent and (2) by opposition, alleging in summary that:
Regarding the exception of material incompetence of the Arbitral Tribunal to review the abstract illegality of the assessments:
a) The Arbitral Tribunal is materially incompetent to review, in the abstract, the constitutionality of the rule in question;
b) The Constitutional Court is the competent forum to address both the illegality and unconstitutionality of legal norms [arts. 280, no. 2, letters a) and d) and 281, no. 1, letters a) and b) and no. 3 of the CRP and arts. 6 and 66 of the Constitutional Court Act];
Regarding the exception of passive illegitimacy of the Respondent:
c) The Tax Administration cannot refuse to apply norms on the grounds of their unconstitutionality or illegality, as it is subject to the principle of legality, as established in articles 266, no. 2 of the CRP, 3, no. 1 of the CPA and 55 of the LGT (in this sense, see point 11 of the arbitral decision rendered in case no. 705/2015-T).
By Opposition:
d) The new wording introduced by Law no. 83-C/2013, of 31 December, in favor of legal certainty and the principle of protection of legitimate expectations, and following the spirit of the legislator, when creating the regime, only clarified the criterion already required, stipulating "that urban real estate is intended for rental for permanent housing whenever it is the object of a rental contract for permanent housing within three years from the moment it became part of the fund's assets";
e) With the amendments introduced, the ratio of the enshrined exemptions was not altered, and it should be noted that the immediate extinction of the benefit was not determined in case the aforementioned rental contract was not concluded, as a sufficiently extended period (three years) was granted for such purpose, thus respecting the principle of legal certainty and protection of legitimate expectations;
f) It is manifest that, from the beginning of the regime, the tax benefits applicable to FIIAH always depended on the allocation of the real estate to rental for permanent housing, a legal requirement that the TA, within its supervisory powers, could always assess, to conclude whether the benefit would remain or, rather, whether the standard taxation system would be restored;
g) Given that the sale of real estate without allocation to rental for permanent housing is at issue, this would always determine the lapse of the exemption, under article 14, no. 2, of the EBF, with article 8, no. 16 of the regime merely specifying an anti-abuse measure, establishing that real estate that do not remain in portfolio with allocation exclusively to residential rental were not acquired for such purpose;
h) By way of example, the arbitral decisions rendered in cases nos. 320/2015-T, 689/2015-T, 694/2016-T, 705/2015-T, 706/2015-T, 707/2015-T, 708/2015-T, 709/2015-T, 710/2015-T, 717/2015-T, 729/2015-T, 735/2015-T, 61/2016-T, 62/2016-T, 63/2016-T, 76/2016-T, 85/2016-T, 93/2016-T, 121/2016-T, 165/2016-T, 232/2016-T, 241/2016-T, 288/2016-T and 617/2016-T, all favorable to the TA;
i) Likewise, in the present proceedings, the issue is neither about the retroactivity or otherwise of the law, nor is there any violation of expectations of the Claimant or worsening of its tax position, as the rationale for granting a tax benefit in IMT/IS terms to FIIAH was clearly established from the beginning: "The acquisitions of urban real estate or autonomous units of urban real estate intended exclusively for rental for permanent housing, by the investment funds...";
j) Compensatory interest is not due, as the assessments do not suffer from any defect and the Claimant does not clarify in what terms such interest is requested.
By order dated 19-05-2017, the holding of a hearing was dispensed with and it was decided that the proceedings would continue with written submissions.
Both Claimant and Respondent presented written submissions.
The arbitral tribunal was regularly constituted.
The parties possess legal personality and capacity (arts. 4 and 10, no. 2, of the same instrument and art. 1 of Regulatory Decree no. 112-A/2011, of 22 March) and are duly represented.
The proceedings do not suffer from any nullities.
It is necessary to prioritize the review of the exceptions raised regarding the material incompetence of the Arbitral Tribunal and the passive illegitimacy of the Respondent, both raised by the TA.
Regarding the exception of material incompetence of the Arbitral Tribunal to review the abstract illegality of the assessments, we concur with the understanding stated in the Arbitral Decisions of CAAD, in particular, cases 707/2015-T and 709/2015-T.
It is not the purpose of this Tribunal to judge or even pronounce on the (un)constitutionality of the rule in question. "What is at issue is whether the Assessments are, or are not, valid, with such judgment depending on another that ascertains, in concreto, the harmony of such assessments with the legal order" (See Arbitral Decision rendered in case 707/2015-T, on page 7).
Now, given that the review of the abstract supervision of the (un)constitutionality of the rule in question is not at issue, the exception regarding the passive illegitimacy of the Respondent cannot proceed.
In light of the foregoing, the exceptions raised are deemed unfounded.
2. MATTER OF FACT
2.1. Proven Facts
The following facts are considered proven:
i. The Claimant is a Closed Real Estate Investment Fund for Residential Rental;
ii. The Claimant paid an IMT assessment with no. ..., in the amount of €1,509.53;
iii. The Claimant paid an IS assessment with no. ..., in the amount of €973.44.
2.2. Grounds for the Decision on the Matter of Fact
The facts were given as proven based on the documents attached to the request for arbitral ruling, the Reply, and the administrative file, attached to the proceedings by the TA.
2.3. Unproven Facts
Based on the documentary evidence made available in the proceedings and consensually accepted by the parties, it is verified that, with interest to the decision of the case, nothing remains to be proven.
3. MATTER OF LAW
As to the merits of the issue, the alleged unconstitutionality of article 236, no. 2 of Law 83-C/2013, of 31 December is at issue, on which there is uniform jurisprudence of CAAD, which we concur with in full and to which we shall hereinafter refer.
As a preliminary matter, because the Claimant requests the nullity of the assessments and, subsidiarily, their annulment, we make reference to what is stated in the Arbitral Decision rendered in case 710/2015-T on this matter, an understanding which we concur with in full.
"On this aspect, we cannot be closer to what is stated in the cited decision in case no. 398/2015-T when it explains that the tax jurisprudence of the Administrative Supreme Court (hereinafter only 'STA') has established that the nullity on which an assessment act is based does not imply the nullity of such act, but rather generates a situation of abstract illegality of the assessment. A thesis that adheres to the case of the assessment act that applies an unconstitutional norm, unless it violates the essential content of a fundamental right, whereby even if the tax assessment acts are based on an unconstitutional norm, the defect.
Now, in the present Arbitral Proceedings, we see no reason to follow an understanding different from that which has been followed by the STA, whereby we maintain, for purposes of the present decision, that a TA assessment act that applies a norm in the erroneous assumption of its validity, its existence, or legal relevance, suffers from the defect of violation of law due to error in the legal assumption, but is a cause of voidability and not nullity."
Once the question of nullity/voidability of the assessments is clarified, it is now important to decide on the merits of the arbitral request regarding the IMT and IS assessments in question, beginning our analysis by exposing the normative context at issue.
Law no. 64-A/2008, of 31 December, which approved the 'Special Regime applicable to Real Estate Investment Funds for Residential Rental', provides in no. 7 of its article 8 that the following are exempt from IMT:
"a) The acquisitions of urban real estate or autonomous units of urban real estate intended exclusively for rental for permanent housing, by the investment funds referred to in no. 1;
b) The acquisitions of urban real estate or autonomous units of urban real estate intended for permanent home occupation, as a result of the exercise of the purchase option referred to in no. 3 of article 5 by tenants of the real estate that form part of the assets of the investment funds referred to in no. 1"
In turn, Law 83-C/2013, of 31 December, through article 235, added to the above-mentioned article 8 of the Special Regime applicable to Real Estate Investment Funds for Residential Rental, nos. 14, 15, and 16, as follows:
"14 – For purposes of the provisions of nos. 6 to 8, it is considered that urban real estate is intended for rental for permanent housing whenever it is the object of a rental contract for permanent housing within three years from the moment it became part of the fund's assets, the taxable person being required to communicate and provide proof to the TA of the respective actual rental within 30 days following the end of said period.
15 – When real estate has not been the subject of a rental contract within the three-year period provided for in the preceding number, the exemptions provided for in nos. 6 to 8 become void, and the taxable person must in such case request from the TA, within 30 days following the end of said period, the assessment of the respective tax.
16 – Should real estate be sold, with the exception of the cases provided for in article 5, or should the FIIAH be subject to liquidation, before the expiration of the period provided for in no. 14, the taxable person must likewise request from the TA, prior to the sale of the real estate or the liquidation of the FIIAH, the assessment of the tax due pursuant to the preceding number."
Finally, we remain with Law 83-C/2013, of 31 December, but now in its article 236, with the heading "Transitional Rule within the Scope of the Special Regime applicable to FIIAH and SIIAH", according to which:
"1. The provisions of nos. 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 real estate that has been acquired by FIIAH as from 1 January 2014.
2. Notwithstanding the provision of the preceding number, the provisions of nos. 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, equally apply to real estate that has been acquired by FIIAH before 1 January 2014, with the three-year period provided for in no. 14 being counted, in such cases, from 1 January 2014."
As we have already had the opportunity to mention, we concur with the uniform jurisprudence of CAAD on this matter included in various Arbitral Decisions, including those alleged by the TA in its reply.
In particular, we highlight the Arbitral Decision rendered in case 707/2015-T, which we concur with in full.
"If we read that normative provision [the norms in question] correctly, we must conclude that the IMT exemption did not depend solely on the identity of the acquirer of the real estate in question. The law does not limit itself to exempting (nor did it exempt at the time) the mere acquisition of real estate by FIIAH. It granted this exemption to FIIAH, yes, but provided that the acquisition concerned urban real estate or autonomous units of urban real estate 'intended exclusively for rental for permanent housing' (information in parentheses ours).
Now, as the illustrious authors of the Opinion rightly point out, the scope of the law is not (is not today as it was not then) the promotion of real estate speculation. However, neither was it, as can be read in it, the protection of the rental funds, pardoning the apparent paradox. The law intended, instead, to stimulate the rental market itself. This objective was pursued through various initiatives, including the establishment of a special regime, and an advantageous one, dedicated to FIIAH, but it would be precipitous to conclude that the legislator intended, without more, to support the said FIIAH. Saying what has just been said does not pretend to mean more than this: it is reductive, and to that extent inaccurate, to claim that the exemption referred to in no. 7 of article 8 (tax regime) of the special regime applicable to FIIAH is satisfied with two assumptions, namely, that of the identity of the acquirer and that of its declaration at the time of acquisition that the real estate is intended for rental for permanent housing.
The destination, indeed exclusive, to be given to real estate acquired by FIIAH is not, by our reading of the norms, to be purely intentional or volitional. It is not enough that the FIIAH, at the time of acquisition of a real estate property, in order to benefit from the IMT and IS exemption, declares that it intends to give the said real estate the destination of rental for permanent housing. For this benefit to fulfill its purpose, for the tax expenditure associated with it to be economically and socially justified, this destination must be effective."
And because we understand that the foregoing applies to the concrete case at issue, notwithstanding the non-coincidence of dates, we again refer to the same Arbitral Decision, when it states that: "These rules [norms in question] do not suggest special precautions when applied to acquisitions of real estate made by FIIAH after their entry into force. The problem exists, however, when attempting to apply them, as in the case of the proceedings, to situations where the acquisition of the real estate took place before the entry into force of these new provisions.
Now, as was seen, no. 2 of article 236 of Law no. 83-C/2013, of 31 December mandates the application of these rules "to real estate that has been acquired by FIIAH before 1 January 2014, with the three-year period provided for in no. 14 being counted, in such cases, from 1 January 2014"
And we continue to quote the same Arbitral Decision when it states that "It is true that, in the prior regime, the one applicable at the date of acquisition of the Real Estate, nothing was expressly said about the need to maintain the real estate in the assets of FIIAH for a certain period. However, it also seems evident to us that the destination to be given to the acquired real estate was a requirement and that this destination cannot be merely 'psychological' or intentional.
As we have seen, it is the law that expressly requires, and in exclusive terms, a certain destination to be given to real estate acquired with the tax benefits of which we have been discussing. The wording would have been different had the attribution of exemptions depended exclusively on the identity of the respective acquirer: being a FIIAH. The acquisition of real estate by FIIAH is a necessary condition, but cannot be viewed, in light of the norms in force in 2013, as a sufficient condition.
However, it must be acknowledged that it would not be reasonable to immediately impose the need to designate, in effective terms, the real estate to rental for permanent housing. At first, at the moment of acquisition, what matters will be the intention declared by the acquirer who is a FIIAH. At the time of acquisition, the FIIAH must manifest the intention to allocate the acquired real estate to this type of rental, with the assumption that the acquirer will not, without loss of benefits, be able to assign to the acquired real estate a destination different from what was declared.
Let us agree that giving a destination different to real estate with IMT and IS exemptions cannot be understood as synonymous with the attribution to such real estate of an effective rental for permanent housing. The same is to say that the period elapsed between the acquisition by the FIIAH of a real estate for rental for permanent housing and the effective conclusion of a rental contract for permanent housing that has it as its object, regardless of the duration of that period, is a time interval that does not permit the conclusion that the real estate in question has been given a destination different from rental for permanent housing. In fact, having real estate on the rental market, available to be rented, is still a manifestation of that declared destination. It is sufficient, in our view, for the susceptibility of such real estate to become the object of a rental contract in which the FIIAH appears as lessor for the requirement of the destination to be given to the asset that, it should be recalled, was acquired with the aforementioned tax benefits.
As we have already had the opportunity to state, the rules in force in 2013, the year in which the Real Estate was acquired by FUND B... with the IMT and IS exemption, did not establish, in temporally rigid terms, the need for a rental contract for permanent housing to be effectively concluded. However, in our view, the benefit of the IMT and IS exemption – within the framework of the economic policy of which it is an instrument – is based on the need to be given that effective destination (regardless of knowing – that is another question – the period available to the FIIAH to be given that effective destination).
Now, the real estate is not given the effective destination of rental for permanent housing when the owner allocates it to a different purpose – for example, commercial rental – or when it can no longer be given the desired destination of residential rental (because the asset is sold, for example).
We do not believe the problem can be analyzed from the perspective of risk, in terms of being able to sustain that the exemptions provided did not intend to place on the FIIAH the risk of not being able to rent the real estate, or of not being able to sell them. It happens that FIIAH, as collective investment vehicles, are true economic agents who must weigh the risks arising from their own activity, which includes the duty to weigh the consequences of the non-allocation of a certain asset to a certain destination.
It is stated in the Opinion that 'the allocation is compatible, especially in periods of rental market crisis, with difficulties and delays in the realization of rental', a statement that does not merit contest. What will no longer merit unanimity, however, is the conclusion that these difficulties and delays do not constitute an integral part of the risks associated with this specific economic activity. If the law enshrined incentives for the acquisition of real estate with the objective of them being intended for rental for permanent housing, it is up to the acquirer of such real estate and beneficiary of such incentives to manage the risks of its business, which must include consideration of the possibility that such real estate may not arouse in the market the interest that its owner, the FIIAH, foresaw."
Finally, and because the Claimant specifically pronounces on the unconstitutionality of the norms in question, because in its understanding they constitute a new regime of lapse of the exemptions in question, we again refer to the Arbitral Decision rendered in case 710/2015-T, which we concur with, when it states that "The benefit in question did not become extinct, nor did it lapse; it was merely regulated, with an expressed period of holding being introduced and the condition of effective rental being concretized, which cannot even be considered disproportionate, as we understand that for compliance with the special regime in question – even in the initial version of letter a) of no. 7 of article 8 of the State Budget Law for 2009 – a mere declared intention at the acquisition of the real estate should not have sufficed, being necessary the effective rental for permanent housing. It is that – the effective rental for permanent housing – the assumption of the benefit, whereby, pursuant to article 12 of the EBF, one cannot even claim that the establishment of the right to the benefit by the Claimant occurred, contrary to what it invokes in its initial request, especially articles 21 (whose factuality as invoked herein, moreover, is not proven) and 22. This understanding of ours is reinforced by the use of the word 'exclusively' in the wording of letter a) of no. 7 of article 8 of the Special Regime. And, thus being and in this decision segment, we again adhere to the position expressed in the CAAD decision in case no. 398/2005-T, in the sense that the issue is not even one of testing the retroactivity of the norm applied, but rather the fact that the unit in question was sold 'without having fulfilled its destination – allocation to permanent residential rental' and that 'sold [as] the unit is, this destination can no longer be fulfilled, whereby the requirement established for the IMT exemption to be applicable was not fulfilled."
In light of the foregoing, we conclude that the Claimant's request is unfounded.
Finally, given the unfoundedness of the arbitral request, the remaining requests are obviously also unfounded, namely the request for refund of amounts paid, as well as the request for compensatory interest.
5. DECISION
Accordingly, this Arbitral Tribunal hereby decides to dismiss the request for declaration of nullity and voidability of the IMT and IS assessments identified, as well as payment of related compensatory interest.
6. Value of the Case
In accordance with article 306, no. 2, of the CPC, 97-A, no. 1, letter a), of the CPPT and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is set at €2,482.97.
7. COSTS
Pursuant to articles 12, no. 2, and 22, no. 4, of the RJAT, the amount of costs is set at €612.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Claimant.
Lisbon, 31-11-2017
The Arbitrator
(André Bacelar Gonçalves)
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