AIMI on Investment Funds & Building Land: CAAD Case 654/2017-T Constitutionality Ruling

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Suzana Fernandes da Costa and Arlindo José Francisco, appointed by the Deontological Council of the Centre for Administrative Arbitration to form an Arbitral Court, hereby agree as follows:

ARBITRAL DECISION (consult full version in PDF)

I – REPORT

On 16 December 2017, A... – Real Estate Investment Fund Management Company, S.A. (hereinafter abbreviated as "Claimant"), holding tax identification number ..., with registered office at ..., no. ..., ... A, ... - ... Lisbon, in its capacity as management company and in representation of the Closed Real Estate Investment Fund B..., NIPC ..., the Open Real Estate Investment Fund C..., holding tax identification number ..., the Closed Real Estate Investment Fund D..., holding tax identification number ... and the E... Special Closed Real Estate Investment Fund (in liquidation), holding tax identification number ..., filed a request for constitution of an arbitral tribunal, under the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by Article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as LFATM), seeking the declaration of illegality of the tax acts for assessment of the Additional Tax on Municipal Property Tax ("AIMI") with numbers 2017..., 2017..., 2017... and 2017..., issued by the Tax and Customs Authority ("TCA"), with reference to the year 2017, in the total amount of €115,171.09.

To substantiate its request, the Claimant alleges, in summary, that:

• it is illegal, due to errors in factual and legal premises, the application of AIMI to investment funds, by the holding of real property within the scope of their activity;

• subsidiarily, the taxation of "land for construction" intended for "commercial, industrial or service" or "other" purposes is illegal, inasmuch as they are not covered by the objective scope of application of the norms under analysis;

• subsidiarily, the legal regime of AIMI is unconstitutional, insofar as it applies to all "land for construction", as contrary to the principle of equality, enshrined in Article 13 of the CRP and to the principle of fiscal equality and contributory capacity enshrined in Article 104, No. 3 of that Fundamental Law.

On 18-12-2017, the request for constitution of the arbitral tribunal was accepted and automatically notified to the TCA.

The Claimant did not proceed with the appointment of an arbitrator, therefore, under the provisions of subparagraph a) of No. 2 of Article 6 and subparagraph a) of No. 1 of Article 11 of the LFATM, the President of the Deontological Council of CAAD designated the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the assignment within the applicable timeframe.

On 07-02-2018, the parties were notified of these designations and did not manifest any intention to challenge any of them.

In accordance with the provisions of subparagraph c) of No. 1 of Article 11 of the LFATM, the collective Arbitral Court was constituted on 27-02-2018.

On 10-04-2018, the Respondent, having been duly notified for that purpose, submitted its reply, defending itself by way of objection.

Under the provisions of subparagraphs c) and e) of Article 16, and No. 2 of Article 29, both of the LFATM, the holding of the meeting referred to in Article 18 of the LFATM was dispensed with.

Having been granted a deadline for submission of written statements, the parties abstained from doing so.

A deadline of 30 days was set for the pronouncement of a final decision, after the expiry of the deadline for submission of statements by the Respondent. Subsequently, that first deadline was extended until the expiry of the deadline set in Article 21/1 of the LFATM.

The Arbitral Court is materially competent and is regularly constituted, in accordance with Articles 2, No. 1, subparagraph a), 5, and 6, No. 1, of the LFATM.

The parties have legal personality and capacity, are legitimated and are legally represented, in accordance with Articles 4 and 10 of the LFATM and Article 1 of Ordinance No. 112-A/2011, of 22 March.

The proceedings are not affected by any nullities.

Thus, there is no obstacle to the hearing of the case.

Having examined everything, it falls to pronounce

II. DECISION

A. FACTUAL MATTER

A.1. Facts found to be proven

The Funds notified of the AIMI assessments subject to the present arbitral action are real estate investment funds, managed and administered by the Claimant.

Within the scope of the activity they develop, the said funds are, and were in 2017, holders of a portfolio of real property, and the holding of this type of assets constitutes the substratum of all the activity of those investment funds.

In that capacity, the Funds were notified of the following tax assessment acts for AIMI, relating to the year 2017, with reference to the real estate portfolio held by them:

• the AIMI assessment No. 2017..., of 30 June 2017, relating to the Closed Real Estate Investment Fund B..., in the total amount of €13,757.94;

• the AIMI assessment No. 2017..., of 30 June 2017, relating to the Open Real Estate Investment Fund C..., in the total amount of €15,632.23;

• the AIMI assessment No. 2017..., of 30 June 2017, relating to the Closed Real Estate Investment Fund D..., in the total amount of €79,690.08;

• the AIMI assessment No. 2017..., of 30 June 2017, relating to the E... Special Closed Real Estate Investment Fund (in liquidation), in the total amount of €6,090.84.

In the aforementioned assessments the TCA included the following real property:

[Table not reproduced in translation]

The Funds proceeded to make full and timely payment of the tax assessment acts described, in the total amount of €115,171.09.

A.2. Facts found to be unproven

With relevance for the decision, there are no facts that should be considered as unproven.

A.3. Substantiation of the proven and unproven factual matter

With regard to factual matter, the Court does not have to pronounce on everything that was alleged by the parties, but rather has the duty to select the facts that matter for the decision and to distinguish the proven matter from the unproven (cf. Article 123, No. 2, of the CTPC and Article 607, No. 3 of the CPC, applicable by virtue of Article 29, No. 1, subparagraphs a) and e), of the LFATM).

In this manner, the facts relevant to the adjudication of the case are chosen and delimited according to their legal relevance, which is established with regard to the various plausible solutions to the legal question(s) (cf. former Article 511, No. 1, of the CPC, corresponding to the current Article 596, applicable by virtue of Article 29, No. 1, subparagraph e), of the LFATM).

Thus, having regard to the positions taken by the parties, in light of Article 110/7 of the CTPC, and the documentary evidence attached to the proceedings, the facts listed above were considered proven, with relevance for the decision.

Allegations made by the parties and presented as facts, consisting of strictly conclusive statements, incapable of proof and whose veracity must be assessed in relation to the concrete factual matter consolidated above, were neither given as proven nor unproven.

B. ON THE LAW

The State Budget Law for 2017 (Law No. 42/2016, of 28 December) introduced the "Additional Tax on Municipal Property Tax" ("AIMI"), which entered into force on 1 January of that same year.

The regulation of AIMI was included in a specific section added to the IMI Code, comprising Articles 135-A to 135-K.

For what is now relevant, Articles 1 and 3 of Article 135-A of the IMI Code provide that the passive subjects of AIMI are "natural or legal persons who are owners, usufructuaries or superficiaries of urban properties situated in Portuguese territory" on 1 January of the year to which the Additional relates.

No. 2 of the same article provides that: "any structures or centres of collective interests without legal personality that appear in the tax rolls as passive subjects of the municipal property tax, as well as undivided estates represented by the head of household, shall be treated as equivalent to legal persons".

AIMI applies, in accordance with No. 1 of Article 135-B of the IMI Code, "to the sum of the tax patrimonial values of urban properties situated in Portuguese territory of which the passive subject is the holder" – and from this sum, the amount of €600,000 must be deducted whenever the passive subject is a natural person or an undivided estate.

Properties excluded from the objective scope of this Additional are "urban properties classified as 'commercial, industrial or for services' and 'other' in accordance with subparagraphs b) and d) of No. 1 of Article 6 of this Code", as provided in No. 2 of that same article.

The applicable rate is 0.4% for legal persons and 0.7% for natural persons and undivided estates, whenever the taxable value does not exceed €1,000,000, in accordance with No. 1 of Article 135-F of the IMI Code; and in cases where the taxable value exceeds €1,000,000, a rate of 1% applies when the passive subject is a natural person.

In accordance with No. 1 of Article 135-G and Article 135-H, both of the IMI Code, the additional tax in question is assessed annually, in June, based on the tax patrimonial values of properties subject to the tax and in relation to passive subjects listed in the tax rolls on 1 January of each year, and must be paid by the end of September.

As seen above, the Claimant raises the following issues:

• illegality, due to errors in factual and legal premises, of the application of AIMI to investment funds, by the holding of real property within the scope of their activity;

• subsidiarily, the illegality of the taxation of "land for construction" intended for "commercial, industrial or service" or "other" purposes, inasmuch as they are not covered by the objective scope of application of the norms under analysis;

• also subsidiarily, the unconstitutionality of the legal regime of AIMI, insofar as it applies to all "land for construction", as contrary to the principle of equality, enshrined in Article 13 of the CRP and to the principle of fiscal equality and contributory capacity enshrined in Article 104, No. 3 of that Fundamental Law.

The issues raised in the present arbitral proceedings have already been the subject of various arbitral decisions, in some parts reaching different conclusions, and reference may be made to, for this purpose, the arbitral awards delivered in proceedings 668/2017-T, 675/2017-T, 686/2017-T, 692/2017-T, 681/2017-T, 688/2017-T, 664/2017-T, 677/2017-T, 603/2017-T, 694/2017-T, 687/2017-T, 683/2017-T, 676/2017-T, 666/2017-T, 682/2017-T, 696/2017-T, and 6/2018-T[1].

Let us proceed, then.

a.

The Claimant submits that with the legislator "upon instituting AIMI, intended to create an effective tax on real estate wealth" and "intended to ensure that urban properties affected by economic activities would not be subject to taxation under AIMI, recognizing that the mere holding of such properties does not constitute (and cannot constitute) a factor demonstrating wealth, nor a sufficient indicator of the contributory capacity of the holders of such properties" as well as that "it is evident that the ratio legis underlying the rule of exclusion from objective scope of application, enshrined in No. 2 of Article 135-B of the IMI Code, was based, essentially, on the intention not to impose additional tax burden on passive subjects who, by virtue of their economic activities, hold properties for the pursuit of their respective corporate purpose".

As far as it is concerned, the Claimant alleges that the properties it holds are the true elements of its "productive process (...), whether as rental properties, whether as true inventories intended for future transformation, intended exclusively for the pursuit of the activity thereof and never being capable of being compared with elements demonstrating wealth", that "the holding of those properties represents, in truth, the substratum of all the activity of these funds – it is inherent, necessary, indispensable for the pursuit thereof", and that "taxing these properties would mean directly taxing an 'economic activity' – something the legislator expressly intended to avoid when creating AIMI.".

On this basis, the Claimant concludes that "it cannot (...) accept – or understand – that the TCA, through the assessment acts now disputed, made this new AIMI apply to the portfolio held by the Real Estate Investment Funds represented here" nor that that Authority "considered, in determining the tax patrimonial value subject to AIMI, the 'land for construction' whose potential use coincides with purposes of 'commercial, industrial or services'".

Thus, the Claimant seeks, in this part, an exclusion from the subjective scope of AIMI, including therein "the passive subjects who, by virtue of their economic activities, hold properties for the pursuit of their respective corporate purpose" and, in particular and for what is now relevant, the Real Estate Investment Funds.

As to this issue, the orientation of CAAD jurisprudence has been that taxation operates independently of the nature of the activity developed, and by way of example, reference may be made to the following decisions (regardless of the final decision regarding the merits of the arbitral request or not):

a) with regard to Real Estate Investment Funds – Proc. No. 664/2017-T and Proc. No. 686/2017-T;

b) financial institutions – Proc. No. 676/2017-T;

c) financial leasing institutions – Proc. No. 696/2017-T;

d) construction and urban development companies – Proc. No. 6/2018-T.

In this respect, it was written in the aforementioned process No. 664/2017-T that:

"In all this context, the understanding according to which it was intended to exclude from the scope of application of the tax properties affected by economic activities, on the pretext that it was legislative intention not to impose additional tax burden on passive subjects who possess properties by effect of their corporate purpose, has no support in the letter of the law nor in the rational and systematic elements of interpretation.", concluding that "the intended extension of the legislative formula used to properties affected by the economic activity of the company, regardless of the specific characterization as commercial, industrial or service properties, has no place whatsoever in light of general criteria of legal hermeneutics.".

Also here the aforementioned understanding is followed, noting additionally, that the argumentation presented by the Claimant is flawed in several of its premises.

Thus, the understanding that the legislator "upon instituting AIMI, intended to create an effective tax on real estate wealth" is not subscribed to; it is instead considered that AIMI corresponds in substance to the form, being an additional to the IMI, implementing what had been the understanding of some, including the Constitutional Court[2], who considered that "the item 28.1 of the TGIS presented itself as a 'supplementary rate of IMI'".

Neither are the conclusions of the Claimant subscribed to, according to which the legislator "intended to ensure that urban properties affected by economic activities would not be subject to taxation under AIMI, recognizing that the mere holding of such properties does not constitute (and cannot constitute) a factor demonstrating wealth, nor a sufficient indicator of the contributory capacity of the holders of such properties" as well as that "it is evident that the ratio legis underlying the rule of exclusion from objective scope of application, enshrined in No. 2 of Article 135-B of the IMI Code, was based, essentially, on the intention not to impose additional tax burden on passive subjects who, by virtue of their economic activities, hold properties for the pursuit of their respective corporate purpose".

In fact, in this regard, it is considered that the non-affectation of economic activities by AIMI was not an ultimate purpose of the legislator in the creation of AIMI, but rather a factor considered by the same at various levels, in the design of the legal regime thereof.

Thus, and in the first place, as the Claimant points out, the legislator excluded from the application of AIMI "urban properties" classified as "commercial, industrial or for services" and "other".

Beyond that, however, the legislator created distinct rates for legal persons and for natural persons, including an increase in cases where the taxable value exceeds €1,000,000, restricted to the latter, which cannot fail to be based, if not entirely, then certainly in large part, on the consideration that properties held by legal persons, as a rule, will be affected by economic activities.

It is not considered appropriate to accept, in the same manner, the understanding that the legislator recognized "that the mere holding of such properties does not constitute (and cannot constitute) a factor demonstrating wealth, nor a sufficient indicator of the contributory capacity of the holders of such properties". In fact, and this will be a patent reality and, as such, insurmountable, it will be undeniable that a legal person holding properties valued at €100,000,000.00 reveals a contributory capacity (in the perspective of the tax at issue), manifestly superior, to another legal person that, with the same purpose, holds properties valued at €100,000.00.

On the other hand, and as already mentioned, AIMI must be understood and treated as such, that is, as an additional to the IMI. Now, being so, how will the contributory capacity evidenced by legal persons through the holding of properties, even if affected by their productive activity, be precisely the same, whether with regard to subjection to AIMI, or with regard to subjection to IMI.

Thus, and in light of all the above, it is considered that the arbitral request should be denied in this part.

b.

With regard to the first subsidiary request formulated, the Claimant considers that "the legislator intended to tax properties intended for residential purposes. Such intention results from the wording of the law and, moreover, was at the genesis of the creation of this additional".

The Claimant further states that "having been clear the legislator's intention to exclude, through No. 2 of Article 135-B of the IMI Code, the application of AIMI to properties affected by economic activities, it should necessarily be understood that 'land for construction' affected by those activities are equally included in that exclusion rule", and for the Claimant, "to understand that 'land for construction' intended, in accordance with their respective property records, for purposes of 'commerce, industry, services' or 'other', are subject to AIMI – as has been understood by the TCA – is manifestly contrary to the spirit of the law and, moreover, is illegal" and that "the applicability of AIMI to this type of 'land for construction' would always demonstrate a manifest inconsistency in the legal regime in question".

The Claimant further points out that "only by mere absurdity would it be comprehensible and appropriate to the purposes pursued by AIMI the hypothesis of the TCA taxing a 'land for construction' with a potential use of 'industry' and not taxing a property (constructed) with the same use – even if that property is not actually being exploited in the exercise of an economic activity.".

In this context, for the Claimant, "the subjection of these lands for construction to AIMI causes a greater tax burden on this type of urban properties and, consequently, will necessarily have an impact on the economic activities that potentially will be developed on these properties", whereby "the taxation methodology adopted by the TCA, in the sense of including in the taxable value for the purposes of AIMI, the passive subjects holding 'land for construction' with the purposes identified by No. 2 of Article 135-B of the IMI Code, constitutes discriminatory treatment that violates, without more, the principle of equality, constitutionally enshrined in Articles 13 and 104, No. 3, of the Constitution of the Portuguese Republic ('CRP') and in Articles 5 and 55 of the General Tax Law ('GTL')".

Thus, the Claimant concludes, "the AIMI tax assessment acts, in the portion that taxes 'land for construction' intended for purposes of 'commercial, industrial or services' or 'other' – here corresponding to the value of tax of €79,373.70 (...) are tainted with manifest illegality, by error in factual and legal premises, and should be promptly annulled".

With regard to this subsidiary request, the Claimant seeks, in summary, the extension of objective exclusions from AIMI subjection, enshrined in No. 2 of Article 135-B of the CIMI, so as to include, also, urban properties classified as "land for construction", provided that the construction thereon envisaged is limited to any of the types to which said No. 2 refers, that is, to urban properties intended for purposes of "commercial, industrial or services" or "other".

With respect to this issue, now presented in the decision by the Claimant, arbitral jurisprudence has been divided.

Thus, for example, the decision delivered in process 686/2017-T concluded that "land for construction" without residential use should be excluded from taxation under AIMI, that is, with purposes of "commercial, industrial or services" or "other".

This decision, basing itself on the unity of the legal system, defends the possibility of extensive interpretation of the exclusion provided for in No. 2 of Article 135-B of the CIMI, in the case of those proceedings, with respect to urban properties classified as "for services", "as expressing a legislative intention to also exclude from taxation the lands intended for the construction of such properties".

For the said Arbitral Court, "Being the taxable event chosen as an index of contributory capacity the ownership of real estate portfolio of value considered elevated….", it would be a lack of coherence not to apply AIMI to buildings intended for commerce, industry or services and to apply it to the lands intended for their construction, especially since the value of the lands is incorporated in the value of the buildings.

The same Court further stated that, if it did not decide thus, it would conclude for the material unconstitutionality of the norm that provides for such taxation.

Already in the decisions delivered in proceedings No. 676/2017-T and 664/2017-T (the first concerns Real Estate Investment Funds and the second concerns a credit institution), the claims of the claimants therein were decided unfavourably, in the sense of eliminating the taxation of "land for construction", even if the envisaged construction is for purposes of "commercial, industrial or services".

With regard to the taxation of land for construction with non-residential purposes, both of the aforementioned decisions converge, and it may be read, in the first, as follows:

"Having the legislator defined a clause of exclusion by express and precise reference to certain species of urban properties, which are immediately identifiable in the context of the law, it is not possible to carry out an extensive interpretation so as to include therein other typologies that the legislator manifestly did not wish to consider. Being unable even to reach such interpretive result on the basis of mere considerations of a pragmatic order or of teleological identity".

Not contesting that from the point of view of fiscal policy the solution could have been different, and with great respect for other opinions, it is considered that the exclusion of taxation of all or part of "land for construction" was not the solution adopted, since No. 2 of Article 135-B of the CIMI only provides for the exclusion of taxation with respect to AIMI of urban properties classified as "commercial, industrial or for services" and "other", precisely in accordance with subparagraphs b) and d) of No. 1 of Article 6, which inevitably leads to the taxation of properties provided for in the two remaining subparagraphs of that same Article 6 of the CIMI, that is, urban properties classified as "residential" (subparagraph a)) or as "land for construction" (subparagraph c)).

Covered by the taxation in question, in accordance with the letter of the law, are all urban properties classified as "residential" and all urban properties classified as "land for construction", and not merely some of them, and if the legislator, in his norm of exclusion from taxation, intended to exclude part of the properties referred to in subparagraphs a) and c) of No. 1 of Article 6 of the CIMI, would have had all the possibilities to do so.

Similarly, the legislator could have altered the species of urban properties provided for in Article 6 of the CIMI, for example, by sub-dividing the lands for construction according to the purposes to which they are intended, which did not happen.

With regard to the possibility of extensive interpretation of the exclusion enshrined in said No. 2 of Article 135-B of the CIMI, in order to encompass lands for construction not intended for residential purposes – a solution adopted in the decisions that accepted claims similar to those of the Claimant, now at issue – it is considered, always with due respect to other understandings, that this should not be accepted.

Thus, and in the first place, it is believed that the identity of situations is not verified in light of the legally relevant criteria, necessary to carry out said extension of the clause of exclusion from objective subjection, that is, it does not appear that lands for construction are in an identical situation to that of constructed properties, from the point of view of the teleology of that exclusion clause.

From a teleological point of view, such clause shall underlie, in the first place[3], the purpose of not burdening with AIMI properties affected, or susceptible of immediate affectation, to productive processes, lands for construction not being endowed with such characteristics, given that whilst a constructed property will be, or be susceptible of being immediately, affected to productive processes, lands for construction are not in such a situation.

As, moreover, the Constitutional Court itself has already recognized, there are fundamental and relevant differences between a constructed property and land for construction.

In the words of that high Court[4]:

"For fiscal purposes, properties (...) are clearly distinguished from lands for construction, in accordance with Article 6 of the Code of Municipal Property Tax (CIMI), the first of those categories being comprised of buildings or constructions already existing (...), while the second consists exclusively of lands for which a right to build buildings intended for that or other purposes is consolidated by an administrative act of prior control of an urban development operation.

Thus, whilst buildings (...) correspond to a real buildability, definitively incorporated in the legal sphere of its holder, lands for construction correspond to merely potential buildability, legally consolidated in the legal sphere of the property owner, but not yet materialized.

That is, the taxation of properties (...) is based on existing reality, on corporeal things, unlike the taxation of lands for construction, which is based on building rights, on future things, as indeed evidenced by Article 45 of the CIMI, establishing that the tax patrimonial value of the latter is determined exclusively by the volume and quality of the building to be constructed on the land, and not by its current characteristics.

It will be said, correctly, that both correspond to real estate portfolio (...). And that, by its real estate value, both are capable of translating a certain form of wealth. But the comparisons end there, because, precisely, the different nature of these goods does not permit equating the contributory capacity of their respective owners, current or future, based solely on their affectation and their tax patrimonial value (TPV)."

In fact, properties already built possess a material reality corresponding to the typology that befalls them. That is, to a property built and licensed for, or having as normal destination, commerce, industry or services, will correspond a material reality adequate to such purposes and, for what is relevant, objectively distinct from a property built and licensed, or with normal destination, for residential purposes.

Lands for construction, on the other hand, are distinguished from other lands in a purely legal plane, that is, depending on an action of a public entity (granting of a license or authorization, admission of prior notification or issuance of favourable prior information of land subdivision or construction operation - cf. Article 6/3 and 37/3 of the CIMI) or of the owners (declaration of purpose in the acquisition title; cf. Article 6/3 of the CIMI), to which the Law attributes certain legal effects.

Thus, in function of the aforementioned material differentiation, the alteration of the affectation of a land for construction, from the point of view of the notes relevant for the problematic at issue, may be simple, requiring merely, for example, a mere declaration in the acquisition title, the presentation and admission of a prior notification, or the presentation and approval of a prior information request.

By contrast, the alteration of the purpose of a building constructed, from residential to commerce/industry/services, or vice versa, will imply, from the point of view of normality, the carrying out of more or less profound works (and necessary licensing).

It is further added that a constructed property has incorporated a significant value corresponding to the construction, which, even in cases where it is not concretely affected by the intended use, will constitute a natural incentive for its economic exploitation since, always from the point of view of normality, a constructed property will not only fail to generate income, as it will lose value (due to its deterioration) by its non-use.

A land for construction, on the other hand, not only does not incorporate, per se, any natural incentive for its construction and subsequent affectation to a productive activity, as, also from a point of view of normality, the contrary may precisely occur, that is, depending on certain market conditions that create expectations of merely speculative gains, there may be incentives for their respective owners to maintain their condition as non-built lands.

In this respect, the Claimant states that the subjection of the lands for construction in question to AIMI "causes a greater tax burden on this type of urban properties and, consequently, will necessarily have an impact on the economic activities that potentially will be developed on these properties".

Now, in light of the teleology discovered in the interpreted norm, set out above, the fact is that such impact may even be positive, insofar as the taxation of lands for construction may constitute an incentive for their construction, thus accelerating the effective use of the properties in productive activities.

All that has been exposed, it is believed, will justify a distinction of treatment, in line with the regime legally enshrined, and contrary to the extension of the clause of non-objective subjection by way of extensive interpretation.

Nevertheless, it shall further be added that a comprehensive understanding of AIMI within the framework of the IMI regime will point, precisely, toward the true purpose of the legislator to subject to the former all lands for construction, and not merely those intended for residential purposes.

Let us see.

In the design of AIMI, and in the sequence of what was the evolution of taxation under item 28.1 of the CIS, the legislator made it very clear (through, first of all, the nomenclature and systematic nature of the taxation created, as well as the express reference to the relevant IMI norms) its intention that the relevant categories for the taxation in question be delineated in accordance with the criteria proper to the CIMI.

And, under this Code, lands - which is the category that now concerns us - may be integrated into the categories of:

• rustic; or

• urban;

  • "for construction" of buildings intended for residential purposes, commerce, services or industry;

  • intended for "other" purposes.

The legislator, in the AIMI regime created, excluded from subjection thereto the lands qualified as "rustic", by way of exclusive subjection of urban properties in No. 1 of Article 135-A, and the lands qualified as "urban" intended for "other" purposes, by way of the exclusion clause of No. 2 of that aforementioned article, and the non-exclusion of lands "for construction" of buildings with certain destinations (namely commerce, services or industry), cannot fail to be considered sufficiently based on considerations of a material order, as has already been seen.

Finally, it cannot fail to be considered relevant in this matter, that the Administrative Tax Court has understood that for the determination of the TPV of lands for construction the affectation of the projected construction is irrelevant.

Thus, in the Administrative Tax Court Award of 20-04-2016, delivered in process 0824/15[5], it was considered that:

"This norm results in the formula above transcribed only having application to the urban properties discriminated therein, that is, those which, already built, are for residential purposes, commerce, industry and services.

However, the legislator did not include therein the lands for construction which it also classifies as urban properties in Article 6 of the CIMI.

For the determination of the tax patrimonial value thereof there is the norm of Article 45 already mentioned where only the area of implantation of the building to be constructed and the adjacent land and the characteristics of No. 3 of Article 42 are relevant.

The remaining coefficients are not therein included since they can only relate to the buildings, as such.

The affectation coefficient can only be relevant vis-à-vis the proven use of the constructed property and likewise the comfort and quality one.

Such multiplier coefficients of the tax patrimonial value only concern the constructed part but have no real basis of support in the potential that the land for construction offers.".

And, further on, in the same award:

"But taking into account the reality the legislator established for the determination of the tax patrimonial value of this species of properties a specific rule – that contained in Article 45 where it is reiterated that account is taken of the value of the area of implantation of the building to be constructed and the value of the land adjacent to the implantation as well as the characteristics of accessibility, proximity, services and location described in No. 3 of Article 42. Having regard to the approved construction project and the provision of No. 2 of Article 45 of the C.I.M.I.

Which means that in the determination of the tax patrimonial value thereof of lands for construction the mathematical formula enshrined in Article 38 of the CIMI is not applicable.

And being so the affectation and quality and comfort coefficients related to the property to be constructed also cannot and should not be taken into account in that appraisal.

Indeed the affectation coefficient has to do with the type of use of the property already built and the same applies to the quality and comfort coefficient.

In lands under construction the approved buildings are merely potential and it is the value of that constructive capacity, generating an increase in tax patrimonial value or wealth for its owner that one seeks to tax. And not factors not yet materialized."

The aforementioned understanding was sanctioned by an award of the Full Bench of the Tax Contentious Division of the Administrative Tax Court of 21-09-2016, delivered in process 01083/13[6], in whose summary it is synthesized that:

"III - In the determination of the tax patrimonial value of lands for construction, the provision of Article 45 of the Code of Municipal Property Tax must be observed, and there is no place for the consideration of the comfort quality coefficient (cq).

IV - Article 45 of the CIMI is the specific norm that regulates the determination of the tax patrimonial value of lands for construction.

V - The comfort quality coefficient, a multiplier factor of the tax patrimonial value contained in the mathematical expression of Article 38 of the CIMI with which the tax patrimonial value of urban properties for residential, commercial, industrial and service purposes is determined, cannot be applied analogically as it is susceptible of altering the tax base interfering with the incidence of the tax."

In this manner, it is concluded that in the determination of the TPV within the framework of the CIMI the destination of the projected construction on the "lands for construction" is not relevant, not being distinguished, from the point of view of patrimonial taxation and, consequently, of the manifestation of contributory capacity, lands for construction of residential buildings, from lands for construction of buildings for commerce, industry or services.

On the contrary, and in function of the application of the affectation coefficient enshrined in Article 41 of the CIMI, in constructed buildings, the destination of the buildings is reflected in the patrimonial value, and consequently in the contributory capacity, considered for the purposes of taxation.

Under AIMI, in light of what has already been stated regarding the nature of this taxation (as an additional to the IMI), there will be no justifications to diverge from such criterion, that is, to consider that the holding of "lands for construction" with buildings projected for distinct purposes, signals different contributory capacities.

Having regard to all the above, considering that there should be no extension, by way of extensive interpretation, of the objective exclusions from AIMI subjection, enshrined in No. 2 of Article 135-B of the CIMI, so as to include therein, also, urban properties classified as "lands for construction", provided that the construction thereon envisaged is limited to any of the types to which said No. 2 refers, that is, to urban properties intended for purposes of "commercial, industrial or services" or "other", this arbitral request should also fail.

c.

Also by way of subsidiary claim, the Claimant considers that the regime of taxation under AIMI is contrary to the principle of equality, enshrined in Article 13, and to the principle of fiscal equality and contributory capacity enshrined in Article 104, No. 3, both of the CRP, inasmuch as, in its understanding, the legal regime of AIMI, in particular its Articles 135-A and 135-B, both of the IMI Code, and the taxation resulting therefrom, promote differentiated treatment and unjustified inequality among taxpayers, and "the application of AIMI to the real estate portfolio held by entities dedicated to real estate exploitation (here comprising the purchase, sale, construction, development and leasing), could only result from the idea that those properties, productive factors of these companies and means for the exercise of their economic activity, constitute an index of increased contributory capacity – which cannot be accepted".

The Claimant further relies, in this matter, on Award No. 250/2017 of the Constitutional Court, of 24 May 2017, delivered in process No. 156/20, already cited above.

In this matter, the Claimant repeats in large part arguments previously presented.

Thus, the Claimant again considers "evident that, upon instituting AIMI, the legislator intended to tax properties intended for residential purposes, as effective manifestations of wealth" and that "it was clear the legislator's intention to exclude from the scope of application of AIMI all properties affected by economic activities", which, as has been seen, is not subscribed to.

The Claimant also asks "if 'commercial, industrial or service properties' and 'other properties' are expressly excluded from the scope of application of AIMI – because affected by economic activities, which the legislator did not wish to burden, – how can 'lands for construction' affected by those same purposes be included in that scope?".

The answer to such question, as has also been seen, goes in the direction of there being a substantial difference between lands for construction and already constructed buildings, and that the latter are susceptible of being, or of being immediately affected, to the activities to which they are intended, contrary to the former.

Thus, contrary to the Claimant, it is not believed that "By making that distinction – besides violating the spirit of the law, as already demonstrated above – we would be distinguishing realities that cannot be distinguished for this purpose: on the one hand, i) commercial, industrial, service or other properties already built and on the other, ii) lands for construction intended for commerce, industry, services or other.", the alleged violation of the principle of equality not being verified.

The Claimant further alleges in this respect, that "if the taxation under AIMI of properties held by these entities were to be accepted, the real estate activity sector would be truly penalized, which, naturally, having no rational justification, cannot be accepted" and that "entities in this sector would assume, thus, an additional burden in relation to the generality of companies, based on a 'hypothetical index of contributory capacity' that has no correspondence with reality".

In this regard, as has also been seen, the contributory capacity targeted is the same as that of the IMI, to which the AIMI is added, and the legislator chose to enshrine lighter taxation rates for legal persons, in relation to natural persons.

As for the tax burden of the real estate sector, in relation to other sectors, note, first and foremost, that within the economic sector in question, companies are treated equally, and it is contained within the scope of the legislator's freedom of action, being, moreover, a common and accepted practice, interference in economic activities, fiscally incentivizing some, and fiscally burdening others.

It is further added that, in the case, contrary to what the Claimant points out, we are not faced with a burden, but rather a non-exemption.

For, well understood, the normative structure created for AIMI consists of a general coverage of that[7], superimposed on properties subject to IMI, followed by the removal of application with respect to certain type of properties.

In this manner, it is not the Claimant – or the properties held by it and on which tax was assessed – that find themselves, by being taxed, in an exceptional situation of burden, but rather the non-exemption sought – by way of subjective or objective exclusion – which, to be recognized, would be of an exceptional character.

Furthermore, the Claimant's argumentation on constitutionality ends up reflecting some argumentation contained in constitutional jurisprudence relating to, by now repealed, taxation under item 28.1 of the Tax Stamp Code, particularly that which was condensed in the several times referenced Award No. 250/2017 of the Constitutional Court, of 24 May 2017, delivered in process No. 156/20, also invoked by the Claimant.

Therein it is stated, among other things, the following, with correspondence to the issues now raised by the Claimant:

• "the norm whose validity is disputed confused manifestations of wealth with factors of production of that same wealth.";

• "if behind the tax imposed on the owner of a residential property of tax patrimonial value exceeding one million euros there may be a taxpayer with sufficient economic force to bear the respective tax burden, behind the tax imposed on the owner of a land for construction there will normally be an entrepreneur, as a rule in the form of a commercial company dedicated to real estate development, about whose economic force we know nothing. In truth, we cannot presume that that taxpayer has an economic force proportional to the value of the land, which is merely instrumental in relation to its economic activity. We do not know what margin of profit it will draw from the exercise thereof, if it is in legal and economic conditions to develop it, or if it will not even have a negative net situation.";

• "the different reality of the taxation of lands for construction, which has more impact on the economic activity developed by its owner than on the value of the asset itself. With the aggravating factor that its respective tax burden, if it does not render that activity permanently unviable, will end up being borne by the final consumer of the real estate products that result from it, whose contributory capacity we cannot presume without knowing the respective building typology and value.".

And, further on:

"Because item 28.1, moreover, disregards the legal nature of taxpayers, not distinguishing natural individuals from legal persons, nor the specific purpose pursued by the latter, it will apply indiscriminately, for example, to a luxury home in a tourist development in the Algarve and to a land for construction of a collective residential building in a cooperative regime in the metropolitan suburbs of Lisbon or Porto."

Thus, from the aforementioned award of the Constitutional Court, it seems possible to draw the understanding, sustained by the Claimant, that the non-consideration of the purpose of the holding of the property and/or the quality of the subject that holds it, may generate the unconstitutionality of the tax.

This understanding is not subscribed to, however, in line with the dissenting opinion issued in the aforementioned award, by the illustrious Counselor Manuel da Costa Andrade.

Thus, and the Constitutional Court itself evidences this, one thing is the taxation of income, another is that of patrimony, and this, by nature, will attend essentially to the tax patrimonial value of the assets held, and not to the personal situation of its holder, and, even in function of reasons of practicability, the factors of personalization are few.

The type of arguments presented by the Constitutional Court in the matter in question, is based essentially on needs of personalization that appear, as formulated, not only impractical, but also, in some way, subversive.

In fact, the aforementioned considerations will be, forthwith, and without more, directly transposable, to the IMI, to the Vehicle Tax, to the IUC, to the IECs, to the Corporate Income Tax and even, in some way, to the VAT. Also therein the taxable events abstract, often exactly in the same manner, if not in an even more pronounced manner, from the personal situation of their respective passive subjects.

Thus, also under those taxes, the said distinction is not made, as a rule, between manifestations of wealth (contributory capacity) and factors of production of that same wealth (that is: a taxable event subject to IMI, Vehicle Tax, IUC, IECs, Corporate Income Tax, will abstract, as a rule, from the circumstance that the same took place within the framework of "consumption" [broadly speaking] or of "production of wealth"), and the differentiation will occur, as in the case of AIMI, by way of the consideration as a cost of the tax borne, under the income tax regime (cf. Article 23/2/f) of the CCITC).

It is further added that there are other situations peacefully accepted - precisely in homage to the principle of practicability - of abstraction from the personal situation of passive subjects, significantly more evident than those pointed out by the Constitutional Court, and which, should the understanding of that High Court be accepted, would be irremediably marred by unconstitutionality. Consider, first and foremost, the situation of someone who acquires a property with recourse to credit guaranteed by a mortgage on the same property, and it being, from a point of view not only personal, but also patrimonial, evident the disparity of contributory capacity ("wealth") between said passive subject, and the holder of a property of equal value, but entirely paid.

On the other hand, properly understood, it is believed that the concerns of the Constitutional Court concern more the manner of valuation of the patrimony, than its subjection. That is: if the tax patrimonial value is justly fixed, and using the example used by the Constitutional Court, the owner of a luxury home in a tourist development in the Algarve and of a land for construction of a collective residential building in a cooperative regime in the metropolitan suburbs of Lisbon or Porto, will evidence, from the point of view of patrimonial perspective, the same contributory capacity, that is, will be holders of an asset with identical tax patrimonial value.

Thus, and in light of the above, it is considered that consequences should not be drawn from the jurisprudence of the Constitutional Court at issue, under the heading of constitutionality of the AIMI norms, applied in the case, namely with regard to the violation of the Constitutional norms pointed out by the Claimant, the arbitral request therefore being denied also in this part.

C. DECISION

It is therefore decided in this Arbitral Court to wholly dismiss the arbitral request filed and, in consequence:

• To acquit the Respondent of the claim;

• To maintain in the legal system the tax assessment acts subject to the present arbitral action; and

• To condemn the Claimant in the costs of the proceedings, in the amount fixed below.

D. Value of the Proceedings

The value of the proceedings is fixed at €115,171.09, in accordance with Article 97-A, No. 1, a), of the Code of Tax Procedure and Process, applicable by virtue of subparagraphs a) and b) of No. 1 of Article 29 of the LFATM and No. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The value of the arbitration fee is fixed at €3,060.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Claimant, since the request was wholly dismissed, in accordance with Articles 12, No. 2, and 22, No. 4, both of the LFATM, and Article 4, No. 4, of the aforementioned Regulation.

Let notice be given.

Lisbon, 03 September 2018

The Presiding Arbitrator

(José Pedro Carvalho)

The Arbitrator Member

(Suzana Fernandes da Costa)

The Arbitrator Member

(Arlindo José Francisco)

[1] All available at https://caad.org.pt/tributario/decisoes/.

[2] Cf. Award of 24-05-2017, delivered in process 250/2017, available at: http://www.tribunalconstitucional.pt/tc/acordaos/.

[3] Except for some marginal situations relating to properties affected by public services, or non-commercial activities, covered by the species "other".

[4] Cf. Award delivered in process 250/2017, already cited.

[5] Available at www.dgsi.pt.

[6] Ibid.

[7] Excepting, from 2018, municipal companies; cf. No. 4 of Article 135-A of the CIMI.