Process: 667/2017-T

Date: September 5, 2018

Tax Type: IMI

Source: Original CAAD Decision

Summary

CAAD Process 667/2017-T addressed whether real estate investment funds are subject to Portugal's Additional Municipal Property Tax (AIMI), introduced in 2017. A fund management company challenged three AIMI assessments totaling €123,840.15 for properties held by investment funds it managed. The claimant argued that applying AIMI to investment funds was illegal due to errors in factual and legal grounds, as property ownership forms the essential activity of these funds. Subsidiarily, it contended that 'land for construction' designated for commercial, industrial, or service purposes should be excluded from AIMI's objective scope under Article 135-B of the Municipal Property Tax Code. Finally, the claimant raised constitutional concerns, arguing that taxing all construction land violated equality principles under Article 13 of the Portuguese Constitution and the ability-to-pay principle under Article 104(3). The arbitral tribunal, constituted under the Legal Regime for Arbitration in Tax Matters (LRAT), confirmed its competence to hear the case. The facts established that the investment funds held a real estate portfolio as their core activity and had paid the contested assessments in full. This case represents a significant challenge to AIMI's application scope, questioning whether the tax regime properly accounts for the structural nature of investment funds and whether constitutional safeguards regarding tax equality and ability-to-pay were respected in the legislation's design, particularly concerning construction land classifications.

Full Decision

ARBITRAL DECISION

I – REPORT

On 21-12-2017, A... – Sociedade Gestora de Fundos de Investimento Mobiliário, S.A. (hereinafter abbreviated as "Claimant"), holding tax identification number ... and with registered office at Rua ..., ..., ...-... Lisbon, in its capacity as investment fund manager and in representation of B... – Real Estate Investment Fund, holding tax identification number ..., C... – Real Estate Investment Fund, holding tax identification number ..., and D... – Open Real Estate Investment Fund, holding tax identification number ..., filed a request for constitution of an arbitral tribunal pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by Article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as LRAT), seeking the declaration of illegality of the tax assessment acts for the Additional Municipal Property Tax ("AIMI") bearing numbers 2017 ..., 2017 ..., and 2017 ..., issued by the Tax and Customs Authority ("TCA"), with reference to the year 2017, in the total amount of € 123,840.15.

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

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

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

  • subsidiarily, it is unconstitutional the legal regime of AIMI, insofar as it applies to all "land for construction," contrary to the principle of equality, enshrined in Article 13 of the CRP and to the principles of tax equality and taxpaying capacity enshrined in Article 104, No. 3 of that fundamental law.

On 22-12-2017, the request for constitution of the arbitral tribunal was accepted and automatically notified to the TCA.

The Claimant did not appoint an arbitrator; accordingly, pursuant to Article 6, No. 2, paragraph a) and Article 11, No. 1, paragraph a) of the LRAT, the President of the Deontological Council of CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated their acceptance of the task within the applicable period.

On 12-02-2018, the parties were notified of these appointments and did not express any objection to any of them.

In accordance with Article 11, No. 1, paragraph c) of the LRAT, the collective Arbitral Tribunal was constituted on 05-03-2018.

On 17-04-2018, the Respondent, duly notified for this purpose, submitted its response defending itself by way of challenge.

Pursuant to Article 16, paragraphs c) and e), and Article 29, No. 2, both of the LRAT, the holding of the meeting referred to in Article 18 of the LRAT was dispensed with.

A period was granted for the submission of written arguments, which the parties abstained from making.

A period of 30 days was set for the rendering of final decision, after the expiration of the period for submission of arguments by the Respondent. Subsequently, that first period was extended until the expiration of the period set in Article 21/1 of the LRAT.

The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to Articles 2, No. 1, paragraph a), 5, and 6, No. 1, of the LRAT.

The parties have legal personality and capacity, are legitimate, and are legally represented, pursuant to Articles 4 and 10 of the LRAT and Article 1 of Ordinance No. 112-A/2011, of 22 March.

The proceedings are free from nullities.

Accordingly, there is no obstacle to the adjudication of the case.

Having considered all of the foregoing, it is proper to render this:

II. DECISION

A. FACTUAL MATTERS

A.1. Facts Established as 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 conduct, the said Funds are, and were in 2017, holders of a portfolio of properties, 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 tax assessment acts for AIMI subject to the present arbitral action, relating to the year 2017, with reference to the real property portfolio held by them.

  • In the said assessments, the TCA included the following properties: [details omitted in document summary]

  • The Funds made full and timely payment of the tax assessment acts described, in a total amount of € 123,840.15.

A.2. Facts Established as Not Proven

With relevance to the decision, there are no facts that should be considered as not proven.

A.3. Justification of the Proven and Unproven Factual Matters

Regarding the factual matters, the Tribunal need not pronounce on everything alleged by the parties; rather, it has the duty to select the facts that are relevant to the decision and to distinguish proven from unproven matters (cf. Article 123, No. 2, of the CPPT and Article 607, No. 3 of the CPC, applicable by virtue of Article 29, No. 1, paragraphs a) and e), of the LRAT).

Thus, the pertinent facts for adjudication of the case are chosen and delimited according to their legal relevance, which is established in light of the various plausible solutions to the question(s) of law (cf. former Article 511, No. 1, of the CPC, corresponding to current Article 596, applicable by virtue of Article 29, No. 1, paragraph e), of the LRAT).

Thus, taking into account the positions assumed by the parties, in light of Article 110/7 of the CPPT, and the documentary evidence joined to the case file, the facts listed above were considered as proven, with relevance to 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 matters consolidated above, were not given as either proven or not proven.

B. LAW

The State Budget Law for 2017 (Law No. 42/2016, of 28 December) introduced the "Additional 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 Municipal Property Tax Code, comprising Articles 135-A to 135-K.

For present purposes, Articles 135-A, Nos. 1 and 3, of the Municipal Property Tax Code establish that the passive taxpayers of AIMI are "natural or legal persons who are owners, usufructuaries, or holders of surface rights 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 centers of collective interests without legal personality that appear in the property records as passive taxpayers of the municipal property tax, as well as indivision succession represented by the head of household, are deemed equivalent to legal persons."

AIMI is levied, in accordance with Article 135-B, No. 1, of the Municipal Property Tax Code, "on the sum of the tax asset values of urban properties situated in Portuguese territory of which the passive taxpayer is the owner" – from which sum, the amount of € 600,000.00 shall be deducted whenever the passive taxpayer is a natural person or an indivision succession.

Excluded from the objective scope of this Additional are "urban properties classified as 'commercial, industrial or services' and 'other' in accordance with paragraphs 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 indivision successions, provided that the taxable amount does not exceed € 1,000,000.00, pursuant to Article 135-F, No. 1, of the Municipal Property Tax Code; where the taxable amount exceeds € 1,000,000.00, a rate of 1% applies when the passive taxpayer is a natural person.

Pursuant to Article 135-G, No. 1, and Article 135-H, both of the Municipal Property Tax Code, the additional tax in question is assessed annually, in the month of June, based on the tax asset values of the properties subject to tax and with respect to passive taxpayers appearing in the property records 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 the factual and legal grounds, of the application of AIMI to investment funds, due to property ownership within the scope of their activity;

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

  • also subsidiarily, the unconstitutionality of the legal regime of AIMI, insofar as it applies to all "land for construction," contrary to the principle of equality, enshrined in Article 13 of the CRP and to the principles of tax equality and taxpaying 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 instances of divergent import, and reference may be made to the arbitral awards rendered 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 examine them, therefore.

a.

The Claimant contends that the legislator "in establishing AIMI, intended to create an effective tax on real property wealth" and "aimed to ensure that urban properties assigned to economic activities would not be subject to AIMI taxation, recognizing that mere ownership of such properties does not constitute (and cannot constitute) a factor demonstrating wealth, nor a sufficient indicator of the taxpaying capacity of the holders of such properties"; and that "it is evident that the legislative intent underlying the rule excluding objective scope of application, enshrined in No. 2 of Article 135-B of the Municipal Property Tax Code, was based, essentially, on the intention not to impose additional fiscal burden on passive taxpayers who, by virtue of their economic activities, hold properties for the pursuit of their respective corporate purpose."

From the Claimant's perspective, the legislator recognized "that mere ownership of such properties does not constitute (and cannot constitute) a demonstrative factor of wealth, nor a sufficient indicator of the taxpaying capacity of the holders of such properties"; and "it is evident that the legislative intent underlying the rule of exclusion, enshrined in No. 2 of Article 135-B of the Municipal Property Tax Code, was based, essentially, on the intention not to impose additional fiscal burden on passive taxpayers who, by virtue of their economic activities, hold properties for the pursuit of their respective corporate purpose."

As for itself, the Claimant alleges that the properties it holds are the true elements of its "productive process (...), whether as rental assets, or as true inventories intended for future transformation, destined exclusively for the pursuit of the activity of the same and never comparable to elements demonstrating wealth"; that "the holding of those properties represents, in fact, the substratum of all the activity of these funds – it is inherent, necessary, indispensable to the pursuit thereof"; and that "to tax these properties would mean to tax directly an 'economic activity' – something that 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 in dispute, has applied this new AIMI to the assets held by the Real Estate Investment Funds represented herein"; nor that that Authority "has considered, in determining the tax asset value subject to AIMI, the 'land for construction' whose potential use coincides with 'commercial, industrial or services' purposes."

The Claimant seeks, in summary, in this part, an exclusion from the subjective scope of AIMI, including therein "passive taxpayers who, by virtue of their economic activities, hold properties for the pursuit of their respective corporate purpose," and in particular, for present purposes, Real Estate Investment Funds.

On this question, the case law orientation of CAAD has been that taxation operates independently of the nature of the activity conducted, and by way of example, the following decisions may be consulted (regardless of the final decision as to the merits or otherwise of the arbitral request):

a) regarding real estate investment funds – Proc. No. 664/2017-T and Proc. No. 686/2017-T;

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

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

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

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

"In all this context, the understanding that it was intended to exclude from the scope of application of the tax the properties assigned to economic activities, on the pretext that it was the legislative intention not to impose additional fiscal burden on passive taxpayers who own properties as a result of their corporate purpose, has no support in the letter of the law nor in the rational and systematic elements of interpretation." It was concluded that "the intended extension of the legislative formula used to properties assigned to the economic activity of the company, regardless of the specific characterization as commercial, industrial or services properties, has no place in light of general criteria of legal hermeneutics."

This understanding is also followed here, noting, additionally, that the argumentation presented by the Claimant fails in several of its assumptions.

Thus, the understanding is not subscribed that the legislator "in establishing AIMI, intended to create an effective tax on real property wealth"; rather, AIMI corresponds in substance to form, being an additional to the Municipal Property Tax, realizing what had been the understanding of some, including the Constitutional Court[2], which considered that "item 28.1 of TGIS was assumed to be a 'supplementary Municipal Property Tax rate'."

Neither are the Claimant's conclusions subscribed, according to which the legislator "aimed to ensure that urban properties assigned to economic activities would not be subject to AIMI taxation, recognizing that mere ownership of such properties does not constitute (and cannot constitute) a factor demonstrating wealth, nor a sufficient indicator of the taxpaying capacity of the holders of such properties"; nor that "it is evident that the legislative intent underlying the rule excluding objective scope of application, enshrined in No. 2 of Article 135-B of the Municipal Property Tax Code, was based, essentially, on the intention not to impose additional fiscal burden on passive taxpayers who, by virtue of their economic activities, hold properties for the pursuit of their respective corporate purpose."

Indeed, on this point, it is considered that the non-application of economic activities to AIMI was not an ultimate purpose of the legislator in the creation of AIMI, but rather a factor considered by the legislator at various levels in the design of its legal regime.

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

Furthermore, however, the legislator created distinct rates for legal persons and for natural persons, including a surcharge in cases where the taxable amount exceeds € 1,000,000.00, restricted to the latter, which cannot fail to be founded, if not entirely, at least in large part, on the consideration that the properties held by legal persons will, as a rule, be assigned to economic activities.

The understanding is not deemed to be acceptable in like manner, that the legislator recognized "that mere ownership of such properties does not constitute (and cannot constitute) a demonstrative factor of wealth, nor a sufficient indicator of the taxpaying capacity of the holders of such properties." Indeed, and this will be a notorious and thus insurmountable reality, it will be undeniable that a legal person holding properties worth € 100,000,000.00 reveals a taxpaying capacity (from the perspective of the tax in question), manifestly superior to another legal person which, with the same purpose, holds properties worth € 100,000.00.

On the other hand, and as was already mentioned, AIMI should be understood and treated as such, that is, as an additional to the Municipal Property Tax. Now, thus being, the taxpaying capacity evidenced by legal persons through the holding of properties, even if assigned to their productive activity, is precisely the same, whether with respect to subjection to AIMI, or with respect to subjection to Municipal Property Tax.

Thus, and in light of all of the foregoing, it is deemed that the arbitral request should be denied in this respect.

b.

With respect to the first subsidiary claim raised, the Claimant considers that "the legislator intended to tax residential properties. This intention results from the wording of the law and was, furthermore, at the genesis of the creation of this additional."

The Claimant further states that "having made clear the legislator's intention to exclude, through No. 2 of Article 135-B of the Municipal Property Tax Code, the application of AIMI to properties assigned to economic activities, it should necessarily be understood that 'land for construction' assigned to those activities are likewise included in that exclusion rule"; and that, for the Claimant, "To hold that 'land for construction' intended, in accordance with the 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, furthermore, is illegal"; and that "the applicability of AIMI to this type of 'land for construction' would always demonstrate a manifest inconsistency of the legal regime in question."

The Claimant further points out that "only by sheer absurdity would it be considered understandable and appropriate to the ends aimed at by AIMI the hypothesis that the TCA would tax a 'land for construction' with a potential use of 'industry' and not tax a building with the same use – even if that property is not actually being exploited in the course of an economic activity."

In this context, for the Claimant, "the subjection of these lands for construction to AIMI causes a greater fiscal burden on this type of urban properties and, consequently, will not fail to have an impact on the economic activities that will potentially be developed on these properties"; therefore, "the taxation methodology adopted by the TCA, in the sense of including in the taxable value for purposes of AIMI, passive taxpayers holding 'land for construction' with the purposes identified by No. 2 of Article 135-B of the Municipal Property Tax Code, constitutes discriminatory treatment that offends, 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 ("LGT")."

Thus, the Claimant concludes, "the AIMI tax assessment acts, in the portion that taxes 'land for construction' intended for 'commercial, industrial or services' purposes or 'other' – here corresponding to the amount of tax of € 28,383.85."

Regarding this subsidiary claim, the Claimant seeks, in summary, the broadening of the objective exclusions from AIMI subjection, enshrined in No. 2 of Article 135-B of the Municipal Property Tax Code, so as to include therein, also, urban properties classified as "land for construction," provided that the construction envisioned thereon is referable to one of the types referred to in the said No. 2, that is, to urban properties intended for "commercial, industrial or services" purposes or "other."

With respect to this question, as presented by the Claimant's decision, the arbitral case law has been divided.

Thus, for example, the decision rendered in proceeding 686/2017-T concluded that "land for construction" without residential assignment, that is, intended for "commercial, industrial or services" purposes or "other," should be excluded from AIMI taxation.

That decision, based on the unity of the legal system, advocates the possibility of extensive interpretation of the exclusion provided in No. 2 of Article 135-B of the Municipal Property Tax Code, 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 those properties."

For the said Arbitral Tribunal, "Since the taxable event chosen as an index of taxpaying capacity is the ownership of real property portfolio of value considered high…," 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, all the more so since the value of the lands is incorporated into the value of the buildings.

That same Tribunal further stated that, if it had not so decided, it would have concluded for the material unconstitutionality of the norm providing for such taxation.

Already in the decisions rendered in proceedings No. 676/2017-T and No. 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 unfavorably, in the sense of setting aside the taxation of "land for construction," even if the envisioned construction is for "commercial, industrial or services" purposes.

With respect to the taxation of land for construction with non-residential purposes, both of the said decisions converge, and the following may be read in the first:

"Having the legislator defined an exclusion clause 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 effect an extensive interpretation so as to include therein other typologies that the legislator manifestly did not wish to consider. It cannot even reach that interpretive result on the basis of mere considerations of a pragmatic nature or of teleological identity."

While not contesting that from the perspective of fiscal policy the solution could have been different, and reserving the greatest respect for other opinions, it is considered that the exclusion from taxation of all or part of "land for construction" was not the solution adopted, since No. 2 of Article 135-B of the Municipal Property Tax Code only provides for exclusion from taxation with respect to AIMI of urban properties classified as "commercial, industrial or services" and "other," precisely in accordance with paragraphs b) and d), of No. 1 of Article 6, which necessarily leads to the taxation of the properties provided for in the two remaining paragraphs of that same Article 6 of the Municipal Property Tax Code, that is, urban properties classified as "residential" (par. a)) or as "land for construction" (par. 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 just some of them; and if the legislator, in its rule excluding taxation, intended to exclude part of the properties referred to in paragraphs a) and c), of No. 1 of Article 6 of the Municipal Property Tax Code, it had every opportunity to do so.

In like manner, the legislator could have altered the species of urban properties provided for in Article 6 of the Municipal Property Tax Code, for example, by subdividing lands for construction according to the purposes to which they are intended, which did not occur.

Regarding the possibility of extensive interpretation of the exclusion enshrined in the said No. 2 of Article 135-B of the Municipal Property Tax Code, in order to cover lands for construction not intended for residential use – the solution adopted in the decisions that granted claims similar to that of the Claimant, now in question – it is considered, always with the respect owed to other understandings, that this shall not be accepted.

Thus, and first of all, it is believed that there is no identity of situations in light of legally relevant criteria, necessary to effect the said extension of the clause excluding objective scope, that is, it does not appear that lands for construction are in a situation identical to that of constructed properties, from the perspective of the teleology of that exclusion clause.

From a teleological perspective, such clause will have underlying, in the first place[3], the purpose of not burdening with AIMI the properties assigned to, or susceptible of immediate assignment to, productive processes; lands for construction do not have such characteristics, given that whereas a constructed property will be, or will be susceptible of being immediately, assigned to productive processes, lands for construction are not in such a situation.

As, indeed, 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 tax purposes, properties (...) are clearly distinguished from lands for construction, in accordance with Article 6 of the Municipal Property Tax Code (CIMI), the first of those categories consisting of buildings or existing constructions (...), whereas the second comprises exclusively lands for which there is consolidated by an administrative act of prior control of an urban development operation the right to build buildings intended for that or other purposes.

Thus, whereas buildings (...) correspond to actual constructability, finally incorporated in the legal sphere of their owner, lands for construction correspond to merely potential constructability, legally consolidated in the legal sphere of the property owner, but not yet materialized.

That is, the taxation of properties (...) is levied on existing reality, on tangible things, unlike the taxation of lands for construction, which is levied on construction rights, on future things, as evidenced by Article 45 of the CIMI, in establishing that the tax asset 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 might be said, correctly, that both correspond to real property assets (...). And that, by their real property value, both are apt to translate a certain form of wealth. But the comparisons end there, because, precisely, the different nature of these assets does not permit equating the taxpaying capacity of their respective owners, current or future, solely on the basis of their assignment and their tax asset value."

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

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

Thus, in light of the noted material differentiation, the change in the assignment of a land for construction, from the perspective of the notes relevant to the problem at hand, may be simple, requiring, for example, merely a declaration in the acquisitive title, submission and admission of a prior notification, or submission and approval of a request for prior information.

Whereas the change in the purpose of a constructed building, from residential to commerce/industry/services, or vice versa, will imply, from the perspective of normalcy, the carrying out of more or less profound works (and necessary licenses).

Moreover, a constructed property has incorporated therein a significant value corresponding to the construction, which, even in cases where it is not concretely assigned to the intended use, will constitute a natural incentive for its economic exploitation, since, always from the perspective of normalcy, an unoccupied building will not only generate no income, but will depreciate (as a function of its deterioration) by its non-use.

Whereas a land for construction, not only does it not incorporate, of itself, any natural incentive for its building and subsequent assignment to a productive activity, but also, again from the perspective of normalcy, the reverse may occur, that is, due to certain market conditions that create expectations of merely speculative gains, there may be incentives for their owners to maintain their condition as unbuilt lands.

On this point, the Claimant states that the subjection of the lands for construction in question to AIMI "causes a greater fiscal burden on this type of urban properties and, consequently, will not fail to have an impact on the economic activities that will potentially be developed on these properties."

Now, in light of the teleology detected in the interpreted norm, set forth above, the fact is that such impact may even be positive, in that the taxation of lands for construction may constitute an incentive for their building, thus accelerating the actual use of the properties in productive activities.

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

Nevertheless, it will always be added that a comprehensive understanding of AIMI within the framework of the Municipal Property Tax regime will point, precisely, in the direction of the real purpose of the legislator to subject to AIMI all lands for construction, and not merely those intended for residential use.

Otherwise.

In the design of AIMI, and following the evolution of taxation under item 28.1 of the Stamp Tax Code, the legislator made abundantly clear (by virtue, first of all, of the nomenclature and systematic nature of the taxation created, as well as of the express referral to the relevant Municipal Property Tax Code norms) its intention that the relevant categories for the taxation in question be delineated according to the criteria proper to the Municipal Property Tax Code.

And, in accordance with this Code, lands – which is the category now at hand – may be included in the categories of:

  • rustic; or
  • urban;
    • "for construction" of buildings intended for residential, commercial, services, or industrial purposes;
    • intended for "other" purposes.

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

Finally, it cannot fail to be considered relevant in this matter that the Administrative Court of Appeal has understood that for the determination of the tax asset value of lands for construction, the intended use of the projected building is irrelevant.

Thus, in the Decision of the Administrative Court of Appeal of 20-04-2016, rendered in proceeding 0824/15[5], it was considered that:

"From this rule it follows that the formula transcribed above applies only to urban properties therein specified, that is, those which already built are for residential, commercial, industrial and services purposes.

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 asset value thereof there is the rule of Article 45 already mentioned where only the implementation area 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 included therein because they can only relate to buildings, as such.

The use coefficient can only be relevant in the face of proven use of the built property, and likewise the comfort and quality coefficient.

Such multiplier coefficients of the tax asset value pertain only to the built portion but have no real basis for support in the potentiality that the land for construction offers."

And, further on, in the same decision:

"But having regard to reality, the legislator established for the determination of the tax asset value of this species of property a specific rule – that set forth in Article 45 where it reiterates that account is taken of the value of the implementation area of the building to be constructed and the value of the land adjacent to the implementation 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 CIMI.

Which means that in the determination of the tax asset value thereof lands for construction do not apply the mathematical formula set forth in Article 38 of the CIMI.

And thus the use coefficients and quality and comfort coefficients related to the building to be constructed also cannot and should not be taken into account in that assessment.

Indeed, the use coefficient relates to the type of use of the already built property 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 property wealth or income for its owner, that is sought to be taxed. And not factors not yet materialized."

The said understanding was sanctioned by decision of the Full Bench of the Contentious Tax Court of the Administrative Court of Appeal of 21-09-2016, rendered in proceeding 01083/13[6], in whose summary it is synthesized that:

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

IV - Article 45 of the CIMI is the specific rule governing the determination of the tax asset value of lands for construction.

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

Thus, it is concluded that in the assessment of the tax asset value within the framework of the Municipal Property Tax Code, the intended purpose of the projected construction in "lands for construction" is not relevant, and there is no distinction, from the perspective of property taxation and, consequently, of the evidencing of taxpaying capacity, between lands for construction of residential buildings and lands for construction of commercial, industrial or services buildings.

To the contrary, and as a function of the application of the use coefficient enshrined in Article 41 of the Municipal Property Tax Code, in constructed buildings, the purpose of the buildings is reflected in the property value, and consequently in the taxpaying capacity, considered for taxation purposes.

In the context of AIMI, in light of what has been stated regarding the nature of this taxation (as an additional to the Municipal Property Tax), there will be no justifications for diverging from such a criterion, that is, for considering that the holding of "lands for construction" with buildings projected of different purposes signals different taxpaying capacities.

In light of all that has been set forth, considering that it is not proper to broaden, by way of extensive interpretation, the objective exclusions from AIMI subjection, enshrined in No. 2 of Article 135-B of the Municipal Property Tax Code, so as to include therein, also, urban properties classified as "lands for construction," provided that the construction envisioned thereon is referable to one of the types referred to in the said No. 2, that is, to urban properties intended for purposes of "commercial, industrial or services" or "other," this arbitral request must also be denied.

c.

Also subsidiarily, the Claimant holds that the AIMI taxation regime is contrary to the principle of equality, enshrined in Article 13, and to the principles of tax equality and taxpaying capacity enshrined in Article 104, No. 3, both of the CRP, in that, in its view, the legal regime of AIMI, specifically its Articles 135-A and 135-B, both of the Municipal Property Tax Code, and the taxation resulting therefrom, promote differentiated treatment and unjustified inequality among taxpayers, and "the application of AIMI to the real property assets held by entities dedicated to real property exploitation (here including purchase, sale, construction, promotion and rental), could only result from the idea that those properties, productive factors of these companies and means for the exercise of their economic activity, constitute evidence of increased taxpaying capacity – which cannot be accepted."

The Claimant further relies, on this point, on Constitutional Court Decision No. 250/2017, of 24 May 2017, rendered in proceeding No. 156/20, already cited above.

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

Thus, the Claimant again considers "evident that, in establishing AIMI, the legislator intended to tax residential properties, as actual manifestations of wealth"; and that "it was clear the legislator's intention to exclude from the scope of application of AIMI all properties assigned to economic activities," which, as has been seen, is not subscribed.

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

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

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

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

On this point, as has also been seen, the taxpaying capacity aimed at is the same as that of the Municipal Property Tax, 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 fiscal burden of the real property sector, in relation to other sectors, it should be noted, first of all, 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, and is, furthermore, a common and accepted practice, the interference in economic activities, fiscally incentivizing some, and fiscally burdening others.

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

That is, properly understood, the normative structure created for AIMI consists of a general scope thereof, imposed on properties subject to the Municipal Property Tax, followed by the removal of the incidence with respect to certain types of properties, intending, in the first place, that an exclusion be recognized from the subjective scope of subjection, and objecting, in the second place, against the scope of the said clause excluding objective incidence.

Thus, it is not the Claimant – or the properties held by it and on which tax was assessed – that finds itself, in being taxed, before an exceptional situation of burden, but rather the non-burden sought – by way of subjective or objective exclusion – which, were it to be recognized, would be of an exceptional character.

Moreover, the Claimant's argumentation on the matter of constitutionality ends up reflecting some argumentation contained in constitutional case law relating to the, meanwhile repealed, taxation under item 28.1 of the Stamp Tax Code, specifically that which was condensed in the already several times cited Constitutional Court Decision No. 250/2017, of 24 May 2017, rendered in proceeding No. 156/20, also invoked by the Claimant.

There it is stated, among other things, the following, with correspondence to the questions 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 with tax asset 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 property promotion, about whose economic force we know nothing. In fact, we cannot presume that that taxpayer has economic force proportional to the value of the land, which is merely instrumental in relation to their economic activity. We are unaware what profit margin they will draw from its exercise, if they are in the legal and economic conditions to develop it, or if they do not have a negative net situation.";

  • "the different reality of the taxation of lands for construction, which has a greater impact on the economic activity conducted by their owner than on the value of the asset in itself. With the aggravating circumstance that the respective tax burden, if not definitively preventing that activity, will ultimately be borne by the final consumer of the real property products resulting therefrom, about whose taxpaying capacity we cannot presume anything without knowing the respective building typology and value."

And, further on:

"Because item 28.1, moreover, disregards the legal nature of the taxpayers, not distinguishing individual subjects from legal persons, nor the specific end pursued by the latter, it will apply indiscriminately, for example, to a luxury dwelling in a tourism enterprise in the Algarve and to a land for construction of a building for collective residential use under cooperative scheme in the metropolitan suburbs of Lisbon or Porto."

Thus, from the aforementioned Constitutional Court decision, it seems possible to draw the understanding, sustained by the Claimant, that failure to consider the purpose of property ownership and/or the quality of the subject holding it, may generate unconstitutionality of the tax.

This understanding, however, is not subscribed, in line with the dissenting opinion rendered in the said decision, by the Illustrious Counselor Manuel da Costa Andrade.

Thus, and the Constitutional Court itself evidences this very thing, one thing is the taxation of income, another that of assets; and the latter, by nature, will essentially regard the property value of the assets held, and not the personal situation of its holder; and, even in light of reasons of practicability, the factors of personalization are limited.

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

Indeed, the said considerations will, immediately and without more, be directly transposable to the Municipal Property Tax, to the Vehicle Tax, to the Automobile Circulation Tax, to the Consumption Excise Taxes, to the Corporate Income Tax and even, in some manner, to the Value Added Tax. Also there the taxable events abstract, often in precisely the same manner, if not in even more pronounced fashion, from the personal situation of the respective passive taxpayers.

Thus, also in the context of those taxes, a distinction is not, as a rule, made between manifestations of wealth (taxpaying capacity) and factors of production of that same wealth (that is: a taxable event subject to Municipal Property Tax, Vehicle Tax, Automobile Circulation Tax, Consumption Excise Taxes, Corporate Income Tax, will as a rule abstract from the circumstance that it occurred within the framework of "consumption" [broadly understood] or of "production of wealth"), and the differentiation will occur, as in the case of AIMI, by way of the consideration as cost of the tax borne, in the context of income taxation (cf. Article 23/2/f) of the Corporate Income Tax Code).

It is also added that there are other situations peacefully accepted – precisely in homage to the principle of practicability – of abstraction from the personal situation of the passive taxpayers, significantly more evident than those pointed out by the Constitutional Court, and which, were the understanding of that High Court to be accepted, would be irremediably compromised by unconstitutionality. Consider, immediately, the situation of someone who acquires a property using credit guaranteed by a mortgage on that same property, where it is evident, from both a personal and patrimonial perspective, the disparity of taxpaying capacity ("wealth") between said passive taxpayer and the holder of a property of equal value, but fully paid.

On the other hand, properly understood, it is believed that the Constitutional Court's concerns relate more to the manner of assessment of assets than to their subjection. That is: if the property value is justly fixed, and using the example used by the Constitutional Court, the owner of a luxury dwelling in a tourism enterprise in the Algarve and of a land for construction of a building for collective residential use under cooperative scheme in the metropolitan suburbs of Lisbon or Porto will evidence, from the perspective of property, the same taxpaying capacity, that is, will be holders of an asset with identical property value.

Thus, and in light of the foregoing, it is deemed that consequences should not be drawn from the Constitutional Court case law in question, in the context of constitutionality of the AIMI norms, as applied in the case, specifically regarding the violation of the Constitution provisions pointed out by the Claimant; and accordingly, this arbitral request is also denied in this respect.

C. DECISION

Being aware of which, this Arbitral Tribunal decides to rule wholly against the arbitral request filed and, in consequence:

  • Absolve the Respondent of the claim;

  • Maintain in the legal order the tax assessment acts that are the subject of the present arbitral action; and

  • Condemn the Claimant for costs of the proceeding, in the amount set forth below.

D. Value of Proceedings

The value of the proceedings is fixed at € 123,840.15, in accordance with Article 97-A, No. 1, a), of the Tax Procedure and Process Code, applicable by virtue of paragraphs a) and b) of No. 1 of Article 29 of the LRAT and of No. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The amount of the arbitration fee is fixed at € 3,060.00, in accordance with Table I of the Regulation of Costs of Tax Arbitration Proceedings, to be paid by the Claimant, in that the claim was wholly denied, in accordance with Articles 12, No. 2, and 22, No. 4, both of the LRAT, and Article 4, No. 4, of the cited Regulation.

Notice be served.

Lisbon, 05 September 2018

The Presiding Arbitrator

(José Pedro Carvalho)

The Arbitrator Member

(Hélder Faustino)

The Arbitrator Member

(Raquel Franco)

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

[2] Cf. Decision of 24-05-2017, rendered in proceeding 250/2017, available at: http://www.tribunalconstitucional.pt/tc/acordaos/.

[3] With the exception of some marginal situations relating to properties assigned to public services or non-business activities, covered by the species "other."

[4] Cf. Decision rendered in proceeding 250/2017, already cited.

[5] Available at www.dgsi.pt.

[6] Ibid.

[7] Excepting, as of 2018, municipal companies; cf. No. 4 of Article 135-A of the Municipal Property Tax Code.

Frequently Asked Questions

Automatically Created

Are real estate investment funds subject to the Additional Municipal Property Tax (AIMI) in Portugal?
Yes, real estate investment funds are subject to AIMI as legal persons under Article 135-A of the Municipal Property Tax Code. However, CAAD Process 667/2017-T challenged this application, arguing that since property ownership constitutes the essential activity of investment funds rather than passive asset holding, the tax assessment contained errors in factual and legal grounds. The fund management company contested assessments totaling €123,840.15 for three investment funds it managed.
Does the AIMI apply to construction land intended for commercial, industrial, or service purposes?
The AIMI regime creates ambiguity regarding construction land. Article 135-B(2) of the Municipal Property Tax Code excludes urban properties classified as 'commercial, industrial or services' and 'other' purposes under Article 6(1)(b) and (d). In Process 667/2017-T, the claimant subsidiarily argued that construction land intended for commercial, industrial, or service purposes should fall outside AIMI's objective scope based on this exclusion, though the document does not reveal the tribunal's final ruling on this specific ground.
Is the AIMI regime on construction land constitutional under Portugal's equality and ability-to-pay principles?
Yes, a fund management company has standing to challenge AIMI assessments through CAAD arbitration on behalf of the investment funds it manages and represents. In Process 667/2017-T, the management company A... filed the arbitration request representing three real estate investment funds (B..., C..., and D...), and the tribunal confirmed the parties had legal personality, capacity, and legitimacy under Articles 4 and 10 of LRAT and Ordinance No. 112-A/2011.
Can a fund management company challenge AIMI tax assessments through CAAD tax arbitration?
The claimant raised three grounds: (1) Principal ground - illegality due to errors in factual and legal grounds in applying AIMI to investment funds, given that property ownership forms the core of their activity; (2) First subsidiary ground - illegal taxation of 'land for construction' intended for commercial, industrial, or service purposes, arguing these fall outside AIMI's objective scope; (3) Second subsidiary ground - unconstitutionality of the AIMI regime as applied to all construction land, violating equality principles (Article 13 CRP) and ability-to-pay principles (Article 104(3) CRP).
What were the grounds for contesting AIMI liquidation acts in CAAD Process 667/2017-T?
Process 667/2017-T contested the constitutionality of applying AIMI to all categories of construction land. The claimant argued this violated Article 13 of the Portuguese Constitution (equality principle) and Article 104(3) (tax equality and ability-to-pay principles). The challenge questioned whether taxing construction land regardless of its development status, potential for generating income, or designated purpose respects constitutional requirements that taxation reflect taxpaying capacity. This raised fundamental questions about whether AIMI's broad application to undeveloped or non-income-producing assets complies with constitutional tax principles.