Process: 675/2017-T

Date: October 25, 2019

Tax Type: IMI

Source: Original CAAD Decision

Summary

This case involves a challenge to an AIMI (Additional Municipal Property Tax) assessment for 2017 totaling €117,926.08. The taxpayer, a commercial entity, contested the legality of including construction land designated for commercial, industrial, and service purposes in the AIMI tax base. The arbitral tribunal initially ruled partially in favor of the claimant in May 2018, annulling €7,586.33 of the assessment and ordering reimbursement with compensatory interest. However, both parties appealed to the Constitutional Court. In a significant development, the Constitutional Court ruled on October 1, 2019, that the arbitral decision was based on an incorrect finding of unconstitutionality regarding Article 135-B(2) of the IMI Code. The Constitutional Court determined that no unconstitutionality existed, requiring a complete reform of the arbitral award. Consequently, the arbitral tribunal issued this reformed decision on October 25, 2019, completely reversing its earlier ruling. The amended operative part now declares the arbitration request entirely unfounded and absolves the Tax and Customs Authority of all claims. This case demonstrates the hierarchical review mechanism in Portuguese tax arbitration, where Constitutional Court rulings on constitutional questions bind arbitral tribunals and can necessitate complete reformation of decisions. The final outcome confirms the legality of AIMI application to construction land values for commercial purposes, establishing important precedent for property tax assessments. The claimant was ultimately ordered to bear costs of €3,060.00.

Full Decision

ARBITRAL TAX JURISPRUDENCE

Case No. 675/2017-T

Decision Date: 2019-10-25

Tax: IMI

Amount in Dispute: € 117,926.08

**Subject Matter: AIMI – Unconstitutionality – Reform of Arbitral Decision, amendment of the operative part (attached to the decision).
Replaces the Arbitral Decision of 04 May 2018

ARBITRAL DECISION

The arbitrators Cons. Jorge Lopes de Sousa (arbitrator-president), Dr. Adelaide Moura and Dr. Ricardo Marques Candeias (arbitrator members), designated by the Deontological Board of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 06-03-2018, hereby agree as follows:

1. Report

A... CRL (hereinafter referred to as "Claimant"), with tax identification number ... and address at Rua ..., no. ... - ..., ...-... Lisbon, pursuant to section a) of Article 2(1) and Articles 10 et seq. of Decree-Law No. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters or "RJAT"), filed a request for arbitral pronouncement seeking a declaration of illegality of the assessment act for the Additional Municipal Property Tax ("AIMI") bearing no. 2017..., issued by the Tax and Customs Authority ("AT") with reference to the year 2017, in the total amount of € 117,926.08.

The Claimant further requests reimbursement of the amount paid with compensatory interest.

The Respondent is the TAX AND CUSTOMS AUTHORITY.

By an arbitral award of 04-05-2018, the content of which is hereby reproduced, it was decided:

A) To judge partially well-founded the request for arbitral pronouncement, regarding the question of the application of AIMI to the value of land for construction for commercial, industrial and service purposes, indicated in subsection d) of the statement of facts established;

B) To partially annul the assessment of the Additional Municipal Property Tax ("AIMI") bearing no. 2017..., in the amount of € 7,586.33;

C) To judge partially well-founded the request for reimbursement of the amount paid, in the amount of € 7,586.33 and to order the Tax and Customs Authority to reimburse the Claimant of such amount;

D) To judge partially well-founded the request for compensatory interest and to order the Tax and Customs Authority to pay such interest to the Claimant calculated on the amount of € 7,586.33, from the date of payment until the date of issuance of the credit note;

E) To judge the request for arbitral pronouncement unfounded as regards the remaining issues and to absolve the Tax and Customs Authority of the respective claims.

Appeals were lodged with the Constitutional Court by both the Claimant and the Tax and Customs Authority.

By a ruling of 01-10-2019, the Constitutional Court understood that the said arbitral award, to the extent that the claim was judged well-founded, should be reformed, as it was based on a finding of unconstitutionality of Article 135-B(2) of the IMI Code, which the Constitutional Court understood did not occur.

Thus, on the basis of the grounds of the said Constitutional Court ruling, which is hereby reproduced, the arbitral award is reformed, with amendment of its operative part.

2. Decision

Accordingly, it is decided:

A) To judge the request for arbitral pronouncement unfounded;

B) To absolve the Tax and Customs Authority of all claims.

3. Value of the Case

In accordance with the provisions of Article 305(2) of the CPC and Article 97-A(1)(a) of the CPPT and Article 3(2) of the Regulation: € 117,926.08.

4. Costs

Pursuant to Article 22(4) of the RJAT, the amount of costs is fixed at € 3,060.00, in accordance with Table I attached to the Regulation on Costs in Tax Arbitration Proceedings, to be borne by the Claimant.

Lisbon, 25-10-2019

The Arbitrators

(Jorge Lopes de Sousa)
(Adelaide Moura)
(Ricardo Marques Candeias)

ARBITRAL DECISION

The arbitrators Cons. Jorge Lopes de Sousa (arbitrator-president), Dr. Adelaide Moura and Dr. Ricardo Marques Candeias (arbitrator members), designated by the Deontological Board of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 06-03-2018, hereby agree as follows:

1. Report

A... CRL (hereinafter referred to as "Claimant"), with tax identification number ... and address at Rua ..., no. ...-..., ...-... Lisbon, pursuant to section a) of Article 2(1) and Articles 10 et seq. of Decree-Law No. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters or "RJAT"), filed a request for arbitral pronouncement seeking a declaration of illegality of the assessment act for the Additional Municipal Property Tax ("AIMI") bearing no. 2017..., issued by the Tax and Customs Authority ("AT") with reference to the year 2017, in the total amount of € 117,926.08.

The Claimant further requests reimbursement of the amount paid with compensatory interest.

The Respondent is the TAX AND CUSTOMS AUTHORITY.

The request for constitution of the arbitral tribunal was accepted by the President of the CAAD and automatically notified to the Tax and Customs Authority on 27-12-2017.

Pursuant to section a) of Article 6(2) and section b) of Article 11(1) of the RJAT, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the Deontological Board designated as arbitrators of the collective arbitral tribunal the undersigned signatories, who communicated acceptance of the appointment within the applicable period.

On 14-02-2018, the parties were duly notified of such designation and did not manifest their intention to refuse the designation of arbitrators, pursuant to the combined provisions of Article 11(1)(a) and (b) of the RJAT and Articles 6 and 7 of the Code of Ethics.

Thus, in accordance with the provisions of section c) of Article 11(1) of the RJAT, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 06-03-2018.

On 18-04-2018, the Tax and Customs Authority filed its response in which it argued that the claim should be judged unfounded and that the Public Prosecutor's Office should be notified of the final decision.

By order of 19-04-2018, a hearing was dispensed with and it was decided that the proceedings should continue with written pleadings.

After the Claimant declared it did not wish to submit pleadings, it was decided that the proceedings would proceed to final decision, with pleadings dispensed.

The arbitral tribunal was properly constituted in accordance with Articles 2(1)(a) and 10(1) of Decree-Law No. 10/2011, of 20 January.

The parties are duly represented, have legal personality and capacity and have standing (Articles 4 and 10(2) of the same decree-law and Article 1 of Ordinance No. 112-A/2011, of 22 March).

The proceedings do not suffer from any nullities.

First of all, it is important to clarify the question of jurisdiction raised by the Tax and Customs Authority and the scope of the powers of cognition of this Arbitral Tribunal.

2. Question of Jurisdiction of the Arbitral Tribunal

The Tax and Customs Authority, in Articles 88 to 90, raises the question of the lack of jurisdiction of the Arbitral Tribunal to hear the question of the legality of taxation on land for construction whose potential use is for commerce, industry or services, on the grounds that only one property is in such a situation.

The Arbitral Tribunal has jurisdiction to assess the legality of assessment acts, as results from Article 2(1)(a) of the RJAT.

In the present case, an assessment act is being challenged and the Taxpayer has the right to impute to it any illegalities it considers applicable, even if it should be found that it has no merit, with the Arbitral Tribunal being competent to assess whether such illegalities affect or do not affect the assessment.

The fact that only one of the construction sites is in the conditions referred to by the Claimant may relate to the scope of success of its claim, in the event that some part should be judged well-founded, but it has nothing to do with the question of the jurisdiction of the Arbitral Tribunal, as the Claimant may impute any illegalities it considers to the entire assessment.

On the other hand, the fact that one of the properties is in the circumstances referred to by the Claimant is sufficient to conclude that all questions of unconstitutionality which have as their premise such circumstances are questions of concrete unconstitutionality and not abstract unconstitutionality, as their resolution has potential reflexive effects on the assessment being challenged.

In these terms, there is no lack of jurisdiction of the Arbitral Tribunal to assess any issue raised.

3. Powers of Cognition of the Arbitral Tribunal

The Tax and Customs Authority invokes the principle of separation and interdependence of powers as an obstacle to the powers of cognition of this Arbitral Tribunal.

There is, assuredly, some misunderstanding, as, in a State governed by the rule of law, it is to the Courts and not to any other bodies, namely those with legislative and executive functions, that the administration of justice is entrusted, "ensuring the protection of the rights and legally protected interests of citizens, repressing violations of democratic legality and settling conflicts between public and private interests" (Articles 202(1) and (2) of the CRP), for which purpose they must interpret and apply the laws to resolve disputes between citizens and the Administration.

And it is also to the Courts that the CRP attributes the power to control the constitutionality of laws issued by bodies with legislative power (Article 204 of the CRP).

This decision is issued by a Court, and therefore has a jurisdictional character, and in the exercise of its jurisdictional power it is incumbent upon it to apply the law according to its interpretation, being subject only to the law as it interprets it, and not being obliged to adopt the interpretation adopted by the Tax and Customs Authority or that which would hypothetically be adopted by bodies with legislative power if they were given the power to apply the law to disputes pending before the Courts.

On the other hand, in the exercise of its interpretative activity, the Arbitral Tribunal is not limited by the letter of the law and must adopt all the criteria for interpretation provided for by law, namely those indicated in Article 9 of the Civil Code and Article 11 of the General Tax Law: "interpretation must not be confined to the letter of the law, but must reconstruct from the texts the legislative intent, taking above all into account the unity of the legal system, the circumstances in which the law was enacted and the specific conditions of the time in which it is applied", being only unable to consider "the legislative intent which has no minimum verbal correspondence in the letter of the law", which may even be "imperfectly expressed".

It is the exercise of this jurisdictional power that is concretized in this arbitral decision, in light of the legal criteria for interpretation.

4. Statement of Facts

4.1 Proved Facts

a) The Claimant is a credit institution whose corporate purpose includes, in particular, the performance of financial operations, pursuant to Article 4 of the General Regime for Credit Institutions and Financial Companies, approved by Decree-Law No. 298/92, of 31 December;

b) In the course of its activity, the Claimant is the owner of various properties, including residential properties, commercial properties and land for construction;

c) In August 2017, the Claimant was notified of the assessment of AIMI bearing no. 2017..., issued by the Tax and Customs Authority ("AT") with reference to the year 2017, in the total amount of € 117,926.08, with a payment deadline in the month of September 2017 (document no. 1 attached with the request for arbitral pronouncement, the content of which is hereby reproduced);

d) Of the properties identified in the assessment, those indicated in the table below are land for construction intended for the construction of industrial, commercial and service properties:

e) On 28-09-2017, the Claimant paid the assessed amount;

f) In the aforementioned assessment, a taxable value of € 29,481,520.49 was considered (document no. 1);

g) The properties held by the Claimant are intended for its installation and operation and for the pursuit of its corporate purpose, in particular its credit activity in the real estate sector;

h) On 21-12-2017, the Claimant filed the request for arbitral pronouncement that gave rise to the present proceedings.

4.2 Unproved Facts and Grounds for Determination of the Statement of Facts

There are no facts relevant to the decision of the case that have not been proved.

The proved facts are based on the documents submitted by the Claimant with the request for arbitral pronouncement.

The Tax and Customs Authority did not submit the administrative file or copies of the property records of the properties on which it based the assessment, nor does it question what is stated by the Claimant regarding the nature of the properties indicated in the table contained in subsection d) of the statement of facts, and it is therefore considered established that these are construction sites with the purposes indicated there.

5. Questions of Law

5.1 Positions of the Parties

The Claimant argues, in summary:

– the legal regime established by Law No. 42/2016, of 28 December, excludes from the scope of AIMI "urban properties classified as 'commercial, industrial or service' and 'other' pursuant to sections b) and d) of Article 6(1)" of the Municipal Property Tax Code (CIMI), so that only urban properties devoted to residential purposes and land for construction, as defined in that Article 6, are covered;

– the intention was to create a wealth tax on real property, in which urban properties devoted to economic activities would not be subject to AIMI taxation, acknowledging that the mere holding of such real estate does not constitute a factor demonstrating wealth, nor a sufficient indicator of the taxpayer's contributive capacity in respect of such properties;

– the ratio legis underlying the rule for exclusion from objective scope of taxation, enshrined in Article 135-B(2) of the IMI Code, was essentially based on the intention not to impose additional fiscal burdens on taxpayers who, by virtue of their economic activities, hold properties for the pursuit of their corporate purpose;

– the properties held by the Claimant are intended for its installation and operation and for the pursuit of its corporate purpose, in particular its credit activity in the real estate sector.

Subsidiarily, the Claimant argues that "land for construction" whose potential use coincides with "commercial, industrial or service" purposes cannot be considered in calculating the taxable property value subject to AIMI, which is the case with the construction sites indicated in the table contained in subsection d) of the statement of facts established. The Claimant takes the view that taxation on construction sites with these purposes is incompatible with the constitutional principle of equality.

Subsidiarily, the Claimant takes the view that the legal regime of AIMI is contrary to the constitutional principle of equality and to the principle of fiscal equality and contributive capacity, enshrined in Articles 13 and 104(3) of the CRP.

The Tax and Customs Authority argues, in summary, as follows:

– AIMI is a tax on a real basis and not on a personal basis;

– the legislator excluded from the scope of taxation urban properties classified as "industrial, commercial or service" and "other" but expressly chose to maintain other properties that also form part of the assets of companies, such as those classified as residential or land for construction, by not including them in the negative definition established, so it did not exclude from the scope all properties devoted to economic activities;

– the restriction was made based on the classification of the properties and not on their connection with a particular economic activity;

– the Claimant seeks an ab-rogating interpretation of the rule, introducing into it a meaning that was not enshrined by the legislator in the letter of the law, even if only imperfectly expressed, thus expanding the scope of the exclusion from taxation to encompass all the properties held by the Claimant;

– as to the ratio legis, AIMI aims to reach a portion of the patrimony of taxpayers, applying to real estate assets constituting a patrimony, legally recognizable as the capital of a given entity (individual or collective), but it was opted in Article 135-B(2) for a negative definition of the scope of taxation, excluding from AIMI properties which, by their potential use, may be economically recognized as production factors, as capital, that is, as intermediate goods which, combined with other production factors, produce new utilities – economic goods that satisfy needs;

– in this definition of the real scope it is clear that the criterion adopted is intended to be universally objective, inducing greater uniformity and equality in the treatment of properties subject to taxation, to the detriment of other criteria that would require case-by-case verification of the actual destination of the properties;

– within its legislative discretion, the legislator excluded from the scope of the tax properties devoted to purposes other than residential;

– the criterion chosen by the legislator – the classification of urban properties as industrial, commercial or service and other – was adopted to the detriment of others that would require case-by-case verification of the actual destination given to the properties;

– the intention to ensure "the absence of impact on economic activity" did not, however, lead to the exclusion from the scope of the tax of commercial companies and other equivalent entities which, by virtue of their purpose being the pursuit of economic activities, would be affected to a greater or lesser degree by the burden of the tax;

– the negative definition of the scope was enshrined in objective scope and not in subjective scope;

– the goods in question and especially land for construction are not merely instrumental to the exercise of the Claimant's activity; they are the object of commerce or industry, as they are intended for resale or, in the case of construction sites, also for transformation in the event that constructions are erected on them for subsequent sale;

– the real estate excluded from AIMI liability, pursuant to Article 135-B(2) of the CIMI, are those that perform an instrumental function to industrial, commercial or service economic activities, insofar as they constitute buildings that serve to support the operation of those activities, and are not themselves generators of income;

– the Claimant's interpretation is clearly an ab-rogating interpretation of the law, with legislative impulse, and if accepted, would violate the constitutional principle of separation and interdependence of powers, enshrined in Articles 2 and 111 of the CRP, constituting itself as a reference and limit to the powers of cognition of the courts in the exercise of their function within the State governed by the rule of law (see Articles 202 and 203 of the CRP);

– there is no unconstitutionality due to breach of the principles of equality and contributive capacity;

– the Tax and Customs Authority cannot refrain from applying the law on the grounds of unconstitutionality, as it is subject to the principle of legality;

– compensatory interest is not due if it is concluded that the AIMI legal regime is unconstitutional.

Indicating the Claimant an order of subsidiarity in the imputation of defects to the assessment being challenged, this order must be observed in its assessment, as results from section b) of Article 124(2) of the CPPT, applicable to tax arbitration proceedings by force of section c) of Article 29(1) of the RJAT.

5.2 Question of the Scope of Objective Taxation of AIMI According to the Dedication to Economic Activities of Residential Properties and Land for Construction

Law No. 42/2016, of 28 December (State Budget for 2017) added Chapter XV to the CIMI, with Articles 135-A to 135-K, which includes the regime for the Additional Municipal Property Tax (AIMI).

Article 135-A defines the objective scope of this tax, establishing that "the taxpayers of the additional municipal property tax are natural or legal persons who are owners, usufructuaries or holders of superficies of urban properties situated in Portuguese territory", with "any structures or centers of collective interests without legal personality that appear in the property records as taxpayers of the municipal property tax being equated to legal persons".

Article 135-B defines the objective scope of this additional tax, establishing the following:

Article 135-B
Objective scope

1 - The additional municipal property tax applies to the sum of the taxable property values of urban properties situated in Portuguese territory of which the taxpayer is the owner.

2 - Urban properties classified as "commercial, industrial or service" and "other" pursuant to sections b) and d) of Article 6(1) of this Code are excluded from the additional municipal property tax.

The Claimant argues that this regime excludes from the scope of AIMI "urban properties classified as 'commercial, industrial or service' and 'other' pursuant to sections b) and d) of Article 6(1)" of the Municipal Property Tax Code (CIMI), so that only urban properties devoted to residential purposes and land for construction, as defined in that Article 6, are covered.

Article 6 of the CIMI establishes the following:

1 - Urban properties are divided into:

a) Residential;

b) Commercial, industrial or service;

c) Land for construction;

d) Other.

2 - Residential, commercial, industrial or service are buildings or structures licensed for such purpose or, in the absence of a license, which have as their normal destination each of these purposes.

3 - Land for construction is understood to be land situated within or outside an urban agglomeration for which a license or authorization has been granted, prior notice accepted or favorable prior information issued for a subdivision or construction operation, and also that which has been declared as such in the acquisition deed, with the exception of land in which the competent entities prohibit any of such operations, namely those located in green areas, protected areas or which, in accordance with municipal territorial planning instruments, are devoted to public spaces, infrastructure or equipment.

4 - The provision of section d) of Article 1 includes land situated within an urban agglomeration that are not construction sites nor are covered by Article 3(2) and also buildings and structures licensed or, in the absence of a license, which have as their normal destination other purposes than those referred to in Article 2 and also those of the exception in Article 3.

From this negative definition of scope, the Claimant draws the conclusion that the intention was to create a wealth tax on real property, in which urban properties devoted to economic activities would not be subject to AIMI taxation.

The legislative concern to "avoid the impact of this tax on economic activity" was announced in the Draft State Budget Law for 2017 and was to be materialized through the exclusion from the scope of taxation of "urban properties classified as 'industrial' properties, as well as urban properties licensed for tourist activity, the latter provided that their destination is duly declared and proven" and the deduction from the taxable value of the amount of "€ 600,000.00, when the taxpayer is a legal person with agricultural, industrial or commercial activity, for properties directly devoted to its operation".

However, it was not on the basis of the activity to which the properties are devoted that the exclusion from the scope of taxation came to be defined, as in the approved version a negative definition was established based only on the types of properties indicated in Article 6 of the CIMI, without any reference to whether or not the properties are devoted to the operation of legal persons.

If, in the final version of the Budget, the legislative intention to exclude from the scope of taxation properties directly devoted to the operation of legal persons had been maintained, that reference to the dedication which was contained in the proposal and which clearly expressed that legislative option would certainly have been maintained.

Thus, as that reference to the dedication of the properties has been removed, there is no legal basis to conclude that residential properties and construction sites devoted to the operation of legal persons are not relevant to AIMI taxation.

"In the absence of other elements that would lead to the choice of a less immediate meaning of the text, the interpreter should in principle opt for that meaning that best and most immediately corresponds to the natural significance of the verbal expressions used, and in particular to their technical-legal significance, in the assumption (not always correct) that the legislator knew how to express his intent correctly. ( )

In the present case, in view of the departure from the proposed version in which relevance was given to the dedication of the properties, there is no reason to conclude that the legislator did not know how to express his intent in adequate terms, as must be presumed by force of Article 9(3) of the Civil Code.

For this reason, it must be concluded that the fact that the Claimant holds the aforesaid properties in the course of its economic activities does not exclude AIMI taxation.

5.3 Question of Whether "Land for Construction" with Potential Use Coinciding with "Commercial, Industrial or Service" Purposes Cannot Be Considered in Calculating the Taxable Property Value Subject to AIMI

The Claimant argues that Article 135-B of the CIMI should be interpreted to mean that the taxable value of construction sites that are not intended for residential purposes is not relevant for AIMI purposes, in coherence with the legislative option to exclude from the scope properties classified as "commercial, industrial or service".

Moreover, the Claimant argues that the application of AIMI to construction sites for the aforementioned purposes, parallel to the exclusion of properties with those purposes, is incompatible with the constitutional and legal principle of equality (Articles 13 and 104(3) of the CRP and Articles 5 and 55 of the General Tax Law).

For this reason, the Claimant argues that the taxable value of the land for construction indicated in subsection d) of the statement of facts established should not be relevant in determining the taxable value of AIMI.

Given that the taxable fact chosen as an index of contributive capacity is the holding of real estate patrimony of value deemed elevated, it would not be coherent not to apply the tax to buildings devoted to commerce, industry and services and to apply it to the land intended for their construction, the value of which is incorporated into the value of the buildings to be constructed.

Thus, from a perspective that bears in mind the unity of the legal system (Article 9(1) of the Civil Code), which has decisive interpretative value, imposed by the principle of the coherence of values or axiology of the legal order ( ), the exclusion provided for in Article 135-B(2) of the CIMI relating to urban properties classified as "commercial, industrial or service" and "other" should be interpreted extensively as expressing a legislative intention to also exclude from taxation land intended for the construction of such properties.

In any case, should one adopt a literal interpretation of this rule, to the effect that all construction sites are within the scope of AIMI, it would be materially unconstitutional, being incompatible with the principle of equality (Article 13 of the CRP), by considering as a taxable fact the holding of construction land for properties devoted to commerce, industry and services and not the holding of the properties constructed thereon, as it constitutes a disadvantageous treatment of taxpayers in the first situation without material justification, as the contributive capacity indicated by real estate patrimony in that situation is necessarily less than, and must be present with an increase, in the second.

In situations of unjustified discriminatory treatment, reflected in the imposition of a duty or burden in violation of the principle of equality, what is illegitimate is, in principle, the act of imposing the duty only on some taxpayers, with the inequality being resolved by elimination of the duties or burdens for those who were discriminatorily burdened with them. ( )

In light of the foregoing, the assessment being challenged is illegal to the extent of the amount of € 7,586.33, which corresponds to the taxable value of € 1,896,581.38, resulting from the sum of the taxable property values of the land for construction indicated in subsection d) of the statement of facts established.

This illegality justifies annulment, in that respect, in accordance with Article 163(1) of the Administrative Procedure Code, subsidiarily applicable pursuant to section c) of Article 2 of the General Tax Law.

5.4 Question of the Unconstitutionality of AIMI

Subsidiarily, the Claimant invokes the unconstitutionality of AIMI, with a dual argument, which should be examined separately.

5.4.1 Indiscriminate Taxation of All "Land for Construction": the (Illegal) Disregard of the Legal Criterion of Property Dedication

The Claimant argues "that the AIMI taxation regime is contrary to the fundamental principle of equality, enshrined in Article 13 of the CRP and, in parallel, contrary to the principle of fiscal equality and contributive capacity enshrined in Article 104(3) of the same instrument", also referred to in Articles 5 and 55 of the General Tax Law.

Clarifying its allegation of unconstitutionality, the Claimant argues, in the first place, that "the legal regime of AIMI, specifically its Article 135-B of the IMI Code – when interpreted to include within the scope of application of AIMI 'land for construction' for purposes of commerce, industry, services or other – is manifestly contrary to the principle of equality constitutionally enshrined.

This is the issue that was already examined in the preceding point, and reference is made to what was stated there, which only applies to that part of the assessment which has as its basis the value of the construction site intended for services.

5.4.2 Unconstitutionality Due to Taxation of the Substrate of an Economic Activity

In the understanding of the Claimant, in summary:

– regard must be had to the nature of the taxpayers burdened with the taxation resulting from AIMI, in particular whether they are entities for which the holding of properties constitutes the (essential) substrate of part of their activity, in the case of the Claimant the credit activity;

– in this case, the essential premise of taxation is not met, that is, the premise that the ownership of such properties constitutes an indication of increased contributive capacity or wealth;

– the properties, in this case, are productive factors and means for the exercise of its economic activity and are not an indication of increased contributive capacity;

– this Additional penalizes this sector of activity in an unjustifiably aggravated manner, to the detriment of the remaining sectors;

– the imposition of this taxation has no relationship with the actual income of the activity developed by these entities – in the limit, burdening them even if they have negative results;

– Article 135-A of the IMI Code – when interpreted to include within the subjective scope of application of AIMI entities that develop a real estate activity – promotes differentiated treatment and unjustified inequality between taxpayers, in manifest violation of the principle of equality enshrined in Article 13 of the CRP and the principle of fiscal equality and contributive capacity enshrined in Article 104(3) of the same instrument;

– especially as regards construction sites, the reasons on which the Constitutional Court based itself in Ruling No. 250/2017, of 24-05-2017, are applicable.

The Tax and Customs Authority argues, in the first place, that it is obliged to apply the law and cannot refrain from applying it on grounds of unconstitutionality.

Furthermore, the Tax and Customs Authority argues, essentially:

– that the choices underlying the definition of the objective scope of AIMI taxation were made within the margin of "legislative discretion" and do not violate the principles of equality and taxation according to contributive capacity, in light of the doctrine and case law of the Constitutional Court;

– one is faced with a "partial tax on certain manifestations of contributive capacity", so it is "normatively inadequate to proceed to a comparison between the global value of the patrimony of other taxpayers";

– "the different valuation and taxation of a property devoted to residential use compared to a property devoted to commerce, industry or services results from the different suitability of the properties in question, which sustains the different treatment given by the legislator who, for economic and social reasons, decided, within its legislative discretion, to exclude from the scope of the tax properties devoted to purposes other than residential";

– the circumstance that other taxpayers holding identically valuable real estate patrimony remain exempt from the tax would justify specific constitutional censure of the rule under review;

– these entities are holders of goods regarded by the legislator as a manifestation of particular wealth;

– the properties are not the substrate of the Claimant's activity, their holding being merely incidental;

– only properties intended for the installation of the Claimant's branches can be considered instrumental to its activity;

– the circumstance that a given asset is worth, as a "factor producing wealth", is not sufficient to contradict the finding that its corresponding holder holds real estate accessible only to someone of particular wealth and, thus, capable of contributing an additional amount to the desired budget consolidation;

– the principle of equality imposes horizontal equality, that is, that all those who are holders of wealth in the same form are taxed in the same way;

– like any property tax, AIMI is disconnected from any eventual realization of profit from the sale of real estate, as well as from the existence, or lack thereof, of a negative or positive net situation, with only the taxable property value of the land being relevant to the economy of the tax.

With regard to the invoked obligation of the Tax and Customs Authority to apply the law, it being not incumbent upon it to review constitutionality, it is irrelevant to the assessment of the legality of the assessment being challenged, as this Arbitral Tribunal has such jurisdiction, as it cannot "apply rules that violate the provisions of the Constitution or the principles enshrined therein" (Article 204 of the CRP).

For this reason, the obligation of the Tax and Customs Authority to apply the law does not constitute grounds for dismissing any illegality of the assessment.

In Article 13 of the Constitution of the Portuguese Republic, the principle of equality of citizens before the law is proclaimed, and Article 104(3) of the CRP establishes that "taxation of patrimony must contribute to equality among citizens".

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

The creation of AIMI, as a supplementary tax on real estate patrimony, which aimed to introduce into taxation "a progressive element of personal basis, taxing more heavily the larger patrimonies" (Report on the 2017 Budget, page 60) is compatible with the objective that taxation of patrimony should contribute to equality among citizens, affirmed in Article 104(3) of the CRP, as progressivity has as a corollary, tending to impose higher taxation on those with greater contributive capacity.

On the other hand, the exclusion of taxation of properties especially designed for productive activity, namely "commercial, industrial or service", finds constitutionally acceptable grounds in the obligation of the State to promote increased economic well-being, which presupposes the proper functioning of productive activities and constitutes one of its priorities in the economic sphere [Article 81(a) of the CRP].

Moreover, in line with what was understood in the arbitral award of 17-03-2016, handed down in case no. 507/2015-T, it should be understood that, while the holding of real estate patrimony intended for residential purposes of elevated value is a tendentially certain indication of economic affluence, superior to that of the general run of citizens, it cannot be considered that there exists a sure indication of superior contributive capacity when one is faced with the holding of rights over properties intended for the exercise of economic activities (commercial, industrial, provision of services or similar), as they must be adequate to the functioning of the respective enterprises, with their dimension and corresponding value not being an indication of affluence.

Thus, there are constitutionally acceptable grounds for the restriction of the scope of AIMI to residential properties and land for construction of residential properties, which came to be enshrined in the approved version of Article 135-B(2) of the CIMI, in the interpretation that was adopted above.

The specific situation of entities that develop credit granting activity in the real estate sphere does not appear to merit special treatment compared to the general run of citizens as regards the holding of properties intended for residential purposes.

In fact, the holding of a real estate patrimony of elevated value evidences, as in relation to any owner of a residential property, a special economic capacity to be able to contribute additionally to the Financial Stabilization Fund of Social Security, to which AIMI revenue is appropriated, and which "corresponds to the objective of the government's program to expand the financing base of Social Security" (Report on the 2017 Budget, page 57).

For this reason, the imposition on the general run of holders of residential properties or land for construction of residential properties does not appear to be materially unconstitutional, in light of the principles of equality and contributive capacity.

6. Request for Reimbursement of Amount Paid and Compensatory Interest

The Claimant submits a request for reimbursement of the amounts collected by the Tax and Customs Authority, as well as payment of compensatory interest.

The Tax and Customs Authority argues, in summary, that in its capacity as a body of Public Administration, it has no competence to decide on the non-application of rules in respect of which doubts of constitutionality are raised" and "consequently, the AT services cannot be imputed any error of fact or law, given the compliance with the law that informs all of its activity.

6.1 Possibility of Assessment in Tax Arbitration Proceedings of Requests for Reimbursement of Tax Paid and Compensatory Interest

Pursuant to section b) of Article 24 of the RJAT, the arbitral decision on the merits of the claim which is not subject to appeal or challenge binds the Tax Administration from the end of the period provided for appeal or challenge, and the latter must, in the exact terms of the success of the arbitral decision in favor of the taxpayer and until the end of the period provided for the voluntary execution of the decisions of the tax courts, "restore the situation that would have existed if the tax act which is the subject of the arbitral decision had not been performed, adopting the acts and operations necessary for that purpose", which is in keeping with the provision of Article 100 of the General Tax Law [applicable by force of section a) of Article 29(1) of the RJAT] which establishes that "the tax administration is obliged, in the event of total or partial success of a claim, judicial challenge or appeal in favor of the taxpayer, to the immediate and full restoration of the legality of the act or situation which is the subject of the dispute, including the payment of compensatory interest, if applicable, from the end of the period of execution of the decision".

Although Article 2(1)(a) and (b) of the RJAT uses the expression "declaration of illegality" to define the jurisdiction of the arbitral tribunals operating at the CAAD, making no reference to condemnatory decisions, it should be understood that it encompasses the powers that in judicial challenge proceedings are attributed to the tax courts, and this is the interpretation that is in keeping with the meaning of the legislative authorization on which the Government based itself to approve the RJAT, in which it is proclaimed, as the first guideline, that "the tax arbitration process must constitute an alternative procedural means to the judicial challenge process and to the action for the recognition of a right or legitimate interest in tax matters".

The judicial challenge process, although essentially a process of annulment of tax acts, admits of condemnation of the Tax Administration to the payment of compensatory interest, as is apparent from Article 43(1) of the General Tax Law, which establishes that "compensatory interest is due when it is determined, in an amicable claim or judicial challenge, that there was an error attributable to the services from which results payment of the tax debt in an amount greater than legally due" and from Article 61(4) of the CPPT (as amended by Law No. 55-A/2010, of 31 December, to which corresponds Article 61(2) in the original version), which states that "if the decision recognizing the right to compensatory interest is judicial, the deadline for payment runs from the beginning of the deadline for its voluntary execution".

Thus, Article 24(5) of the RJAT, when stating that "payment of interest is due, regardless of its nature, in the terms provided for in the general tax law and in the Code of Procedure and Tax Process", should be understood as allowing recognition of the right to compensatory interest in the arbitration process.

On the other hand, as the right to compensatory interest depends on the right to reimbursement of amounts paid improperly, which is its calculation basis, it is implicit in the possibility of recognition of the right to compensatory interest the possibility of assessment of the right to reimbursement of such amounts.

Accordingly, the claim for reimbursement of the amounts improperly paid and for payment of compensatory interest must be assessed.

6.2 Right to Reimbursement

On the basis of what has been stated, the claim for arbitral pronouncement succeeds only partially, as regards the first subsidiary claim, to the extent of that part of the assessment which has as its basis the value of the land for construction intended for commerce, industry and services.

The value of the assessment relating to such land is € 7,586.33.

Following the partial illegality of the assessment act, there is grounds for reimbursement of improperly paid tax, by force of Articles 24(1)(b) of the RJAT and 100 of the General Tax Law, as this is essential to "restore the situation that would have existed if the tax act which is the subject of the arbitral decision had not been performed".

In light of the foregoing, the claim for reimbursement of the amount of € 7,586.33 succeeds.

6.3 Compensatory Interest

As results from point 5.3, the illegality of the assessment does not result from unconstitutionality, but rather from the interpretation that should be made of Article 135-B(2) of the CIMI.

Thus, the case law invoked by the Tax and Customs Authority on the non-existence of the right to compensatory interest in cases in which the illegality of the assessment derives from unconstitutionality does not apply here.

The Claimant paid the assessed amount and is entitled to reimbursement of the amount of € 7,586.33.

On the basis of what has been stated, the partial illegality of the assessment act is attributable to the Tax and Customs Authority, as it issued the assessment on its own initiative, with an erroneous interpretation of the law, in that respect.

Consequently, the Claimant is entitled to compensatory interest, pursuant to Articles 43(1) of the General Tax Law and 61 of the CPPT, as regards the amount to be reimbursed.

The compensatory interest shall be paid from the date on which the Claimant made the payment until full payment of the amount that should be reimbursed, at the statutory default rate, pursuant to Articles 43(4) and 35(10) of the General Tax Law, Article 61 of the CPPT, Article 559 of the Civil Code and Ordinance No. 291/2003, of 8 April.

7. Decision

Accordingly, this Arbitral Tribunal agrees:

A) To judge the request for arbitral pronouncement partially well-founded, regarding the question of the application of AIMI to the value of land for construction for commerce, industry and services, indicated in subsection d) of the statement of facts established;

B) To partially annul the assessment of the Additional Municipal Property Tax ("AIMI") bearing no. 2017..., in the amount of € 7,586.33;

C) To judge the request for reimbursement of the amount paid partially well-founded, in the amount of € 7,586.33 and to order the Tax and Customs Authority to reimburse the Claimant of such amount;

D) To judge the request for compensatory interest partially well-founded and to order the Tax and Customs Authority to pay such interest to the Claimant calculated on the amount of € 7,586.33, from the date of payment until the date of issuance of the credit note;

E) To judge the request for arbitral pronouncement unfounded as regards the remaining issues and to absolve the Tax and Customs Authority of the respective claims.

8. Value of the Case

In accordance with the provisions of Article 305(2) of the CPC and Article 97-A(1)(a) of the CPPT and Article 3(2) of the Regulation: € 117,926.08.

9. Costs

Pursuant to Article 22(4) of the RJAT, the amount of costs is fixed at € 3,060.00, in accordance with Table I attached to the Regulation on Costs in Tax Arbitration Proceedings, to be borne by the Claimant and the Tax and Customs Authority in the proportions of 93.57% and 6.43%, respectively.

10. Notification to the Public Prosecutor's Office

The Tax and Customs Authority requests notification of this arbitral decision to the Public Prosecutor's Office.

Since the Public Prosecutor's Office does not have special representation before the arbitral tribunals operating at the CAAD (Article 4(1) of the Statute of the Public Prosecutor's Office), this decision shall be communicated to the Office of the Attorney General, for such purposes as it may deem appropriate.

Lisbon, 04-05-2018

The Arbitrators

(Jorge Lopes de Sousa)
(Adelaide Moura)
(Ricardo Marques Candeias)

Frequently Asked Questions

Automatically Created

What is AIMI (Adicional ao Imposto Municipal sobre Imóveis) and how is it applied to property owners in Portugal?
AIMI (Adicional ao Imposto Municipal sobre Imóveis) is an additional tax levied on top of the standard Municipal Property Tax (IMI) in Portugal. It applies to individuals whose aggregate taxable property value exceeds €600,000 (€1,200,000 for married couples filing jointly) at progressive rates. For companies and corporate entities, AIMI applies to the total taxable value of urban properties without any exemption threshold, at a rate determined by law. The tax base is calculated using the taxable patrimonial values (valores patrimoniais tributários) registered in the property matrix. AIMI was introduced to increase revenue from high-value property holdings and applies annually based on property values as of January 1 of each tax year.
Can the constitutionality of AIMI be challenged through tax arbitration proceedings at CAAD?
Yes, the constitutionality of AIMI can be challenged through tax arbitration proceedings at CAAD (Centro de Arbitragem Administrativa), but with important limitations. Taxpayers may raise constitutional questions as part of their arbitration request when contesting AIMI assessments. However, as this case demonstrates, if an arbitral tribunal bases its decision on a finding of unconstitutionality, either party can appeal directly to the Constitutional Court (Tribunal Constitucional). The Constitutional Court has exclusive jurisdiction to make final determinations on constitutional matters. If the Constitutional Court disagrees with the arbitral tribunal's constitutional analysis, it can order a complete reform of the arbitral decision, requiring the tribunal to issue a new ruling consistent with the Constitutional Court's determination on constitutionality, as occurred in this case.
What is a reform of an arbitral decision (reforma da decisão arbitral) and when can it alter the operative part of a ruling?
A reform of an arbitral decision (reforma da decisão arbitral) is a significant modification requiring the arbitral tribunal to issue a completely new ruling with an amended operative part. Unlike a simple correction, a reform fundamentally changes the decision's conclusions. In Portuguese tax arbitration, reform occurs when the Constitutional Court reviews an appeal and determines that the arbitral tribunal based its decision on an erroneous constitutional interpretation. Following Constitutional Court ruling 01-10-2019 in this case, the arbitral tribunal was bound to reform its May 2018 decision, completely reversing from partial annulment of the AIMI assessment to declaring the taxpayer's claim entirely unfounded. The reform maintains procedural history but substitutes the earlier decision entirely, establishing the reformed version as the binding final ruling.
Does AIMI apply to the taxable value of land plots designated for commercial, industrial, and service construction?
Yes, AIMI applies to the taxable patrimonial value of land plots (terrenos para construção) designated for commercial, industrial, and service purposes. This case definitively established this principle after Constitutional Court intervention. Article 135-B(2) of the IMI Code, which governs AIMI's tax base, was determined to be constitutional in its application to such construction land. For companies and corporate entities subject to AIMI, all urban property holdings are included in the tax base calculation, including undeveloped construction land classified for commercial, industrial, or service development. The taxable value used is the valor patrimonial tributário registered in the property matrix. This ruling confirms that AIMI's scope extends beyond completed buildings to encompass development land, significantly impacting real estate holding companies and commercial property investors.
What are the rights to reimbursement and compensatory interest (juros indemnizatórios) when an AIMI liquidation is partially annulled?
When an AIMI assessment (liquidação) is partially or fully annulled, taxpayers have statutory rights to reimbursement of amounts paid and compensatory interest (juros indemnizatórios). The reimbursement covers the exact amount corresponding to the annulled portion of the assessment. Compensatory interest accrues automatically from the date of payment until issuance of the credit note (nota de crédito) by the Tax Authority, calculated at the legal rate established in the General Tax Law (Lei Geral Tributária). These rights are enshrined in Portuguese tax law to compensate taxpayers for the State's improper retention of funds. However, as this case demonstrates, if an arbitral decision granting such rights is later reformed on appeal, those entitlements are extinguished. The final reformed decision here eliminated the previously awarded €7,586.33 reimbursement and associated compensatory interest, illustrating that such rights depend on the definitive character of the favorable ruling.