AIMI Tax on Construction Land & Real Estate Companies: CAAD Case 675/2018-T Ruling on Constitutionality

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Ricardo Jorge Rodrigues Pereira and Jorge Carita, designated by the Deontological Council of the Centre for Administrative Arbitration to form an Arbitral Tribunal, hereby agree as follows:

I – REPORT

1. On 22 December 2018, A..., S.A., Tax Identification Number..., with registered office in..., ..., no...., ...-... ..., 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 RJAT), seeking a declaration of illegality of the assessment act for the Additional Municipal Property Tax (AIMI) no. 2018..., relating to the year 2018, in the amount of €102,856.56.

2. To support its request, the Claimant alleges, in summary:

i. the illegality of the assessment act, due to errors in the factual and legal premises, in subjecting the properties held by the Claimant within the scope of its activity to AIMI

ii. subsidiarily, the illegality of the taxation of "land for construction" intended for "commercial, industrial or services" purposes or "others", on the grounds that they are not covered by the scope of objective application of the rules under analysis;

iii. further subsidiarily, the unconstitutionality of the legal regime of AIMI, insofar as it applies to all "land for construction", as contrary to the principle of equality, enshrined in article 13 of the Portuguese Constitution and the principle of fiscal equality and contributory capacity enshrined in article 104, no. 3 of that fundamental law.

1. On 26-12-2018, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.

2. The Claimant did not proceed to appoint an arbitrator; therefore, pursuant to article 6, no. 2, paragraph a) and article 11, no. 1, paragraph a) of the RJAT, the President of the Deontological Council of CAAD designated the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable period.

3. On 14-02-2019, the parties were notified of these designations and manifested no intention to challenge any of them.

4. In accordance with the provisions of article 11, no. 1, paragraph c) of the RJAT, the collective Arbitral Tribunal was constituted on 06-03-2019.

5. On 08-04-2019, the Respondent, duly notified for this purpose, filed its response defending itself by contesting the claim.

6. Pursuant to article 16, paragraphs c) and e), and article 29, no. 2, both of the RJAT, the holding of the meeting referred to in article 18 of the RJAT was dispensed with, as well as the presentation of arguments by the parties.

7. It was indicated that the final decision would be notified by the deadline provided in article 21, no. 1 of the RJAT.

8. The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to articles 2, no. 1, paragraph a), 5 and 6, no. 2, paragraph a) of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to articles 4 and 10 of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

The proceedings do not suffer from any nullities.

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

Having considered everything, it is necessary to pronounce

II. DECISION

A. FACTUAL MATTERS

A.1. Facts found to be proven

1. The Claimant is a real estate company whose corporate purpose comprises the "installation and development, promotion and management of a science and technology park (property administration)".

2. The Claimant was notified of the tax assessment act for AIMI no. 2018..., relating to the year 2018, with reference to the real estate assets held by it, in the amount of €102,856.56.

3. The Claimant made full and timely payment of the said assessment, in the amount of €102,856.56.

4. On 22 December 2018, the Claimant filed the request that gave rise to the present arbitral action.

A.2. Facts found not to be proven

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

A.3. Substantiation of proven and unproven factual matters

With respect to factual matters, the Tribunal need not pronounce on everything alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to discriminate between proven and unproven matters (cf. article 123, no. 2 of the Tax Code of Procedure and Process and article 607, no. 3 of the Code of Civil Procedure, applicable ex vi article 29, no. 1, paragraphs a) and e) of the RJAT).

Thus, the facts relevant to the judgment of the case are selected and defined according to their legal relevance, which is established in light of the various plausible solutions to the question(s) of law (cf. previous article 511, no. 1 of the Code of Civil Procedure, corresponding to current article 596, applicable ex vi article 29, no. 1, paragraph e) of the RJAT).

Thus, taking into account the positions assumed by the parties, in light of article 110, no. 7 of the Tax Code of Procedure and Process, the documentary evidence and the administrative files attached to the record, the above-listed facts were considered proven, with relevance to the decision, taking into account that, as was written in the Judgment of the Administrative Court of South of 26-06-2014, rendered in case 07148/13, "the probative value of the tax inspection report (...) may have probative force if the assertions contained therein are not contested".

Neither proven nor unproven were allegations made by the parties and presented as facts, consisting of strictly conclusive statements, incapable of proof and whose truthfulness is to be assessed in relation to the concrete factual matter above established.

B. LAW

The main question to be resolved in the present arbitral proceeding concerns the determination of the scope of subjection of the "Additional Municipal Property Tax" ("AIMI"), which was introduced by the State Budget Law for 2017 (Law no. 42/2016, of 28 December) and which came 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 subjects of AIMI are "natural or legal persons who are owners, usufructuaries or holders of surface rights of urban real property situated in Portuguese territory" on 1 January of the year to which the Additional relates.

No. 2 of the same article provides that: "any structures or centres of collective interests without legal personality that appear in the tax rolls as passive subjects of municipal property tax, as well as undivided estates represented by the head of household, are treated as 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 values of urban real property situated in Portuguese territory of which the passive subject is the owner" – from which sum the amount of €600,000 must always be deducted whenever the passive subject is a natural person or an undivided estate.

Excluded from the objective scope of this Additional are "urban real property classified as "commercial, industrial or for services" and "others" 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 undivided estates, provided that the taxable amount does not exceed €1,000,000, pursuant to article 135-F, no. 1 of the Municipal Property Tax Code, and where the taxable amount exceeds €1,000,000, a rate of 1% applies when the passive subject 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 June, based on the tax values of real property subject to tax and in relation to the passive subjects listed in the tax rolls on 1 January of each year, and must be paid by the end of September.

As already noted, the Claimant raised the following questions:

a. illegality, due to errors in the factual and legal premises, of the application of AIMI, due to the holding of real property in the context of its activity;

b. subsidiarily, the illegality of the taxation of "land for construction" intended for "commercial, industrial or services" purposes or "others", on the grounds that they are not covered by the scope of objective application of the rules under analysis;

c. also subsidiarily, the unconstitutionality of the legal regime of AIMI, insofar as it applies to all "land for construction", as contrary to the principle of equality, enshrined in article 13 of the Portuguese Constitution and the principle of fiscal equality and contributory capacity enshrined in article 104, no. 3 of that fundamental law.

The questions that arise in the present arbitral proceedings have already been the subject of various arbitral decisions, in some respects of different tenor, and reference may be made, for this purpose, among others, to the arbitral awards rendered in cases 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, and more recently 438/2018-T, 342/2018-T, 291/2018-T, 521/2018 and 631/2018-T.

Let us proceed, then.

a.

The Claimant understands that the legislator, in instituting AIMI, revealed the express intention of "AIMI representing an effective tax on real estate wealth" and "aimed to ensure that urban real property intended for economic activities would not be subject to AIMI taxation, recognizing that the mere holding of such real property does not constitute (and cannot constitute) a demonstrator of wealth, nor a sufficient indicator of the contributory capacity of the holders of such real property", as well as that "it is evident that the legislative purpose 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 of not unduly burdening the passive subjects who, by virtue of their economic activities, hold real property for the pursuance of their respective corporate purpose".

As for itself, the Claimant alleges that the real property held by it are the true elements of its "productive process (...), whether as rental assets or as true inventories intended for future transformation, intended exclusively for the pursuance of the activity and never able to be compared with elements demonstrative of wealth", that "the holding of real property configures, effectively, the substrate of all activity by the Claimant" and that "to tax these real property would mean directly taxing an 'economic activity' – something that the legislator expressly intended to avoid by creating AIMI."

On this basis, the Claimant concludes that "it cannot (...) accept – or understand – that the Tax Authority, through the assessment act now disputed, imposed this new AIMI on the assets held by it" nor that that Authority "considered, in determining the tax 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 in it "the passive subjects who, by virtue of their economic activities, hold real property for the pursuance of their respective corporate purpose", and in particular, for present purposes, real estate companies.

As to this question, the guidance of CAAD case law has been that taxation operates independently of the nature of the activity carried out, and reference may be made, by way of example, to the following decisions (regardless of the final decision on the merits or otherwise of the arbitral request):

a) as regards Real Estate Investment Funds – Case no. 664/2017-T and Case no. 686/2017-T;

b) financial institutions – Case no. 676/2017-T;

c) financial leasing institutions – Case no. 696/2017-T;

d) construction and urban development companies – Case no. 6/2018-T.

In this respect, it was written in the aforesaid case 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 real property intended for economic activities, on the pretext that it was legislative intention not to unduly burden the passive subjects who possess real property by virtue of their corporate purpose, has no support in the wording of the law nor in the rational and systematic elements of interpretation.", concluding that "the intended extension of the legislative formula used to real property intended for the economic activity of the company, regardless of the specific characterization as commercial, industrial or services real property, has no place in light of general criteria of legal hermeneutics."

This understanding is also defended in the recent Arbitral Decision no. 420/2018-T of 05-01-2018, pursuant to which, it is considered that although the legislator demonstrated concern to avoid the impact of AIMI on economic activity, "(…) it was not on the basis of the activity to which the real property is intended that the exclusion of application was defined, since in the adopted wording, non-application was defined only on the basis of the types of real property indicated in article 6 of CIMI without any reference to the allocation to the functioning of legal persons." That Decision continues by stating that "The allocation of real property, which presupposes a use, and the purpose to which it is intended, the 'normal destination', underlying the classifications of real property, to which no. 2 of article 6 of CIMI refers, are distinct concepts". It concludes by stating that, "If the final version of the Budget had maintained the legislative intention to remove the application to real property directly intended for the functioning of legal persons, the reference to this allocation that was in the proposal and which clearly expressed this legislative option would certainly have been maintained. Thus, since this reference to the allocation of real property was suppressed, there is no legal support to conclude that residential real property and land for construction intended for the activity of legal persons do not fall within the scope of AIMI."

The same understanding is followed here, noting additionally that the argument presented by the Claimant is flawed in several of its premises.

Thus, the understanding that the legislator "in instituting AIMI, intended to create an effective tax on real estate wealth" is not subscribed to, being considered instead that AIMI corresponds in substance to form, being an additional tax to the Municipal Property Tax, implementing what had been the understanding of some, including the Constitutional Court, which considered that "item 28.1 of the General Stamp Tax Table was assumed to be a 'complementary Municipal Property Tax rate'".

Neither are the conclusions of the Claimant subscribed to, according to which the legislator "aimed to ensure that urban real property intended for economic activities would not be subject to AIMI taxation, recognizing that the mere holding of such real property does not constitute (and cannot constitute) a demonstrator of wealth, nor a sufficient indicator of the contributory capacity of the holders of such real property", as well as that "it is evident that the legislative purpose 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 of not unduly burdening the passive subjects who, by virtue of their economic activities, hold real property for the pursuance of their respective corporate purpose".

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

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

Beyond that, however, the legislator created different rates for legal persons and natural persons, including a surcharge in cases where the taxable amount exceeds €1,000,000, limited to the latter, which cannot fail to be based, if not entirely, at least in large part, on the consideration that real property held by legal persons, as a rule, will be intended for economic activities.

Indeed, as Professor José Maria Fernandes Pires states, AIMI aimed to "tax wealth in a progressive manner, above a certain amount, when the holders are natural persons and all the wealth of legal persons, regardless of amount and at a proportional rate", so it should be considered that it was never in the mind of the legislator to exclude economic activities, but rather to exclude urban real property classified according to a purpose.

In truth, if that were the intention, knowing that the majority of legal persons engage in economic activities, it would make no sense at all to tax legal persons from a subjective perspective.

It follows that, with the aforesaid Author, it should be considered that "AIMI is levied, as we have already stated, only on wealth materialized in a small part of urban real property, so it is a partial, but personal, tax on urban real estate wealth."

The understanding that the legislator recognized "that the mere holding of such real property does not constitute (and cannot constitute) a demonstrator of wealth, nor a sufficient indicator of the contributory capacity of the holders of such real property" is likewise not considered acceptable. Indeed, and this will be a notorious reality and, as such, insurmountable, it will be undeniable that a legal person that holds real property valued at €100,000,000.00 reveals a contributory capacity (from the perspective of the tax in question), manifestly superior to another legal person that, with the same purpose, holds real property valued at €100,000.00.

Furthermore, and as already stated, AIMI should be understood and treated as such, that is, as an additional tax to the Municipal Property Tax. Now, being so, how can the contributory capacity evidenced by legal persons through the holding of real property, even though intended for their productive activity, be precisely the same, both as regards subjection to AIMI and as regards subjection to Municipal Property Tax.

Thus, and in light of the above, the arbitral request is deemed not to be well-founded in this part.

b.

With respect to the first subsidiary request, the Claimant considers that "the legislator intended to tax real property (...) intended for residential purposes. This intention results from the wording of the law and, moreover, was at the genesis of the creation of this additional tax".

Furthermore, the Claimant 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 real property intended for economic activities, it should necessarily be understood that 'land for construction' intended for those activities is also included in that exclusion rule", being that, for the Claimant, "To understand that 'land for construction' intended, according to the terms of their respective property records, for purposes of 'commerce, industry, services' or 'others', are subject to AIMI – as has been understood by the Tax Authority – is manifestly contrary to the spirit of the law and, moreover, illegal".

The Claimant further points out that "only by mere absurdity would it be considered understandable and adequate to the purposes aimed at by AIMI the hypothesis that the Tax Authority would tax 'land for construction' with a potential use of 'industry' and not tax a real property (constructed) with the same use – even if that real property is not actually being exploited in the context of the exercise of an economic activity."

In this context, for the Claimant, "the subjection of this land for construction to AIMI causes a greater tax burden on this type of urban real property and, consequently, will not fail to have an impact on the economic activities that will potentially be developed on these real property", so that "the taxation methodology adopted by the Tax Authority, in the sense of including in the taxable value for AIMI purposes, the passive subjects 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 infringes, without more, the principle of equality, constitutionally enshrined in articles 13 and 104, no. 3, of the Portuguese Constitution and in articles 5 and 55 of the General Tax Law".

Thus, the Claimant concludes, "the AIMI tax assessment act, in the portion that taxes 'land for construction' intended for 'services' purposes – corresponding to the tax amount of €96,347.40 (...) is tainted by manifest illegality, due to errors in the factual and legal premises, and should be partially annulled."

With respect to this subsidiary request, the Claimant seeks, in summary, an expansion of the objective exclusions from subjection to AIMI, enshrined in no. 2 of article 135-B of CIMI, so as to also include urban real property classified as "land for construction", provided that the construction provided for thereon can be attributed to one of the types to which the said no. 2 refers, that is, urban real property intended for "commercial, industrial or services" purposes or "others".

With respect to this question, now presented to the decision by the Claimants, arbitral case law has been divided.

Thus, for example, the decision rendered in case 686/2017-T, concluded that it should be excluded from AIMI taxation the "land for construction" without residential allocation, that is, with "commercial, industrial or services" purposes or "others".

This decision, based on the unity of the legal system, defends the possibility of extensive interpretation of the exclusion provided in no. 2 of article 135-B of CIMI, in those proceedings, with respect to urban real property classified as "for services", "as expressing a legislative intention to also exclude from taxation land intended for the construction of such real property".

For the said Arbitral Tribunal, "Since the taxable fact chosen as an index of contributory capacity is the ownership of real estate assets 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 land intended for their construction, especially since the value of the land is incorporated into the value of the buildings.

That same Tribunal further stated that, if it decided otherwise, it would conclude for the material unconstitutionality of the norm that provides for such taxation.

Now in the decisions rendered in cases no. 676/2017-T and 664/2017-T (the first concerns Real Estate Investment Funds and the second concerns a credit institution), the claims of the claimants therein were decided against, in the sense of removing the taxation of "land for construction", even if the planned construction is for "commercial, industrial or services" purposes.

As for the taxation of land for construction with non-residential purposes, both of the aforesaid decisions converge, and the following can be read in the first:

"Having the legislator defined an exclusion clause by express and precise reference to certain species of urban real property, which are immediately identifiable in the context of the law, it is not possible to carry out an extensive interpretation in order to include other typologies that the legislator manifestly did not wish to consider. One cannot even arrive at that interpretive result based on mere considerations of a pragmatic order or of teleological identity".

It is not disputed that from the perspective of tax policy the solution could have been different, and with great respect for other opinions, it is considered that the exclusion of taxation of all or part of "land for construction" was not the solution adopted, since no. 2 of article 135-B of CIMI only provides for exclusion from AIMI taxation with respect to urban real property classified as "commercial, industrial or for services" and "others", precisely in accordance with paragraphs b) and d) of no. 1 of article 6, which inevitably leads to the taxation of the real property provided for in the two remaining paragraphs of that same article 6 of CIMI, that is, urban real property classified as "residential" (paragraph a)) or as "land for construction" (paragraph c)).

Covered by the taxation in question, in accordance with the letter of the law, are all urban real property classified as "residential" and all urban real property classified as "land for construction", and not merely some of them, being that if the legislator, in his taxation exclusion rule, intended to exclude a part of the real property referred to in paragraphs a) and c) of no. 1 of article 6 of CIMI, would have had all the possibility of doing so.

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

Regarding the possibility of extensive interpretation of the exclusion enshrined in said no. 2 of article 135-B of CIMI, in order to encompass land for construction not intended for residential purposes – a solution adopted in the decisions that upheld claims similar to that of the Claimant, now in question – it is considered, always with due respect to other understandings, that it should not be accepted.

Thus, and first and foremost, it is believed that the identity of situations does not exist in light of legally relevant criteria, necessary to effect that extension of the clause excluding objective scope of application, that is, it does not appear that land for construction is in a situation identical to that of constructed real property, from the point of view of the teleology of that exclusion clause.

From a teleological point of view, such a clause will have underlying it, in the first place, the purpose of not burdening with AIMI the real property intended for, or susceptible of immediate allocation to, productive processes, with land for construction not possessing such characteristics, given that while constructed real property will be, or will be susceptible of being, immediately allocated to productive processes, land for construction is not in such a situation.

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

In the words of that high Court:

"For tax purposes, real property (...) is clearly distinguished from land for construction, in accordance with article 6 of the Municipal Property Tax Code (CIMI), the first of those categories being constituted by buildings or constructions already existing (...), while the second consists exclusively of land for which the right to build buildings intended for that or other purposes is consolidated by an administrative act controlling a prior urbanization operation.

Thus, while buildings (...) correspond to a real buildability, definitely incorporated in the legal sphere of their owner, land for construction corresponds to a merely potential buildability, legally consolidated in the legal sphere of the property owner, but not yet materialized.

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

It will rightly be said that both correspond to real estate assets (...). And that, by their real estate 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 allow one to equate the contributory capacity of their respective owners, current or future, based solely on their allocation and their tax value.")

Indeed, already constructed real property has a material reality corresponding to the typology that is assigned to it. That is, to a constructed and licensed real property for, or which has as its normal destination, commerce, industry or services, there will correspond a material reality adequate for such purposes and, for present purposes, objectively distinct from constructed and licensed real property, or with normal destination, for residential purposes.

Land for construction, on the other hand, is distinguished from other land only on a merely legal plane, that is, in function of an action of a public entity (granting of license or authorization, admission of prior notification or issuance of favorable prior information of subdivision or construction operation - cf. article 6, no. 3 and article 37, no. 3 of CIMI) or of the owners (declaration of purpose in the acquisition deed; cf. article 6, no. 3 of CIMI), to which the Law attributes certain legal effects.

Thus, in function of the pointed-out material differentiation, the alteration of the allocation of a land for construction, from the point of view of the notes relevant to the problem in question, may be simple, requiring, for example, merely a declaration in the acquisition deed, the presentation and admission of a prior notification, or the presentation and approval of a prior information request.

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

Furthermore, a constructed real property has incorporated a significant value corresponding to the construction, which, even in cases where it is not concretely intended for the use in question, will constitute a natural incentive to its economic exploitation since, always from a point of view of normality, a constructed real property will not only not generate income, but will lose value (due to its degradation) by its non-use.

By contrast, land for construction not only does not incorporate, per se, any natural incentive for its construction and subsequent allocation to a productive activity, but, also from a point of view of normality, the opposite may occur, that is, in function of certain market conditions that create expectations of merely speculative gains, there may be incentives for the respective owners to maintain its condition as unbuilt land.

In this respect, the Claimant stated that the subjection of the land for construction in question to AIMI "causes a greater tax burden on this type of urban real property and, consequently, will not fail to have an impact on the economic activities that will potentially be developed on these real property".

Now, in light of the teleology surprised in the interpreted rule, above set out, the fact is that such an impact may even be positive, in that the taxation of land for construction may constitute an incentive for its construction, thus accelerating the effective use of real property in productive activities.

All that has been set out, it is considered, will justify a distinction in treatment, in line with the legally enshrined regime, and contrary to the extension of the exclusion clause by means of interpretive extension.

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

Let us see.

In the design of AIMI, and following what had been the evolution of taxation under item 28.1 of the Stamp Tax Code, the legislator made it very clear (by virtue, first and foremost, of the nomenclature and systematics of the taxation created, as well as the express reference to the relevant Municipal Property Tax norms) his intention that the categories relevant to the taxation in question be delineated in accordance with the criteria proper to CIMI.

And, under the terms of this Code, land – which is the category we are now concerned with – may be included in the categories of:

a) rustic; or

b) urban;

i. "for construction" of buildings intended for residential, commercial, services or industrial purposes;

ii. intended for "other" purposes.

The legislator, in the regime of AIMI created, excluded from subjection to the latter land qualified as "rustic", by virtue of the exclusive subjection of urban real property in no. 1 of article 135-A, and land qualified as "urban" intended for "other" purposes, by virtue of the exclusion clause of no. 2 of that cited article, being that the non-exclusion of land "for construction" of buildings with certain destinations (namely commerce, services or industry), cannot fail to be considered sufficiently grounded in considerations of a material order, as has already been seen.

Finally, it cannot fail to be considered relevant in this matter that the Administrative Supreme Court has understood that for the determination of the tax value of land for construction it is irrelevant the allocation of the planned construction.

Thus, in the Judgment of the Administrative Supreme Court of 20-04-2016, rendered in case 0824/15, it was considered that:

"From this rule it follows that the formula above transcribed only has application to the urban real property discriminated therein, that is, those that are already built for residential, commercial, industrial and services purposes.

However, the legislator did not include therein land for construction which it also classifies as urban real property in article 6 of CIMI.

For the determination of the tax value thereof there is the rule of article 45 already referred to where only the area of implantation of the building to be constructed and the adjacent land and the characteristics of no. 3 of article 42 are taken into account.

The remaining coefficients are not included therein because they can only apply to buildings, as such.

The allocation coefficient can only be relevant in the face of the proven use of the constructed real property and the same for comfort and quality.

Such multiplying coefficients of the tax value only apply to the constructed part, but have no real basis of support in the potential that land for construction offers."

And, further on, in the same judgment:

"But taking into account the reality, the legislator established for the determination of the tax value of this species of real property a specific rule – that contained in article 45 where it is reiterated that account is taken of the value of the area of implantation of the building to be constructed and the value of the land adjacent to the implantation as well as the characteristics of accessibility, proximity, services and location described in no. 3 of article 42. Taking into account the construction project approved and the provision of no. 2 of article 45 of CIMI.

Which means that in the determination of its tax value of land for construction there is no application of the mathematical formula enshrined in article 38 of CIMI.

And being so the coefficients of allocation and quality and comfort related to the real property to be built can neither be nor should be taken into account in that evaluation.

Indeed, the allocation coefficient has to do with the type of use of the already constructed real property and the same is true of the quality and comfort coefficient.

On land under construction the approved buildings are merely potential and it is the value of that constructive capacity, generating an increase in tax value or wealth for its owner that is sought to be taxed. And not factors not yet materialized."

The aforesaid understanding was sanctioned by judgment of the Plenary of the Contentious Tax Chamber of the Administrative Supreme Court of 21-09-2016, rendered in case 01083/13, in whose summary it is synthesized that:

"III - In the determination of the tax value of land 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 CIMI is the specific rule that regulates the determination of the tax value of land for construction.

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

Thus, it is concluded that for the purposes of ascertaining the tax value under CIMI, the destination of the planned construction on "land for construction" is irrelevant, not being distinguished, from the point of view of patrimonial taxation and, consequently, of the evidencing of contributory capacity, land for construction of residential buildings, from land for construction of commercial, industrial or services buildings.

By contrast, and in function of the application of the allocation coefficient enshrined in article 41 of CIMI, in constructed buildings, the destination of the buildings has an impact on the tax value, and consequently on the contributory capacity, considered for taxation purposes.

In the context of AIMI, given what has already 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 "land for construction" with planned buildings of distinct purposes signals different contributory capacities.

Taking into account what has been set out, considering that the expansion, by means of extensive interpretation, of the objective exclusions from subjection to AIMI, enshrined in no. 2 of article 135-B of CIMI, should not be effected, so as to also include therein urban real property classified as "land for construction", provided that the construction provided for therein can be attributed to one of the types to which the said no. 2 refers, that is, urban real property intended for "commercial, industrial or services" purposes or "others", this arbitral request should also not be well-founded.

c.

Also subsidiarily, the Claimant understands that the regime of AIMI taxation is contrary to the principle of equality, enshrined in article 13, and the principle of fiscal equality and contributory capacity enshrined in article 104, no. 3, both of the Portuguese Constitution, on the grounds that, in its understanding, the legal regime of AIMI, in particular 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 estate assets held by entities dedicated to real estate exploitation (here including the purchase, sale, construction, promotion and leasing), could only result from the idea that those real property, productive factors of these companies and means for the exercise of their economic activity, constitute an index of increased contributory capacity – which cannot be accepted".

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

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

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

Thus, contrary to the Claimant, it is not believed that "By making that distinction – in addition to contravening 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 real property already built and on the other, ii) land for construction intended for commerce, industry, services or others.", the alleged violation of the principle of equality not being verified.

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

In this respect, as has already been seen, the contributory capacity aimed at is the same as that of the Municipal Property Tax, to which AIMI is added, being that the legislator opted to enshrine lighter taxation rates for legal persons, in relation to natural persons.

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

As is referred to in Arbitral Decision no. 668/2017-T, "it has been uniformly understood by the Constitutional Court that the principle of equality as a limit to legislative discretion does not require equal treatment of all situations, but rather requires that those in equal situations be treated equally and those in unequal situations be treated unequally, in a manner as not to create arbitrary and unreasonable discriminations, because lacking sufficient material foundation".

Furthermore, in the case in question, contrary to what the Claimant points out, we are not faced with a burdening, but with a non-relief.

For, well viewed, the normative structure created for AIMI consists of a general scope thereof, superimposed on the real property subject to Municipal Property Tax, followed by the removal of the incidence with respect to certain types of real property.

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

Furthermore, the Claimant's argument in terms of constitutionality ultimately reflects some argument contained in the constitutional case law relating to the, since then repealed, taxation under item 28.1 of the Stamp Tax Code, in particular that which was condensed in the afore-mentioned Judgment no. 250/2017 of the Constitutional Court, of 24 May 2017, rendered in case no. 156/2016, also cited by the Claimant.

There it is referred to, among other things, the following, with correspondence in the questions now raised by the Claimant:

• "the rule 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 home of tax value above 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 land for construction there will normally be an entrepreneur, as a rule in the form of a commercial company dedicated to real estate promotion, about whose economic force we know nothing. In fact, we cannot presume that that taxpayer has an economic force proportional to the value of the land, which is merely instrumental in relation to his economic activity. We do not know what profit margin he will derive from its exercise, if he is in legal and economic conditions to develop it, or whether he may not even have a negative net position.";

• "the different reality of the taxation of land for construction, which has a greater impact on the economic activity carried out by its owner than on the value of the asset in itself. With the added burden that the respective tax charge, if it does not permanently jeopardize that activity, will end up being borne by the final consumer of the real estate products resulting from it, of whose contributory 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 purpose pursued by the latter, it will indiscriminately affect, for example, a luxury residence in a tourist development in the Algarve and land for construction of a collective residential building under a cooperative regime in the metropolitan suburbs of Lisbon or Porto."

Thus, from the aforesaid judgment of the Constitutional Court, it would appear possible to draw the understanding, sustained by the Claimant, that the non-consideration of the purpose of the holding of the real property and/or the quality of the subject holding it may generate the unconstitutionality of the tax.

Such understanding is, however, not subscribed to, in line with the dissenting vote delivered in the aforesaid judgment by the Illustrious Counselor Manuel da Costa Andrade, as well as in line with the more recent case law of the Constitutional Court.

Recently, the Constitutional Court, in the context of Judgment no. 378/2018, came to understand that, after all, there is no unconstitutionality of item 28 of the General Stamp Tax Table, considering that, "the tax provided for in item 28.1, as is proper of taxes on assets, delimits its scope of application by exclusive reference to the ownership of certain asset values «regardless of the function performed by such assets (productive capital, application of funds, or durable consumption». On the other hand, being a tax on assets, it does not single out nor distinguish the respective passive subjects by resort to any criterion other than precisely the ownership of such asset values".

Thus, and the Constitutional Court itself evidences this, one thing is the taxation of income, another that of assets, the latter being, by nature, will essentially regard the asset value of the assets held, and not the personal situation of its holder, being, even in function of the reasons of practicability, reduced the personalization factors.

This line of argument has been reinforced in the more recent case law of the Constitutional Court, which even in its Judgment no. 22/2019, of 9 January 2019, decided "Not to declare unconstitutional the rule contained in item 28.1 of the General Stamp Tax Table, annexed to the Stamp Tax Code, in the wording given by Law no. 83-C/2013, of 31 December, insofar as it applies to situations in which land for construction belongs to companies engaged in the commercialization of land for resale".

As was written in the already mentioned CAAD Decision no. 420/2018-T, "assets provide their holder with a special contributory capacity, advantages which by their nature escape the tax on personal income (…) In this perspective, the tax on assets is seen as something more than an extension of the tax on personal income – it is not a matter of overburdening income here that is already subject to it but of reaching manifestations of contributory capacity that in fact escape it".

Indeed, also in the context of Municipal Property Tax, Stamp Duty on Real Estate Transfers, Vehicle Tax, Real Estate Transaction Tax, Stamp Tax, a distinction is not usually made, the manifestations of wealth (contributory capacity) of the factors of production of that same wealth (that is: a taxable event subject to Municipal Property Tax, Stamp Duty on Real Estate Transfers, Vehicle Tax, Real Estate Transaction Tax, Stamp Tax, will abstract, as a rule, from the circumstance that it has occurred in the context of "consumption" [broad sense] or of "production of wealth"), being that the differentiation will occur, as in the case of AIMI, by means of the consideration as cost of the tax borne, in the context of income tax (cf. article 23, no. 2, f) of the Corporate Income Tax Code).

Reference is made again in the Judgment of the Constitutional Court no. 378/2018, with respect to item 28.1 of the General Stamp Tax Table, that "the rule in question is based on the consideration of concrete legal-patrimonial situations, delimited in function of the tax value of the real property and its normal social allocation, integrating in its subjective scope of application a set of undetermined taxpayers in accordance with a uniform criterion (…). For none of them is their concrete economic-financial situation (income or profits), their nature (singular or collective), organizational structure (entrepreneurial or not entrepreneurial), concrete legal form assumed (commercial company or other) and, much less, the various activity sectors in which the merchants covered may eventually operate and the specific risks inherent to each of those branches of activity".

As to the understanding pursued by the Claimant, based on Judgment no. 250/2017 of the Constitutional Court, of 24 May 2017, rendered in case no. 156/2016, note, finally, that item 28.1 of the General Stamp Tax Table, as it was conceived in addition of application to land for construction by Law no. 83-C/2013, as unconstitutional, essentially due to the lack of personalization of the tax, a situation that with the creation of AIMI was resolved, and considering furthermore the different legal structure (in Stamp Tax there was no reference to article 6 of CIMI, and one spoke of "residential allocation"), as well as the different structure and ratio of the Stamp Tax and the "additional to the Municipal Property Tax", all of which will point in the direction that the question of unconstitutionality is now superseded.

Indeed, in the sense defended in Judgment no. 378/2018 of the Constitutional Court, it is concluded that "the mere statistical probability of being reached by the rule in question of commercial companies dedicated to real estate promotion, associated with the promotion of economic variables of uncertain verification, such as the impact of the tax on that particular branch of commercial activity whose value, moreover, will not fail to be considered as a cost of the activity – does not constitute a sufficiently solid reason to support a judgment of unconstitutionality of the rule in question, in the specific hypothesis in appraisal, considering, moreover, the negative character of constitutional review dictated by the principle of equality".

Thus, and in light of the above, it is considered that consequences should not be drawn in terms of constitutionality of the AIMI rules, applied in the case, in particular with respect to the violation of the Constitutional norms pointed out by the Claimant, and therefore the arbitral request also does not proceed in this part.

As a result of what was decided, the accessory request for indemnification interest is also prejudiced, filed by the Claimant, which is dependent, naturally, on the well-foundedness of some of the remaining requests, which is not the case.

C. DECISION

We hereby decide in this Arbitral Tribunal to judge the arbitral request filed entirely unwell-founded and, consequently:

a) Dismiss the Respondent's claim;

b) Maintain in the legal order the tax assessment act that is the subject of the present arbitral action; and

c) Condemn the Claimant for the costs of the proceedings, in the amount set out below.

D. Value of the proceedings

The value of the proceedings is fixed at €102,856.56, pursuant to article 97-A, no. 1, a), of the Tax Code of Procedure and Process, applicable by virtue of paragraphs a) and b) of no. 1 of article 29 of the RJAT and no. 3 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The value of the arbitration fee is fixed at €3,060.00, pursuant to Table I of the Regulation of Costs of Tax Arbitration Proceedings, to be paid by the Claimant, since the request was entirely unwell-founded, pursuant to article 12, no. 2, and article 22, no. 4, both of the RJAT, and article 4, no. 5, of the cited Regulation.

Notify accordingly.

Lisbon, 2 May 2019

The Presiding Arbitrator

(José Pedro Carvalho)

The Arbitrator Vogal

(Ricardo Jorge Rodrigues Pereira)

The Arbitrator Vogal

(Jorge Carita)