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Full Decision
ARBITRAL DECISION
The arbitrator Dr. José Joaquim Monteiro Sampaio e Nora, designated by the Deontological Council of the Administrative Arbitration Centre as sole arbitrator on 6 March 2019, hereby delivers the following arbitral decision:
I. REPORT:
A..., S.A. (hereinafter briefly referred to as the "Claimant"), holder of tax identification number ..., with registered office at ..., no. ..., ..., ..., ...-... Carnaxide, has, pursuant to the provisions of subparagraph a) of paragraph 1 of article 2nd and paragraphs 1 and 2 of article 10th, all of Decree-Law no. 10/2011, of 20 January ("Legal Framework for Arbitration in Tax Matters" or "RJAT") and articles 1st and 2nd of Ordinance no. 112-A/2011, of 22 March, requested the CONSTITUTION OF AN ARBITRAL TRIBUNAL for the purpose of obtaining a declaration of illegality of the tax assessment act for the Additional Municipal Property Tax ("AIMI"), no. 2018..., relating to the year 2018, in the total amount of € 10,726.19, on the grounds of errors in factual and legal assumptions, such assessment being liable to annulment, with all legal effects, on the understanding that in creating AIMI, the legislator intended to tax only properties – already built properties and land – for residential purposes, and therefore the AIMI assessment on the "building land" destined, in accordance with the respective property records, for purposes of "commerce, industry, services" or "other uses" is unlawful, which, in its view, are not subject to AIMI, as has been consistently understood by the Tax Authority.
Furthermore, AIMI cannot apply to the real estate assets of real estate brokerage companies, since it constitutes the substrate of their activity and cannot be considered as an indicator of their contributory capacity for AIMI tax purposes, as it does not indicate wealth or fortune.
Following these grounds, the Claimant considers that articles 135º.-A and 135º.-B of the Municipal Property Tax Code should be disapplied to real estate companies as unconstitutional, for violation of the principles of equality and equality in fiscal taxation, provided for in articles 13º. and 104º., no. 3 of the Portuguese Constitution.
For this reason, it requests that the present application for annulment of the assessment be allowed, with the consequent condemnation of the Tax Authority to refund to the Claimant the tax unduly assessed and paid by it, with the condemnation of the Tax Authority to payment of indemnity interest, at the legal rate, calculated until full reimbursement to the Claimant of the amount unduly paid.
The respondent is the TAX AUTHORITY AND CUSTOMS SERVICE.
The application for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax Authority and Customs Service on 26-12-2018.
Pursuant to the provisions of subparagraph a) of paragraph 2 of article 6th and subparagraph b) of paragraph 1 of article 11th of the RJAT, in the wording introduced by article 228th of Law no. 66-B/2012, of 31 December, the Deontological Council designated as sole arbitrator the undersigned, who communicated acceptance of the appointment within the applicable period.
On 26-12-2018 the parties were duly notified of this designation, and did not manifest any intention to challenge the appointment of the arbitrator, in accordance with the combined provisions of article 11th, paragraph 1, subparagraphs a) and b) of the RJAT and articles 6th and 7th of the Deontological Code.
Thus, in accordance with the provision of subparagraph c) of paragraph 1 of article 11th of the RJAT, in the wording introduced by article 228th of Law no. 66-B/2012, of 31 December, the singular arbitral tribunal was constituted on 6-3-2019.
Notified to respond on 7/3/2019, the Tax Authority and Customs Service (hereinafter referred to as "Tax Authority") presented its response on 18-3-2019, in which, with abundant citation of doctrine and case law, it refutes the Claimant's arguments, maintaining that there are no grounds for differentiated treatment of real estate companies and, on the other hand, all building land should be subject to AIMI taxation, regardless of the intended purpose of the properties that the owner intends to construct on such land.
Consequently, there is no violation of constitutional provisions by the Tax Authority in its interpretation of the norms of articles 135º.-A and 135º.-B of the Municipal Property Tax Code, requesting that, should an unconstitutionality be found to exist, the decision be notified to the Public Prosecutor, for the purposes of article 280º., no. 3 of the Portuguese Constitution and article 72º., no. 3 of the Constitutional Court Act.
By arbitral order of 13-4-2019, the hearing provided for in article 18th of the RJAT was dispensed with and the parties were given the opportunity to, if they wished, present written submissions, with the Claimant able to do so within 10 days of notification of that order, and the Tax Authority within the same period, counted from notification of the Claimant's submissions, or from the expiry of that period.
Neither party made use of this facility.
It was further decided that the final decision would be rendered within 30 days after submission of submissions by the Respondent, or after expiry of the respective period, and the Claimant was notified to give due compliance with the provisions of article 4º-3 of the Costs Regulation in Tax Arbitration Proceedings, that is, payment, before the decision and in the manner provided for by regulation, of the remainder of the arbitration fee, which it has already done.
While the final judgment was being prepared, it was noted that the Claimant had not attached to the case file any document evidencing its registered existence, at least with an indication of the Permanent Certificate code, including its purposes as a company, which can only be proved by document (article 364º of the Civil Code and article 75º of the Commercial Registry Code), and therefore, by order of 11/6/2019, the Claimant was notified to attach a document evidencing its registered existence and any municipal decision approving a construction project for the building land in question in the present case, and the Respondent to attach to the case file the Statement Form 1 of 26/3/2008, which ordered the registration of the building land in the urban property register, as well as the assessment report of the said land of 3/5/2008, as referred to in the property record attached by the Claimant. Consequently, and pursuant to the provisions of article 21st of the RJAT, the period for rendering the final decision was extended by a further 30 days.
By application of 17/6/2019, the Claimant attached the Permanent Certificate with access code no. ..., the statement for purposes of registration of the building land in question in the present case in the urban property register, and the assessment acts fixing the tax value of the property issued by the Tax Authority and Customs Service in the year 2008 concerning the said land.
Notified of this attachment, the Tax Authority made no comment.
II. PROCEDURAL ORDER:
The Arbitral Tribunal was regularly constituted, in accordance with the provisions of articles 2nd, paragraph 1, subparagraph a), and 10th, paragraph 1, of Decree-Law no. 10/2011, of 20 January, is competent as to the subject matter, the parties have legal personality and capacity and have standing (articles 4th and 10th, paragraph 2, of the same decree-law and article 1st of Ordinance no. 112-A/2011, of 22 March) and are properly represented, with no other exceptions or nullities known ex officio that need be addressed.
III. PROVEN FACTS:
In light of the documents attached by the Claimant and the agreement of the parties, whether express or by lack of challenge, the following facts are considered proven:
a) The Claimant is a public limited company, with registered office at ..., no. ..., ..., ..., in Carnaxide, and has tax identification number ... .
b) The Claimant has as its purpose the carrying out of real estate enterprises, namely the purchase, sale, civil construction, reconstruction, development, promotion and lease of own and third-party properties, including the resale of those acquired for that purpose.
c) There is registered in the urban property register of the Union of Parishes of ..., ... and ..., municipality of Porto, an urban property of the building land type, registered under matrix article no. ..., with the Claimant being the full owner of that property.
d) The said property was previously registered in the urban property register of the now extinct Parish of ... under matrix article numbers ..., ... and ..., already as building land, having been reported as such on 26-3-2008 to the Finance Office Porto –... .
e) It appears from the said matrix registration that the said building land was assessed as being destined for services, as per the respective property record.
e) There is no municipal decision approving a construction project, and a construction project for the property has not yet been drawn up.
f) The Claimant was notified of a tax assessment act for AIMI, relating to the year 2018, issued on 30 June 2018, in the amount of € 10,726.19, which should be paid in September 2018.
g) The Claimant paid the assessed tax within the period set for it.
h) The petition for the present arbitration request was filed on 22-12-2018.
Of relevance to the decision of the present case, no other fact was proven.
IV. QUESTIONS TO BE DECIDED:
1. Considering the proven facts and the substantive law contained in the request for arbitral decision submitted by the Claimant, there are two questions to be decided:
- on one hand, whether the Claimant, by being a real estate company, will be exempt from payment of AIMI regarding the properties of which it is the owner by reason of its corporate purpose and with future destination for resale or transformation into urban properties;
- on the other hand, whether or not those consisting of building land, which are registered as being destined for services and as such referring to the allocation coefficient on the basis of which the tax property value was determined, should be included in the urban properties to which AIMI does not apply;
- finally, whether, in the event of eventual acceptance of the interpretation advocated by the Claimant, the norms of articles 135º.-A and 135º.-B of the Municipal Property Tax Code would not be affected by unconstitutionality, and therefore, in addition to being interpreted in accordance with the terms advocated by the appellant, they should not even be disapplied on the grounds of such unconstitutionality.
2. AIMI – additional to municipal property tax – was created by Law no. 42/2016, of 28 December and inserted in the Municipal Property Tax Code (CIMI), after the addition of Chapter XV, with the designation of additional to municipal property tax, with the insertion of articles 135º.-A to 135º.-M and an amendment to article 1st of the CIMI.
As stated in paragraph 2 of article 1st of the CIMI, the AIMI "constitutes revenue of the Financial Stabilization Fund of Social Security".
Its objective scope of application is defined by article 135º.-B, paragraph 1, which provides that "the additional to municipal property tax applies to the sum of the tax property values of urban properties located in Portuguese territory of which the taxpayer is the owner", with article 135º.-A defining its subjective scope of application by determining that "passive subjects of the additional to municipal property tax are natural persons or legal entities who are owners, usufructuaries or holders of surface rights over urban properties located in Portuguese territory" (no. 1), and clarifying in no. 2 that "for the purposes of no. 1, any structures or centres of collective interests without legal personality that appear in the registers as passive subjects of municipal property tax, as well as the undivided estate represented by the head of household, are deemed equivalent to legal entities."
It is thus verified that AIMI, like the Municipal Property Tax, is a tax on real property, having as its object the taxation of real estate assets, regardless of who is the owner, usufructuary or holder of real rights over the properties.
However, for AIMI purposes, not all real estate assets can be taxed under AIMI, as referred to in article 135º.-B, no. 2, given that "excluded from the additional to municipal property tax are urban properties classified as «commercial, industrial or for services» and «other» in accordance with subparagraphs b) and d) of paragraph 1 of article 6th of this Code", thus negatively delimiting its objective scope of application, excluding from this real or objective scope of application, given the classification of urban properties contained in article 6th of the CIMI, only the urban properties referred to in subparagraphs b) and d) of paragraph 1 of that article, that is, residential urban properties and other properties, the latter being considered as "land situated within an urban agglomeration that are not building land".
But while the Municipal Property Tax defines exemptions of a personal nature for public law entities (article 11th, paragraph 1 of the CIMI) and special situations of commencement of taxation for certain activities (article 9th, subparagraph d) of the CIMI), the same does not apply to AIMI, which only has as exempt entities the aforementioned public law entities, only indirectly contemplating a special situation of commencement of taxation (article 135º.-B, no. 3, subparagraph a) of the CIMI).
3. Having presented this overview of AIMI, we now address the first of the questions we must analyze.
The Claimant is, without doubt, a real estate company, as can be concluded from proven facts 1 and 2, since it has as its purpose "the carrying out of real estate enterprises, namely the purchase, sale, civil construction, reconstruction, development, promotion and lease of own and third-party properties, including the resale of those acquired for that purpose" (fact b) of the proven facts).
For this reason, the Claimant considers that, by being a real estate company, it will be exempt from payment of AIMI regarding the properties of which it is the owner by reason of its corporate purpose and with future destination for resale or transformation into urban properties.
In its arguments, the Claimant seeks to demonstrate that the ownership of properties is merely the normal means of conducting its commercial activity, and therefore such ownership is not a factor indicating wealth, which is what AIMI proposes to tax, as written in the presentation of the reasons for AIMI taxation, but is a commodity of its economic activity.
For this reason, it must be considered here that legal significance is attributed to the tax situation of such companies within the Municipal Property Tax framework. Indeed, in cases of acquisition of properties for resale and of building land, provisions are made in subparagraphs d) and e) of paragraph 1 of article 9th of the CIMI for non-subjection to Municipal Property Tax for three and four years, respectively, and, by virtue of subparagraph a) of paragraph 3 of article 135º.-C of the same decree-law, for non-subjection to AIMI, in relation to taxpayers who are registered as engaged in such activity. During the period of "non-taxation" there is no tax effect to be considered under Municipal Property Tax, the property not being a reality qualified as real property for tax purposes, even for AIMI.
However, it results from the proven facts that the Claimant has been the owner of the said properties for more than 4 years, and therefore is already liable for Municipal Property Tax, and therefore no longer benefits from the advantage of article 135º., no. 3, subparagraph c).
4. Thus, being liable under Municipal Property Tax, it is unavoidably liable under AIMI, for lack of legal grounds for its non-taxation.
The argument put forward by the Claimant regarding the fact that the properties of which it is the owner are merely commodities of its commercial activity does not merit our acceptance, since the availability of properties is a factor of income for the Claimant as long as it is the owner of the properties, even if it is to sell them.
Furthermore, if it has at its disposal a broad set of properties, even if with a view to their future transformation through construction of buildings on land or with a view to their resale of those built properties or which it has already acquired built, this gives it the possibility of obtaining financing which it would not otherwise be able to obtain.
In sum, the greater or lesser extent of the real estate assets of a real estate company is a factor of wealth of that company by virtue of the income and advantages it can obtain from that property.
5. Furthermore, in weighing between the allocation criterion of the property that the Claimant invokes as grounds for the exclusion of AIMI from applying to urban properties destined for commerce, industry or services, on one hand, and the purposes to which the new taxation is intended, such as financing Social Security, ensured through the allocation of AIMI revenues to the Financial Stabilization Fund of Social Security, provided for in paragraph 2 of article 1st of the CIMI, in the wording of Law no. 42/2016, will also serve to answer negatively to the Claimant's request.
This is because, having the principle of diversification of sources of Social Security financing, in accordance with the respective Fundamental Law, the purpose of «reduction of non-salary labour costs» (article 88th of Law no. 4/2007, of 16 January), the exclusion of the scope of application as regards urban properties destined for commercial, industrial and service activities is still justified by the consideration that these are the typologies most frequently connected with the functioning of the business fabric; otherwise, companies, already called upon to support the financing of Social Security in their capacity as employers, would tend to see increased (and not reduced as prescribed by the Fundamental Law) the non-salary costs of labour with the expansion of the bases for obtaining financial resources of the system brought about by the fiscal measure.
Thus, it constitutes a reasonable and sufficient ground that, in the face of real estate assets not destined for such activities, whose holders will not be associated with the same intensity with the financing of Social Security as employers, the legislator should have privileged the collection of revenue allocated to the same system.
And, just as was concluded regarding the purpose of promoting economic structures and only to that extent and with this interpretation, the assertion of the intention not to excessively burden fiscally the taxpayers who, by virtue of their economic activities, hold properties for the pursuit of their corporate purpose makes sense, since they already contribute to the financing of the Social Security system, and therefore, with this weighing it can be concluded that the new taxation satisfies the requirements of the principle of proportionality. It is shown to be appropriate to the intended purpose – it provides for the increase of revenues –, it is necessary – the diversification and increase of sources of financing of Social Security is a condition of its sustainability – and is not shown to be excessive, whether in terms of the applicable rates, in particular for legal entities (article 135º.-J of the CIMI), or because the tax paid is deductible from taxable income for Corporate Income Tax purposes (article 135º.-J of the CIMI).
6. For this very reason, the Constitutional Court recently decided "not to find unconstitutional the norm extractable from article 135º.-B, nos. 1 and 2, of the Municipal Property Tax Code, added by article 219th of Law no. 42/2016, of 28.12, in the segment in which it subjects to taxation under the additional to municipal property tax (AIMI) the ownership of properties destined for housing and of building land for construction of properties destined for housing, belonging to companies whose object is the commercialization of properties."
The first question raised by the appellant thus fails, namely that by virtue of being a real estate company, it may be exempt from payment of AIMI regarding the properties of which it is the owner and which it destines, by virtue of its corporate purpose, in the future for resale or transformation into urban properties.
Similarly, the norms of articles 135º.-A and 135º.-B, both of the CIMI, should not be disapplied to companies that, like the Claimant, carry on real estate activities.
7. Having excluded the hypothesis of non-payment of AIMI for subjective reasons related to the nature of the economic activity conducted by the Claimant, it remains for us to determine whether objectively the property of which it is the owner may also benefit from the exemption included in article 135º.-B, no. 2 of the CIMI, because the tax assessment of the building land took into account the allocation coefficient "services".
It should be noted that it was not possible to determine the reason why it was considered that the building land owned by the Claimant would be allocated to services. This destination, beyond not appearing in the Claimant's property record, is not justified in the assessment report attached to the case file.
Furthermore, the allocation to services could only occur with the construction of any building or structure, which would necessarily be subject to municipal license indicating that purpose.
However, there is no licensing for construction on the land in question, nor is there even an application for a construction license, as the Claimant acknowledged.
Therefore, the building land in question in the present case could also be destined for residential purposes and would then no longer be exempt from AIMI.
For this reason, since the objective of the norm in paragraph 2 of article 135º.-B of the Municipal Property Tax Code is not to excessively burden real estate assets with an intermediary function within the organizational structure of the taxpayer, as regards building land this functional nexus is not yet established with sufficient assurance, since its owner is in no way prevented from altering the intended purpose, so as to destine to the construction of residential properties building land initially licensed for construction with other uses or even still not licensed. In the case of built properties with the purpose of commerce, industry, services or other uses, even though one cannot exclude the possibility of there being discrepancy between normal use and actual use, particularly in cases where there is no licensing or other constitutive intervention by municipal authorities or other entities holding public law powers, we can consider the probability of such a deviation to be slight, and to that extent the risk shows itself to be insufficient to call into question the structure of the tax.
Thus, the allocation considered for assessment purposes is not binding, nor has the legislator chosen it as relevant for AIMI scope of application purposes, even in cases where there may already be or has been requested municipal licensing.
Accordingly, neither the criterion chosen for comparing the legal and subjective situations – the potential use of urban properties – carries weight in the problematic area under consideration, nor are the owners of the two types of urban properties put in comparison – building land destined for commerce, industry, services or similar, on one hand, and constructed properties classified, in accordance with article 6th of the Municipal Property Tax Code, as «commercial, industrial or for services» or «other», on the other – in comparable positions, in accordance with the tax fact and the structure of AIMI's objective scope of application, and therefore there is found, also on this point, no ground to consider such building land as exempt from AIMI, by being framed in article 135º.-B, no. 2 of AIMI.
Moreover, it is not insignificant that article 6th, paragraph 1 of the CIMI has given autonomous status to building land (subparagraph c) as urban properties relative to residential buildings (subparagraph a) and commercial, industrial or service buildings (subparagraph b), an autonomy made without distinguishing any form of planned or unplanned use of such building land.
For this reason, the fact that an allocation coefficient for services was used in the assessment formula of such land is not binding for AIMI purposes, since the legislator makes no distinctions regarding building land for purposes of AIMI's objective scope of application, nor do the justifying reasons for the introduction of this tax already stated above and contained in article 1st, paragraph 2 of the CIMI, that is, the financing of the Social Security system, justify such a distinction.
Consequently, the Claimant's entire argument tending to demonstrate that the building land of which it is the owner is not subject to AIMI's objective scope of application is rejected, since those consisting of building land should not be included in the urban properties to which AIMI does not apply, solely and only because they are registered as being destined for services, and even though the allocation coefficient has been applied on the basis of which the tax property value was determined.
As a consequence, the norm subjecting AIMI taxation to the ownership of building land, disregarding its possible and eventual future uses, cannot be considered unconstitutional, not only because this choice falls within the legislator's margin of discretionary authority in the exercise of its legislative power, but also because this choice is not shown to be disproportionate, with no violation of the principle of equality, even in its negative aspect, since it subjects all owners of building land to the same regime of AIMI's scope of application, regardless of their future intention of construction on that particular parcel of land.
For this reason, we consider that the norm of 135º.-B, no. 2 of the CIMI is not affected by unconstitutionality, when properly interpreted, as we have set forth above, and should not be disapplied on the grounds of unconstitutionality.
8. With all the reasons and grounds invoked by the Claimant having failed, the application filed by it must be wholly rejected, both the application for a declaration of illegality of the AIMI tax assessment act, relating to the year 2018, in the total amount of € 10,726.19, and the consequent application for full restitution of the assessed and paid tax, plus the corresponding indemnity interest, as well as the alternative application for disapplication of the norms of articles 135º.-A and 135º.-B of the Municipal Property Tax Code, on grounds of unconstitutionality, by virtue of not violating any constitutional principle or norm.
V. INDEMNITY INTEREST:
In light of the Claimant's application for annulment of the assessment effected and paid being rejected, there is no ground for restitution of any amounts, and therefore the application for condemnation to payment of indemnity interest is also rejected.
VI - DECISION
Accordingly, and on the grounds set forth, the Arbitral Tribunal decides to wholly reject the application for a declaration of illegality of the AIMI assessment challenged, relating to the year 2018, in the total amount of € 10,726.19, absolving the Tax and Customs Administration of the applications filed by the Claimant, rejecting the alternative application for disapplication of the norms of articles 135º.-A and 135º.-B of the Municipal Property Tax Code, on grounds of unconstitutionality, by virtue of not violating any constitutional principle or norm, and condemning the Claimant to pay the costs of the present proceedings, as the losing party.
Value of the case: In accordance with the provisions of article 306th, no. 2 of the Code of Civil Procedure, 97º.-A, no. 1 a) of the Tax Procedure Code and article 3rd, no. 2 of the Costs Regulation in Tax Arbitration Proceedings, the value of the application is fixed at € 10,726.19.
Costs: Pursuant to article 22nd, no. 4, of the RJAT, and in accordance with Table I attached to the Costs Regulation in Tax Arbitration Proceedings, I fix the amount of costs at € 918.00, to be borne by the Claimant.
Lisbon, 9 July 2019,
The Arbitrator
José Sampaio e Nora
(Text prepared by computer, in accordance with article 131st, no. 5 of the Civil Procedure Code, applicable by referral from article 29th, no. 1, subparagraph e) of the RJAT and according to the former orthography).
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