AIMI Tax on Real Estate Investment Funds: Construction Land Taxation & Constitutionality (CAAD 681/2018-T)

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Nuno Pombo and Maria Alexandra Mesquita, appointed 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... – Real Estate Investment Fund Management Company, S.A., NIPC ..., with registered office at Avenue ..., ..., ..., ...-... ..., in its capacity as management company and on behalf of B... – CLOSED SPECIAL REAL ESTATE INVESTMENT FUND, NIPC..., C... – CLOSED SPECIAL REAL ESTATE INVESTMENT FUND, NIPC..., D... – CLOSED SPECIAL REAL ESTATE INVESTMENT FUND, NIPC..., E... – CLOSED SPECIAL REAL ESTATE INVESTMENT FUND, NIPC..., F... – CLOSED SPECIAL REAL ESTATE INVESTMENT FUND, NIPC..., G... – CLOSED SPECIAL REAL ESTATE INVESTMENT FUND, NIPC..., H... – CLOSED SPECIAL REAL ESTATE INVESTMENT FUND – NIPC ..., I... – CLOSED SPECIAL REAL ESTATE INVESTMENT FUND, NIPC..., J... – CLOSED SPECIAL REAL ESTATE INVESTMENT FUND, NIPC..., CLOSED REAL ESTATE INVESTMENT FUND K..., NIPC..., CLOSED REAL ESTATE INVESTMENT FUND L..., NIPC..., CLOSED REAL ESTATE INVESTMENT FUND M..., NIPC..., N... – CLOSED SPECIAL REAL ESTATE INVESTMENT FUND, NIPC..., O... – CLOSED SPECIAL REAL ESTATE INVESTMENT FUND, NIPC..., P... – CLOSED REAL ESTATE INVESTMENT FUND, NIPC..., Q... – CLOSED SPECIAL REAL ESTATE INVESTMENT FUND, NIPC..., R... – CLOSED REAL ESTATE INVESTMENT FUND, NIPC..., S... – CLOSED SPECIAL REAL ESTATE INVESTMENT FUND, NIPC..., CLOSED REAL ESTATE INVESTMENT FUND T..., NIPC ... and CLOSED REAL ESTATE INVESTMENT FUND – U..., NIPC..., 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 acts of assessment of the Additional Property Tax ("AIMI") No. 2018..., No. 2018..., No. 2018..., No. 2018..., No. 2018..., No. 2018..., No. 2018..., No. 2018..., No. 2018..., No. 2018..., No. 2018..., No. 2018..., No. 2018..., No. 2018..., No. 2018..., No. 2018..., No. 2018..., No. 2018..., 2018 ... and No. 2018..., relating to the year 2018, in the total amount of € 420,317.99.

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

i. The illegality of the assessment act, due to errors in the factual and legal grounds, by subjecting the properties held by the Applicant in the context of its activity to AIMI;

ii. Subsidiarily, the illegality of the taxation of "building land" intended for "commercial, industrial or services" or "other" purposes, on the grounds that they are not covered by the scope of objective incidence of the norms under analysis;

iii. Alternatively, the unconstitutionality of the AIMI legal regime, to the extent that it applies to all "building land", as contrary to the principle of equality, enshrined in Article 13 of the CRP and to the principle of tax 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 Applicant did not proceed with the appointment of an arbitrator, and therefore, pursuant to the provisions of paragraph a) of No. 2 of Article 6 and paragraph a) of No. 1 of Article 11 of the RJAT, the President of the Deontological Council of CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable deadline.

3. On 14-02-2019, the parties were notified of such appointments, and neither manifested a wish to refuse any of them.

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

5. On 09-04-2019, the Respondent, having been duly notified for this purpose, submitted its response defending itself by way of exception.

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

7. It was indicated that the final decision would be notified by the end of the deadline laid down in Article 21/1 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 Ministerial Directive No. 112-A/2011, of 22 March.

The proceedings are not affected by any nullities.

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

Everything having been considered, it falls to the Tribunal to render judgment.

II. DECISION

A. FACTS

A.1. Facts Established as Proven

1. The Funds notified of AIMI assessments constitute real estate investment funds managed and administered by the Applicant.

2. In the context of the activity carried out by the Funds, they are and were in 2018 owners of a portfolio of properties (documents 1 to 20, attached with the request for arbitral ruling), and the holding of this type of assets constitutes the substratum of all the activity of those investment funds.

3. The Funds were notified of AIMI assessments subject to the present arbitral action, relating to the year 2018, with reference to the real estate assets held by them.

4. In the said assessments, the Tax Authority included the following properties:

[Table of properties]

1. The Funds made full and timely payment of the said assessments, in the total amount of € 420,317.99.

A.2. Facts Established as Not Proven

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

A.3. Reasoning for the Established and Unestablished Facts

With regard to the facts, the Tribunal does not have to pronounce on everything that was alleged by the parties; rather, it is its duty to select the facts that matter for the decision and to distinguish the proven facts from those not proven (see Article 123, No. 2, of the CPPT and Article 607, No. 3 of the CPC, applicable by virtue of Article 29, No. 1, paragraphs a) and e), of the RJAT).

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

Thus, taking into account the positions assumed by the parties, in light of Article 110/7 of the CPPT, the documentary evidence and the Administrative Proceedings file attached to the record, the facts listed above were considered as proven, with relevance to the decision, taking into account that, as was written in the Decision of the TCA-South of 26-06-2014, rendered in process 07148/13, "the probative value of the tax inspection report (...) may have probative force if the assertions contained therein are not contested".

The allegations made by the parties and presented as facts, consisting of strictly conclusive assertions, incapable of proof and whose truthfulness must be assessed in relation to the concrete facts established above, were neither established as proven nor as not proven.

B. LEGAL ANALYSIS

The principal question to be resolved in the present arbitral proceedings concerns the determination of the scope of application of the "Additional Property Tax" ("AIMI"), which the State Budget Law for 2017 (Law No. 42/2016, of 28 December) introduced 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 Property Tax Code, comprising Articles 135-A to 135-K.

For what is relevant here, Articles 1 and 3 of Article 135-A of the Property Tax Code establish that the persons liable to AIMI are "natural or legal persons who are owners, usufructuaries or surface proprietors of urban properties situated in Portuguese territory" on 1 January of the year to which the Additional relates.

No. 2 of the same article provides that: "any structures or collective interest centres without legal personality that appear in the registers as persons liable to the municipal property tax, as well as undivided succession represented by the head of household, are treated as equivalent to legal persons".

AIMI applies, according to No. 1 of Article 135-B of the Property Tax Code, "to the sum of the tax values of urban properties situated in Portuguese territory of which the person liable is the owner" – and, from this sum, the amount of € 600,000.00 must be deducted whenever the person liable is a natural person or an undivided succession (see No. 2 of Article 135-C of the same Code).

Urban properties classified as "commercial, industrial or services" and "other" were excluded from the objective scope of this Additional "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 successions, whenever the taxable value does not exceed € 1,000,000.00, in accordance with No. 1 of Article 135-F of the Property Tax Code, and where the taxable value exceeds € 1,000,000.00, a rate of 1% applies when the person liable is a natural person (see No. 2 of the same article).

Pursuant to the combined provisions of No. 1 of Article 135-G and Article 135-H, both of the Property Tax Code, the additional tax in question is assessed annually, in June, based on the tax values of the properties subject to tax and in relation to the persons liable that appear in the registers on 1 January of each year, and must be paid by the end of September.

As seen above, the Applicant raises the following questions:

a. Illegality, due to errors in factual and legal grounds, of the application of AIMI to investment funds, by the holding of properties in the context of their activity;

b. Subsidiarily, the illegality of the taxation of "building land" intended for "commercial, industrial or services" or "other" purposes, on the grounds that they are not covered by the scope of objective incidence of the norms under analysis;

c. Also alternatively, the unconstitutionality of the AIMI legal regime, to the extent that it applies to all "building land", as contrary to the principle of equality, enshrined in Article 13 of the CRP and to the principle of tax equality and contributory capacity enshrined in Article 104, No. 3 of that Fundamental Law.

The questions raised in the present arbitral proceedings have already been the subject of several arbitral decisions, some of which are of divergent import, and reference may be made, in this regard and among others, to the arbitral awards rendered in processes 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 examine them, then.

a.

The Applicant contends that the legislator "in instituting AIMI, intended to create an effective tax on real estate wealth" and "aimed to ensure that urban properties affected by economic activities would not be subject to taxation under AIMI, recognizing that the mere holding of such properties does not constitute (and cannot constitute) a factor demonstrating wealth, nor a sufficient indicator of the contributory capacity of the holders of such properties" as well as that "it is evident that the legislative intent underlying the rule excluding objective incidence, enshrined in No. 2 of Article 135-B of the Property Tax Code, was based, essentially, on the intention not to impose excessive fiscal burden on the persons liable who, as a result of their economic activities, hold properties for the pursuit of their respective corporate purpose".

As for the Applicant itself, it alleges that the properties it holds are the true elements of its "productive process (...), whether as rental assets or as true inventories intended for future transformation, intended exclusively for the pursuit of the activity of the same and never to be compared with elements demonstrating wealth", that "the holding of those properties represents, in reality, the substratum of all the activity of these funds – it is inherent, necessary, indispensable to the pursuit of the same", and that "to tax these properties would mean directly taxing an 'economic activity' – something that the legislator expressly intended to avoid in creating AIMI."

On this basis, the Applicant concludes that "it cannot (...) accept – or understand – that the Tax Authority, through the assessment acts now challenged, has imposed this new AIMI on the assets held by the Real Estate Investment Funds represented here" nor that that Authority "has considered, in determining the tax value of assets subject to AIMI, the 'building land' whose potential use coincides with purposes 'commercial, industrial or services'".

The Applicant seeks, in sum, in this part, an exclusion from the subjective incidence of AIMI, including in such exclusion "the persons liable who, as a result of their economic activities, hold properties for the pursuit of their respective corporate purpose" and, in particular and for what is relevant here, Real Estate Investment Funds.

On this question, the jurisprudence of CAAD has been to the effect 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 as to the merits or otherwise of the arbitral request):

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

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

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

d) Regarding construction and urbanization companies – Process No. 6/2018-T.

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

"In all this context, the understanding that the aim was to exclude from the scope of the tax the properties affected by economic activities, under the pretext that it was the legislative intention not to impose excessive fiscal burden on the persons liable who own properties as a result 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 the properties affected by the company's economic activity, regardless of the specific characterization as commercial, industrial or services properties, has no basis in light of the general criteria of legal hermeneutics."

This understanding is also supported in Arbitral Decision No. 420/2018-T of 05-01-2019, 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 properties are affected that the exclusion of incidence was defined, for in the wording that was approved, the non-incidence was defined only on the basis of the types of properties indicated in Article 6 of CIMI without any reference to the affectation to the functioning of legal persons." That Decision goes on to state that "The affectation of a property, which presupposes a use, and the purpose to which it is intended, the 'normal destination', which underlies the classifications of properties referred to in No. 2 of Article 6 of CIMI, are distinct concepts." It concludes by stating that, "If the final draft of the Budget had maintained the legislative intention to exclude incidence on the properties directly affected by the functioning of legal persons, the reference to this affectation that appeared in the proposal and that clearly expressed this legislative option would certainly have been maintained. Thus, having suppressed that reference to the affectation of the properties, there is no legal support for concluding that residential properties and building land affected by the activities of legal persons do not fall within the scope of AIMI."

This understanding is followed here as well, noting additionally that the argumentation presented by the Applicant 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, and it is rather considered that AIMI corresponds in substance to the form, being an additional to the Property Tax, implementing what had been the understanding of some, including the Constitutional Court, which considered that "the entry 28.1 of TGIS assumed itself as a 'complementary Property Tax rate'".

The conclusions of the Applicant are also not subscribed to, according to which the legislator "aimed to ensure that urban properties affected by economic activities would not be subject to taxation under AIMI, recognizing that the mere holding of such properties does not constitute (and cannot constitute) a factor demonstrating wealth, nor a sufficient indicator of the contributory capacity of the holders of such properties", as well as that "it is evident that the legislative intent underlying the rule excluding objective incidence, enshrined in No. 2 of Article 135-B of the Property Tax Code, was based, essentially, on the intention not to impose excessive fiscal burden on the persons liable who, as a result of their economic activities, hold properties for the pursuit of their respective corporate purpose".

Indeed, in this regard, it is believed that the non-affectation of economic activities by AIMI was not a final purpose of the legislator in creating AIMI, but rather a factor considered by the legislator at various levels in the design of that legal regime.

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

Beyond that, however, the legislator created different rates for legal persons and natural persons, including an increase in cases where the taxable value exceeds € 1,000,000.00, restricted to the latter, which cannot fail to be based, if not entirely then largely, on the consideration that the properties held by legal persons will, as a rule, be affected by economic activities.

Indeed, as Professor José Maria Fernandes Pires notes, AIMI aimed to "tax wealth progressively, above a certain value, when the holders are natural persons and all the wealth of legal persons, regardless of value and at a proportional rate." Therefore, it should be considered that it was never in the legislator's mind to exclude economic activities, but rather to exclude urban properties classified according to a purpose.

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

From this it follows that, with the aforementioned Author, it should be considered that "AIMI applies, as we have already stated, only to the wealth materialized in a small part of urban properties, so it is a tax that is only partial, but personal, on urban real estate wealth."

The understanding is likewise not considered to merit approval that the legislator recognized "that the mere holding of such properties does not constitute (and cannot constitute) a factor demonstrating wealth, nor a sufficient indicator of the contributory capacity of the holders of such properties". Indeed, and this will be a notorious reality and, as such, inescapable, it is considered undeniable that a legal person holding properties worth € 100,000,000.00 reveals a contributory capacity (from the perspective of the tax in question) manifestly superior to another legal person that, for the same purpose, holds properties worth € 100,000.00.

On the other hand, and as has already been stated, AIMI must be understood and treated as such, that is, as an additional to the Property Tax. Now, if that is so, the contributory capacity evidenced by legal persons through the holding of properties, even if affected by their productive activity, is precisely the same, whether with respect to subjection to AIMI or with respect to subjection to Property Tax.

Thus, and in light of all that has been set forth, it is considered that the arbitral request should be dismissed on this point.

b.

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

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

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

In this context, for the Applicant, "the subjection of these building land to AIMI causes a greater fiscal burden on this type of urban properties and, consequently, will not fail to have an impact on the economic activities that will potentially be developed in these properties", and therefore "the taxation methodology adopted by the Tax Authority, to the effect of including in the taxable value for AIMI purposes, the persons liable holding 'building land' with the purposes identified by No. 2 of Article 135-B of the Property Tax Code, constitutes a discriminatory treatment that violates, without more, the principle of equality, constitutionally enshrined in Articles 13 and 104, No. 3, of the Constitution of the Portuguese Republic ("CRP") and in Articles 5 and 55 of the General Tax Law ("LGT")".

Thus, the Applicant concludes, "the AIMI tax acts, in the portion that taxes 'building land' intended for 'commercial, industrial or services' or 'other' purposes – here corresponding to the tax amount of € 131,950.81 – are tainted with manifest illegality, due to errors in the factual and legal grounds".

With regard to this subsidiary request, the Applicant seeks, in sum, the broadening of the objective exclusions from AIMI incidence, enshrined in No. 2 of Article 135-B of CIMI, so as to include there, also, urban properties classified as "building land", provided that the construction therein foreseen is reducible to some of the types referred to in the aforementioned No. 2, that is, to urban properties intended for "commercial, industrial or services" or "other" purposes.

With regard to this question, now presented for decision by the Applicant, arbitral jurisprudence has been divided.

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

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

For the referred Arbitral Tribunal, "If the taxable event chosen as an index of contributory capacity is the holding 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, all the more so since the value of the land is incorporated in the value of the buildings.

The same Tribunal also noted that, if it did not so decide, it would conclude as to the material unconstitutionality of the norm providing for such taxation.

Already in the decisions rendered in processes No. 676/2017-T and No. 664/2017-T (the first concerns Real Estate Investment Funds and the second concerns a credit institution), the claims of the applicants therein were decided unfavorably, to the effect of excluding the taxation of "building land", even where the foreseen construction is for "commercial, industrial or services" purposes.

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

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

Without contesting that from the perspective of tax policy the solution could have been different, and with due respect for other opinions, it is considered that the exclusion of taxation of all or part of the "building land" was not the solution adopted, since No. 2 of Article 135-B of CIMI only provides for the exclusion of taxation with respect to AIMI of urban properties classified as "commercial, industrial or services" and "other", precisely in accordance with paragraphs b) and d) of No. 1 of Article 6, which leads, inevitably, to the taxation of the properties provided for in the two remaining paragraphs of that same Article 6 of CIMI, that is, urban properties classified as "residential" (par. a)) or as "building land" (par. c)).

Included in the taxation in question, in accordance with the letter of the law, are all urban properties classified as "residential" and all urban properties classified as "building land", and not merely some of them, and if the legislator, in its rule excluding taxation, intended to exclude a part of the properties referred to in paragraphs a) and c) of No. 1 of Article 6 of CIMI, it would have had every possibility of doing so.

In the same manner, the legislator could have altered the species of urban properties provided for in Article 6 of CIMI, for example, by subdividing the building land depending on the purposes to which they were intended, which did not occur.

With regard to the possibility of extensive interpretation of the exclusion enshrined in the aforementioned No. 2 of Article 135-B of CIMI, in order to encompass building land not intended for residential use – a solution adopted in the decisions that accepted claims similar to that of the Applicant, here under examination – it is considered, always with due respect for other understandings, that it should not merit approval.

Thus, and first of all, it is believed that the identity of situations is not verified in light of the legally relevant criteria, necessary to effect such extension of the exclusion clause from objective incidence, that is, it does not appear that the building land is in a situation identical to that of constructed properties, from the perspective of the teleology of that exclusion clause.

From a teleological perspective, such clause will have underlying, in the first place, the purpose of not burdening with AIMI the properties affected, or susceptible of immediate affectation, by productive processes, with the building land not presenting such characteristics, given that whilst a constructed property will be, or will be susceptible of being immediately, affected by productive processes, building land is not in such a situation.

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

In the words of that high Court:

"For tax purposes, properties (...) are clearly distinguished from building land, under Article 6 of the Municipal Property Tax Code (CIMI), with the first of those categories consisting of existing buildings or constructions (...), whilst the second consists exclusively of land for which the right to construct buildings intended for that or other purposes has been consolidated by an administrative act of prior control of an urbanistic operation.

Thus, whilst buildings (...) correspond to an actual buildability, definitely incorporated in the legal sphere of their owner, building land corresponds to merely potential buildability, legally consolidated in the legal sphere of the property owner, but not yet materialized.

That is, the taxation of properties (...) focuses on the existing reality, on corporeal things, unlike the taxation of building land, which focuses on construction rights, on future things, as evidenced by Article 45 of CIMI, which establishes 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 present characteristics.

It could rightly be said that both correspond to real estate assets (...). And that, by its real estate value, both are apt to express a certain form of wealth. But the comparisons end there, because, precisely, the different nature of these goods does not permit equating the contributory capacity of their respective owners, present or future, solely on the basis of their affectation and their tax value (VPT)."

Indeed, already constructed properties possess a material reality corresponding to the typology that is theirs. That is, to a property constructed and licensed for, or having as normal destination, commerce, industry or services, there corresponds a material reality adequate to such purposes and, for what is relevant, objectively distinct from a property constructed and licensed, or with normal destination, for residential use.

Building land, on the other hand, are distinguished from other land, on a purely legal plane, that is, as a function of the action of a public body (grant of license or authorization, admission of prior communication or issuance of favorable prior information from an urbanistic operation or construction – see Article 6/3 and 37/3 of CIMI) or of the owners (declaration of purpose in the acquisitive title; see second paragraph of Article 6/3 of CIMI), to which the Law attributes certain legal effects.

Thus, as a function of the aforementioned material differentiation, the alteration of the affectation of building land, from the perspective of the notes relevant to the problem at hand, could be simple, requiring merely, for example, a mere declaration in the acquisitive title, the submission and admission of a prior communication, or the submission and approval of a prior information request.

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

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

Building land, on the other hand, not only does not incorporate, per se, any natural incentive for its construction and subsequent affectation to a productive activity, but, also from a normalcy perspective, the opposite could precisely occur, that is, as a function of certain market conditions that create expectations of purely speculative gains, there could be incentives for their owners to maintain their condition as unbuilt land.

In this regard, the Applicant asserts that the subjection of the building land in question to AIMI "causes a greater fiscal burden on this type of urban properties and, consequently, will not fail to have an impact on the economic activities that will potentially be developed in these properties".

Now, in light of the teleology discovered in the norm interpreted, set out above, the fact is that such impact could even be positive, to the extent that the taxation of building land could constitute an incentive for its construction, thereby accelerating the effective use of the properties in productive activities.

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

Nevertheless, it may further be added that a comprehensive understanding of AIMI within the framework of the Property Tax regime will point, precisely, in the direction of the legislator's real purpose to subject to the former all building land, and not merely that intended for residential use.

Let us see thus.

In the design of AIMI, and following what was the evolution of taxation under entry 28.1 of CIS, the legislator made quite clear (by virtue, first, of the nomenclature and systematic of the taxation created, as well as the express reference to the relevant Property Tax norms) its intention that the relevant categories for the taxation in question be delineated in accordance with the criteria proper to CIMI.

And, under this Code, the land – which is the category that now concerns us – may fall within 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 AIMI regime created, excluded from subjection to that regime land classified as "rustic", by way of the exclusive subjection of urban properties in No. 1 of Article 135-A, and land classified as "urban" intended for "other" purposes, by way of the exclusion clause of No. 2 of that referred article, and 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 Superior Tax Court has understood that for the determination of the tax value of building land the affectation of the foreseen construction is irrelevant.

Thus, in the Decision of the Superior Tax Court of 20-04-2016, rendered in process 0824/15, it was considered that:

"It follows from this norm that the formula set out above has application only to the urban properties therein discriminated, that is, to those that, once built, are for residential, commercial, industrial and services purposes.

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

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

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

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

Such coefficients, multipliers of tax value, only respect to the built structure but do not have a real basis of support in the potential that the building land 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 properties a specific rule – that contained in Article 45 where it is reiterated that the value of the area of implantation of the building to be constructed and the value of the land adjacent to the implantation are taken into account as well as the characteristics of accessibility, proximity, services and location described in No. 3 of Article 42. Taking into account the approved construction project and the provisions of No. 2 of Article 45 of CIMI.

Which means that in the determination of its tax value of building land the mathematical formula enshrined in Article 38 of CIMI does not apply.

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

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

In building land the approved constructions are merely potential and it is the value of that constructive capacity, generating an increase in tax value or wealth for its owner, that it is sought to tax. And not factors still not materialized."

That understanding was sanctioned by a judgment of the Plenum of the Tax Litigation Division of the Superior Tax Court of 21-09-2016, rendered in process 01083/13, in whose summary it is synthesized that:

"III - In the determination of the tax value of building land it is necessary to observe the provisions of Article 45 of the Municipal Property Tax Code, with no room for consideration of the comfort and quality coefficient (cq).

IV - Article 45 of CIMI is the specific norm that regulates the determination of the tax value of building land.

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 properties for residential, commercial, industrial and services purposes is determined cannot be applied by analogy as it is susceptible of altering the tax base by interfering with the incidence of the tax."

Thus, it is concluded that in determining the tax value under CIMI the destination of the construction foreseen in "building land" is not relevant, with building land for the construction of residential buildings not being distinguished from building land for the construction of commerce, industry or services buildings, from the perspective of tax value and, consequently, of the evidencing of contributory capacity.

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

In the context of AIMI, given what has already been stated regarding the nature of this taxation (as an additional to the Property Tax), there would be no justifications for diverging from such a criterion, that is, for considering that the holding of "building land" with buildings foresigned with distinct purposes signals different contributory capacities.

In light of everything that has been set forth, considering that it is not appropriate to proceed with the broadening, through extensive interpretation, of the objective exclusions from AIMI incidence, enshrined in No. 2 of Article 135-B of CIMI, so as to include there, also, urban properties classified as "building land", provided that the construction therein foreseen is reducible to some of the types referred to in the aforementioned No. 2, that is, to urban properties intended for "commercial, industrial or services" or "other" purposes, this arbitral request should also be dismissed.

c.

Also as a subsidiary matter, the Applicant considers that the AIMI taxation regime is contrary to the principle of equality, enshrined in Article 13, and to the principle of tax equality and contributory capacity enshrined in Article 104, No. 3, both of the CRP, in that, in its view, the AIMI legal regime, specifically Articles 135-A and 135-B thereof, both of the 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 engaged in real estate exploitation (here including purchase, sale, construction, promotion and leasing), could only result from the idea that those properties, productive factors of those companies and means for the exercise of their economic activity, constitute evidence of increased contributory capacity – which cannot be accepted".

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

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

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

Thus, it is not believed that "In making that distinction – in addition to offending against 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, for services or other buildings already built and on the other, ii) building land intended for commerce, industry, services or other.", with the alleged violation of the principle of equality not being verified.

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

In this regard, as has also already been seen, the contributory capacity aimed at is the same as that of the Property Tax, to which AIMI is added, and the legislator chose to establish lighter taxation rates for legal persons in relation to natural persons.

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

As is stated 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 implies that those in equal situations be treated equally and those in unequal situations be treated unequally, so as not to create arbitrary and unreasonable discriminations, because lacking sufficient material basis."

It is further added that, in the case, contrary to what the Applicant points out, we are not facing a burden, but a non-relief.

That is, when properly considered, the normative structure created for AIMI consists of a rule of general scope of that tax, overlaid on the properties subject to Property Tax, followed by an exception from incidence regarding a determined type of property.

Thus, it is not the Applicant – or the properties held by it and on which tax was assessed – that find themselves, in being taxed, in an exceptional situation of burden, but rather the intended non-relief – by way of subjective or objective exclusion – which, if recognized, would be characterized by an exceptional character.

Furthermore, the Applicant's argumentation on constitutionality ends up reflecting some argumentation contained in constitutional jurisprudence regarding the, by now repealed, taxation under entry 28.1 of the Stamp Tax Code, designedly that which was condensed in Constitutional Court Decision No. 250/2017, of 24 May 2017, rendered in process No. 156/20, also invoked by the Applicant.

There it is stated, among other things, the following, with correspondence in the questions now raised by the Applicant:

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

• "if behind the tax imposed on the owner of a residential property with tax value exceeding one million euros there could be a taxpayer with sufficient economic force to bear the respective tax burden, behind the tax imposed on the owner of building land there will normally be an entrepreneur, usually in the form of a commercial company engaged in real estate promotion, about whose economic force we know nothing. In fact, we cannot presume that such taxpayer has an economic force proportional to the value of the land, which is merely instrumental in relation to its economic activity. We are unaware of what profit margin it will draw from its exercise, if it is in legal and economic conditions to do so, or if it will not have a negative net position."

• "the different reality of the taxation of building land, which has a greater bearing on the economic activity carried out by its owner than on the value of the good itself. With the further aggravation that its respective tax burden, if it does not definitely render that activity unviable, will end up being borne by the final consumer of the real estate products resulting from it, about whose contributory capacity we cannot presume without knowing the respective building typology and value."

And, further on:

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

Thus, from the referred Constitutional Court decision, it seems possible to draw the understanding, sustained by the Applicant, that the non-consideration of the purpose of the holding of the property and/or the quality of the subject holding it could generate the unconstitutionality of the tax.

Such understanding is not subscribed to, however, following the line of the dissenting vote issued in the judgment in question by the Illustrious Justice Manuel da Costa Andrade.

Indeed, the considerations pointed out will be, first and foremost, and without more, directly transposable to the Property Tax, to the Vehicle Transfer Tax, to the Vehicle Circulation Tax, to Economic Activities Taxes, to the Stamp Tax and even, in some manner, to the Value Added Tax. Also there the taxable events often, exactly in the same manner, if not even more pronouncedly, abstract from the personal situation of their respective persons liable.

Thus, also under those taxes, the rule does not distinguish, as a rule, the manifestations of wealth (contributory capacity) from the factors of production of that same wealth (that is: a taxable event subject to Property Tax, Vehicle Transfer Tax, Vehicle Circulation Tax, Economic Activities Taxes, Stamp Tax, will abstract, as a rule, from the circumstance that the same occurred within the framework of "consumption" [broadly understood] or of "production of wealth"), and the differentiation will occur, as in the case of AIMI, by way of the consideration as a cost of the tax borne, under the income tax (see Article 23/2/f) of CIRC).

As for the understanding advocated by the Applicant, based on Constitutional Court Decision No. 250/2017, of 24 May 2017, rendered in process No. 156/2016, it should be noted that entry 28.1 of TGIS, as it was conceived, in addition with application to building land by Law No. 83-C/2013, was held to be unconstitutional, essentially for the lack of personalization of the tax, a situation which with the creation of AIMI was resolved, and it is further to be considered the different legal structure (in the Stamp Tax it did not refer to Article 6 of CIMI, and one spoke of "residential affectation"), as well as the different structure and ratio of the stamp tax and the "additional to the Property Tax", all of which will point in the direction that the question of unconstitutionality is now overcome.

Recently the Constitutional Court in the context of Decision No. 378/2018 came to understand that, after all, there is no unconstitutionality of Entry 28 of TGIS, considering that, "the tax provided for in Entry 28.1, as is proper for taxes on patrimony, delimits its scope of incidence by reference exclusively to the ownership of certain patrimonial 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 patrimony, it also does not individualize nor distinguishes its respective persons liable by recourse to any criterion other than precisely the ownership of such patrimonial values".

Thus, and the Constitutional Court itself evidences this, one thing is the taxation of income, another is that of patrimony, with this, by nature, attending essentially to the patrimonial value of the goods held, and not to the personal situation of its holder, being indeed, in light of reasons of practicality, the factors of personalization reduced.

This line of argument has been reinforced in the most recent jurisprudence of the Constitutional Court, which even in its Decision No. 22/2019, of 9 January 2019, decided "Not to declare unconstitutional the norm contained in entry 28.1 of the General Table of Stamp Tax, annexed to the Stamp Tax Code, in the wording given by Law No. 83-C/2013, of 31 December, to the extent that it applies to situations in which the building land belongs to companies engaged in the commercialization of building land for resale".

Reference is further made in Constitutional Court Decision No. 378/2018, with regard to Entry 28.1 of TGIS that "the norm in question stems from the consideration of concrete legal-patrimonial situations, delimited according to the tax value of the property and its normal social affectation, integrating in its subjective scope of application an indeterminate set of taxpayers according to a uniform criterion (…). In relation to none of them is their concrete economic-financial situation (income or profits), their nature (singular or collective), organization structure (business or non-business), specific legal form assumed (commercial or other company) and, much less, the diverse sectors of activity in which the merchants covered possibly operate and the specific risks inherent to each of those business branches assessed".

Thus, it is concluded in the direction of that defended in Constitutional Court Decision No. 378/2018 that "the mere statistical probability of being affected by the norm in question by commercial companies engaged in 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 norm in question, in the specific hypothesis under examination, considering, moreover, the negative character of constitutional control dictated by the principle of equality".

Thus, and in light of the foregoing, it is considered that no consequences should be drawn from the Constitutional Court's jurisprudence invoked by the Applicant, in the context of constitutionality of the AIMI norms applied in the case, namely with regard to the violation of the Constitutional norms pointed out by the Applicant, and therefore the arbitral request is also dismissed on this point.

Given the decision, the Applicant's accessory request for compensatory interest is also rendered moot, which is naturally dependent on the merits of some of the remaining requests, which is not the case.

C. DECISION

It is therefore decided by this Arbitral Tribunal to declare the arbitral request wholly without merit and, in consequence,

a) Absolvе the Respondent of the claim;

b) Maintain in the legal order the tax acts subject to the present arbitral action; and

c) Condemn the Applicant to the costs of the proceedings, in the amount set out below.

D. Value of the Proceedings

The value of the proceedings is fixed at € 420,317.99, pursuant to Article 97-A, No. 1, a), of the Tax Procedure and Proceedings Code, applicable by force 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 arbitration fee is fixed at € 6,732.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Applicant, since the request was wholly without merit, pursuant to Articles 12, No. 2, and 22, No. 4, both of the RJAT, and Article 4, No. 5, of the cited Regulation.

Let notification be made.

Lisbon, 13 May 2019

The Presiding Arbitrator

(José Pedro Carvalho)

The Arbitrator Member

(Nuno Pombo)

The Arbitrator Member

(Maria Alexandra Mesquita)