AIMI on Real Estate Investment Funds: Objective Incidence and Unconstitutionality Under Article 135-B of IMI Code (CAAD 682/2018-T)

ARBITRAL DECISION (Please consult the full version in PDF)

The arbitrators Councillor Fernanda Maças (arbitrator-president), Prof. Doctor Vasco Valdez and Dr. Sílvia Oliveira (arbitrators-members), appointed by the Ethics Council of the Administrative Arbitration Centre (CAAD) to form the Collective Arbitral Tribunal, constituted on 6 March 2019, hereby agree as follows:

1. REPORT

1.1

Closed Real Estate Investment Fund A..., holder of tax identification number ..., Open Real Estate Investment Fund B..., holder of tax identification number ... and Closed Real Estate Investment Fund C..., holder of tax identification number ..., hereby represented by their managing company, D... - Real Estate Investment Fund Management Company, S.A., holder of tax identification number..., with registered office at ..., no..., ..., in Lisbon (hereinafter referred to as the "Claimant"), filed a petition for arbitral decision and for the constitution of a Collective Arbitral Tribunal, on 22 December 2018, pursuant to the provisions of article 2, no. 1, paragraph a) and article 10 of Decree-Law no. 10/2011, of 20 January (RJAT), in which the Tax and Customs Authority is the Respondent (hereinafter referred to as the "Respondent").

1.2

The Claimant requests in the arbitral petition that this Tribunal rule on the legality of the tax assessment acts for the Additional Municipal Property Tax (AIMI) with numbers 2018..., 2018..., 2018..., relating to the year 2018, in the total amount of EUR 174,055.19, petitioning that the said acts be annulled and the total amount of tax paid be reimbursed, plus compensatory interest, or, if not so deemed, that the said assessment acts be partially annulled and, consequently, the reimbursement of the amount of EUR 144,825.60 be determined, corresponding to the AIMI collection relating to land for construction assigned to "commerce, industry and services", with reference to the AIMI assessments identified, plus their respective compensatory interest.

1.3

Subsidiarily, the Claimant further requests that "articles 135-A and 135-B of the Property Tax Code be disapplied, in the specific case, due to manifest unconstitutionality, due to violation of the constitutional principle of equality (...) and, consequently, the illegality of the tax assessment acts of AIMI sub judice be declared, because based on unconstitutional norms, with the same being promptly annulled, with all legal consequences".

1.4

The petition for constitution of the Arbitral Tribunal was accepted by the Honourable President of CAAD on 26 December 2018 and notified to the Respondent on the same date.

1.5

Given that the Claimant did not proceed to appoint arbitrators, pursuant to the provisions of article 6, no. 2, paragraph a) of RJAT, the undersigned were appointed as arbitrators on 14 February 2019 by the President of the Ethics Council of CAAD, the appointment having been accepted within the legally prescribed timeframe and terms.

1.6

On the same date, the Parties were duly notified of this appointment, having not expressed a wish to refuse it, pursuant to the combined terms of article 11, no. 1, paragraphs a) and b) of RJAT and articles 6 and 7 of the Code of Ethics.

1.7

Thus, in accordance with the provisions of paragraph c), no. 1, article 11 of RJAT, the Arbitral Tribunal was constituted on 6 March 2019, and an arbitral decision was issued on 7 March 2019, to the effect of notifying the Respondent to, "(…) within 30 days, respond, attach a copy of the administrative file and request, if it so wishes, the production of additional evidence".

1.8

On 9 April 2019, the Respondent filed its Reply, having defended itself by objection and concluded that "(…) the present petition for arbitral decision should be judged inadmissible as unproven and, consequently, the Respondent should be absolved of all claims (…) with the due legal consequences or, if not so deemed, it requests (…) that the notification be made to the Public Prosecution Service of the learned arbitral decision".

1.9

On the same date, the Respondent attached a copy of the administrative file to the proceedings.

1.10

In these terms, by decision of this Arbitral Tribunal, dated 9 April 2019, it was decided to waive the meeting provided for in article 18 of RJAT and decided that the proceedings should continue with successive written pleadings, to be submitted within fifteen days, with 6 September 2019 being set as the deadline for issuing the arbitral decision.

1.11

The Claimant and the Respondent submitted written pleadings concluding, respectively, as in the arbitral petition and in the Reply.

2. PRELIMINARY RULING (SANEADOR)

2.1

The petition for arbitral decision is timely as it was submitted within the timeframe provided for in paragraph a) of no. 1 of article 10 of RJAT.

2.2

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

2.3

The parties have legal personality and legal capacity, have standing regarding the petition for arbitral decision and are duly represented, pursuant to the provisions of articles 4 and 10 of RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

2.4

The joinder of claims and the joinder of plaintiffs (here represented by the Claimant) is legal and valid, pursuant to the provisions of article 3, no. 1 of RJAT, given that the merits of the claims depends essentially on the assessment of the same circumstances of fact and on the interpretation and application of the same principles or rules of law.

2.5

No pleas that warrant examination were raised.

2.6

No nullities have been verified.

3. MATTERS OF FACT

3.1. Of the proven facts

3.1.1

The Real Estate Investment Funds, here represented by the Claimant, are owners of various properties, namely residential, commercial, industrial, for services and land for construction.

3.1.2

The said Real Estate Investment Funds were notified of the AIMI assessments relating to the year 2018, subsequently identified:

3.1.3

From the properties identified in the assessments in question (those indicated in the copies of their respective property cards, attached to the arbitral petition as document no. 4, whose contents are hereby considered fully reproduced), land for construction intended for the building of industrial, commercial and services properties are those subsequently identified:

FUND A...

FUND B...

FUND C...

3.1.4

The Real Estate Investment Funds represented by the Claimant paid, within the deadline for voluntary payment, the total amount of AIMI assessed.

3.1.5

On 22 December 2018, the Claimant filed the petition for arbitral decision that gave rise to the present proceedings.

3.1.6

No other facts capable of affecting the substantive decision on the claim were proven.

3.2. Justification regarding matters of fact

3.2.1

Regarding matters of fact, the Tribunal does not have the duty to rule on all alleged matters, but rather has the duty to select those relevant to the decision, taking into account the cause (or causes) of action that forms the basis of the claim filed by the plaintiff [(cf. articles 596, no. 1 and 607, nos. 2 to 4 of CPC, applicable ex vi of article 29, no. 1, paragraphs a) and e) of RJAT)] and to establish whether it considers it proven or unproven (cf. article 123, no. 2 of CPPT).

3.2.2

According to the principle of free evaluation of evidence, the Tribunal bases its decision, in relation to the evidence produced, on its intimate conviction, formed on the basis of the examination and evaluation it makes of the evidence presented to the proceedings and in accordance with its experience of life and knowledge of persons (cf. article 607, no. 5 of CPC).

3.2.3

Only when the probative force of certain evidence is pre-established by law (e.g. full probative force of authentic documents, cf. article 371 of the Civil Code) does not the principle of free evaluation of evidence apply in the evaluation of the evidence produced.

3.2.4

With respect to the proven matters of fact, the conviction of this Arbitral Tribunal was based, beyond the free evaluation of the positions assumed by the Parties (on matters of fact), on the contents of the documents attached by both Parties to the proceedings, as well as on the analysis of the administrative file forwarded by the Respondent.

3.3. Of the unproven facts

3.3.1

No facts given as unproven with relevance to the arbitral decision have been verified.

4. Position of the parties

4.1. Claimant

4.1.1

The Claimant begins by noting that the Arbitral Tribunal is competent to assess claims relating to the declaration of illegality of tax assessment acts, in that "(…) the requirements for the material competence of the Arbitral Tribunal for the assessment of the present claim are indisputably verified, the claim being unquestionably timely".

4.1.2

The Claimant petitions that "(…) the illegality of the tax assessment acts for AIMI with numbers 2018..., 2018..., 2018..., relating to the year 2018, in the total amount of € 174,055.19, be declared, they should be annulled and the amount of tax (…) paid (…) be fully reimbursed to the Funds, plus the corresponding compensatory interest".

4.1.3

The Claimant further states that the Funds it represents are real estate investment funds administered by the Claimant and that, "in the exercise of its activity, the Funds are owners of a vast collection of properties, which includes urban properties that constitute land for construction with potential allocation to industry, commerce and services".

4.1.4

Now, "in this context, the Funds were notified of the following tax assessment acts for AIMI, relating to the year 2018, covering the urban properties held by them and excluding urban properties classified as commercial, industrial or for services and others":

a) "the AIMI assessment no. 2018..., issued on 30 June 2018, relating to Fund A...; in the amount of € 13,757.94 (…);

a) the AIMI assessment no. 2018..., issued on 30 June 2018, relating to Fund B..., in the amount of € 101,753.13 (…);

b) the AIMI assessment no. 2018..., issued on 30 June 2018, relating to Fund C..., in the amount of € 58,544.12 (…)".

4.1.5

"Among other properties, the IMI assessments sub judice accounted for, for the purpose of determining the taxable value and the corresponding amount of AIMI to be paid by the Funds, the tax property values of land for construction intended for the building of properties assigned to industry, services and commerce, as identified in the type of allocation coefficient and location set out in their respective property cards (…)".

4.1.6

The Claimant clarifies that the Funds proceeded to full and timely payment of their respective AIMI assessments identified in the petition despite understanding that they are affected by illegality, which is why they filed the arbitral petition jointly.

4.1.7

In this context, the Claimant notes that "according to information released by the Government, the creation of AIMI aimed to require a greater fiscal effort from taxpayers who, allegedly, show higher indicators of wealth, thus configuring itself as a tax of a personal nature that affects urban real property wealth" and "assuming a progressive character, AIMI affects wealth materialized in the right of ownership, usufruct or superficies over certain urban properties, located in Portuguese territory".

4.1.8

The Claimant understands that "the legislator chose to exclude from the objective scope of this Additional the urban properties classified as commercial, industrial or for services and others (…)" whereby it argues that, "(…) by exclusion, (…) only the urban properties assigned to residential purposes and the land for construction, as defined in article 6 of the Property Tax Code, are subsumed under the taxation rules of this Additional".

4.1.9

"In this context, and subject to better judgment, the Claimant considers (…) that, in the terms described (…), the AIMI assessments under analysis are affected by a defect of violation of law, due to errors in the factual and legal prerequisites and, as such, they should be annulled with all legal effects".

4.1.10

The Claimant argues that "(…) in light of the preparatory work (…) it is clear that the legislator aimed to ensure that urban properties assigned to economic activities would not be subject to taxation in AIMI, considering that, being this Additional a tax with a progressive element of personal basis, aims to tax more highly the larger assets (…)" whereby "in this way, the legislator aimed to ensure that urban properties assigned to economic activities would not be subject to taxation in AIMI, acknowledging that the mere holding of such properties does not constitute (…) a factor demonstrating wealth, nor a sufficient indicator of the contributory capacity of the holders of such properties".

4.1.11

Thus, the Claimant understands that "(…) it is evident that the ratio legis which was at the genesis of the rule of exclusion of objective scope (…) was based essentially on the intention of not placing excessive tax burden on taxpayers who, by force of their economic activities, hold properties for the pursuit of their respective corporate purpose".

4.1.12

In these terms, "(…) the Claimant cannot accept (…) that the Tax Authority, through the assessment acts now disputed, has caused this new AIMI to bear on the real property assets held by the Funds" nor can it accept that the Respondent "(…) has considered, in determining the tax property value subject to AIMI, land for construction (…) whose potential use coincides with commercial, industrial or services purposes".

4.1.13

According to what is argued by the Claimant, "(…) it does not seem compatible with the ratio legis and the historical circumstances that presided over the creation of AIMI (…) the taxation of real property assets held by entities whose economic activity involves (…) the holding of properties (…) and (…) the taxation of land for construction whose potential [use] coincides with commercial, industrial or services purposes or others".

4.1.14

The Claimant argues that "(…) the holding of such properties represents (…) the substratum of the Funds' activities (…)" whereby "(…) it is evident that AIMI (…) can never bear on the properties held by the Funds in the scope of their activity, inasmuch as the principles underlying the taxation here under analysis are not met".

4.1.15

Thus, the Claimant concludes that "taxing these properties would mean directly taxing an economic activity - something the legislator expressly intended to avoid when creating AIMI" and the Claimant also considers the taxation of land for construction assigned to commercial, industrial or services or other purposes to be illegal, inasmuch as it understands that this is "(…) discriminatory treatment that attacks (…) the principle of equality (…)".

4.1.16

Additionally, "subsidiarily (…) the Claimant understands that the taxation regime for AIMI is contrary to the basic principle of equality (…) and, in parallel, contrary to the principle of fiscal equality and contributory capacity (…)".

4.1.17

Thus, according to the Claimant's arguments, "(…) it is demonstrated [that] the legal regime of AIMI, in particular its article 135-A of the Property Tax Code – when interpreted in the sense of including within the subjective scope of AIMI entities that develop a real estate activity, promotes differentiated treatment and unjustified inequality among taxpayers, in manifest violation of the principle of equality (…) and the principle of fiscal equality and contributory capacity (…)", concluding that "as such, that norm should be disapplied (…) because it is manifestly unconstitutional when applied to collective persons that develop a real estate activity (…)", and consequently the AIMI assessments subject to the claim "(…) should be annulled, inasmuch as they are affected by the defect of violation of law, by embodying error regarding the legal prerequisites of the application of a norm that is materially unconstitutional".

4.1.18

In this manner, the Claimant understands that "(…) each of the Funds should be fully compensated for the respective amount of AIMI assessed, inasmuch as it is not due" and "(…) should the present claim be meritorious, the Claimant requests (…) that the respective compensatory interest be paid".

4.2. Respondent

4.2.1

The Respondent replied, defending itself by objection, arguing that, in the AIMI assessments in question, "the determination of the Tax Property Value was carried out in accordance with what was registered in the matrix (…)", taking into account that "the properties were not covered by the exclusions provided for in no. 2 of art. 135-B, nor by no. 3 of art. 135-C of CIMI", "respecting (…) the law in its only possible interpretation, meeting all the factual and legal prerequisites (…)".

4.2.2

That is, the Respondent considers that "(…) the AIMI assessments in question observe all the legal conditions for their legal validity" inasmuch as "(…) it is verified that the sum of the tax property value considered as the taxable matter of the tax concerns properties of which the Funds are holders, classified as residential or land for construction (…)", which "(…) fall within the scope of objective scope set forth in no. 1 of article 135-B of the Property Tax Code, with the exclusion set forth in no. 2 of the same provision not being applicable to them".

4.2.3

Thus, the Respondent understands that "(…) the Claimant has no grounds whatsoever" when "(…) it presents two distinct grounds for objecting either in whole or only in part to the AIMI assessments sub judicio:

• that the properties in question are assigned to its economic activity, which necessarily involves (necessarily) the holding of properties

• that the potential assignment of certain properties that correspond to "land for construction" coincides with purposes of "commerce, industry or services" or "others".

4.2.4

In this connection, the Respondent argues that it follows from the provisions of article 135-B of the Property Tax Code that "(…) AIMI bears on the properties classified as residential and as land for construction — regardless of their potential assignment (…), inasmuch as they are not expressly listed in the norm delimiting the negative scope of application".

4.2.5

On the other hand, the Respondent understands that "(…) it can thus be stated that, with respect to AIMI bearing on urban properties of which collective persons and equivalent structures are owners, usufructuaries or superficiaries (…), the tax assumes the nature of a real tax, inasmuch as the modeling of the amount to be paid abstracts from the economic dimension of the entities, namely the qualification as a small, medium or large company, as well as not reaching the totality of the net assets of the entities" whereby, for the Respondent, "(…) it is not true that AIMI can be qualified as a tax of a personal nature that affects urban real property wealth, since (…) we are not facing a personal tax (…)".

4.2.6

In these terms, the Respondent understands that "this (…) is the framework within which the legislator moved when delineating the configuration of the subjective and objective scope of AIMI, also guiding its choices by other specific considerations such as mitigating the impact of this taxation on the exercise of economic activities in general, through the exclusion of urban properties for industrial, commercial and services purposes, and others (…) with the purpose of not placing fiscal burden on business competitiveness, especially in international markets (…)".

4.2.7

The Respondent alleges "(…) that the letter of the law does not allow the Claimant to impute to the Tax Authority an error in its interpretation or for the AIMI assessments to be affected by the defect of violation of law, due to errors in the factual and legal prerequisites" inasmuch as it understands that "(…) if one looks at the wording of article 135-B, no. 2 of the Property Tax Code (…), it follows that the legislator, specifically, only excluded from AIMI taxation the urban properties classified as «commercial, industrial or for services» and «others» in accordance with paragraphs b) and d) of no. 1 of article 6 of the Property Tax Code".

4.2.8

"That is, contrary to what the Claimant intends, from the wording given to the cited legal provision it follows that the legislator chose to formulate the restriction by taking into account the classification of the properties, with nothing in the letter of the law that suggests that such exclusion can be broadened, in particular extended to other properties not included therein when they are the substratum of a certain economic activity of the tax subject".

4.2.9

The Respondent reiterates that "(…) to interpret a law is to fix its meaning and the scope with which it should apply (…) but, in that interpretive task, the literal element cannot be set aside, since the letter of the law is the main reference and starting point for the interpreter".

4.2.10

Thus, the Respondent understands that "contrary to what is sought by the Claimant (…), it is not the Tax Authority who decides to tax a land for construction with a potential use of industry and not tax a building with the same use, but rather, because it is what results from article 135-B, no. 2 of the Property Tax Code (…)" inasmuch as "(…) urban properties classified as industrial, commercial or services and others are not taxed".

4.2.11

In these terms, the Respondent understands that "(…) having the disputed assessments been carried out in accordance with the provisions of law (…), it is not foreseeable, then, where the error of fact and law that is imputed to the Tax Authority can reside" inasmuch as "(…) nothing exists in the letter of the law that suggests that the exclusion from taxation provided can be extended to other properties not included therein when they are the substratum of a certain economic activity of the tax subject, whereby what is contended by the Claimant lacks meaning".

4.2.12

On the other hand, the Respondent argues that "(…) in interpretative terms there is no way to not recognize that the legislator excluded from the scope the urban properties used for industrial, commercial or services purposes and others, but chose to maintain other properties that also form part of the assets of companies, that is, did not ensure in all cases that urban properties assigned to economic activities would not be subject to AIMI taxation, contrary to what is said by the Claimant", from which it follows that "(…) it is more consonant with the letter and spirit of the law present in no. 2 of article 135-B of the Property Tax Code, the conclusion that the ratio legis which was at the genesis of the exclusion of objective scope, set forth therein, was oriented towards the objective of excluding from the subjection to the tax (…), the properties that support the development of economic activities, that is, which are held for use or provision of goods or services or for administrative purposes (…)".

4.2.13

Thus, for the Respondent "it is well understood (…) the legislative solution of subjecting to taxation all tax subjects by virtue of their holding of the relevant legal situations over the urban properties identified in the objective scope, with independence from the legal or economic structuring that such tax subjects may possess" whereby "(…) being the substratum of the activity of Real Estate Investment Funds composed of real property rights over properties, if the legislator were to grant them an exception regime, it would be privileging indirect investment in real property assets through recourse to this financial product and opening the door to tax evasion conduct".

4.2.14

In these terms, the Respondent reiterates that "no illegality is detected (…) in the subjection to AIMI of urban properties held by real estate investment funds whose management is ensured by the Claimant".

4.2.15

With respect to land for construction, to defend its position, the Respondent emphasizes that "(…) at the date of taxation in AIMI of land for construction, only the actual reality of the land itself, as it is legally characterized, and taking into account the Tax Property Value contained in the matrix, matters, not a future building (…)" inasmuch as "this would mean, after all, that taxation would be determined, instead of on the basis of current and effective contributory capacity, on the basis of a future and eventual contributory capacity".

4.2.16

The Respondent understands that "(…) as is uniformly recognized in case law, the Tax Authority cannot disapply legal norms on the grounds of unconstitutionality, as, moreover, the defect of unconstitutionality alleged by the Claimant does not occur".

4.2.17

According to the Respondent, "the Claimant is not correct when it argues the unconstitutionality of the AIMI regime due to violation of the principles of equality (…) and contributory capacity (…)" inasmuch as "(…) in light of the constitutional principles invoked it follows that the choices underlying the delimitation of the objective scope of AIMI are made within the legislator's margin of freedom to shape the law".

4.2.18

Thus, the Respondent argues that "(…) in the delimitation of the real scope of application it is clear that the criterion adopted is intended to be universally objective, inducing greater uniformity and equality in the treatment of the properties subject to taxation, to the detriment of other criteria that would appeal to case-by-case verifications of the actual destination given to the properties" whereby "it will not be, therefore, the circumstance that other taxpayers holding identically valuable real property assets be exempt from the tax, that will justify a specific constitutional censure of the norm under scrutiny".

4.2.19

And as to the fact that the properties taxed are the substratum of the Funds' activity (according to the Claimant's position), the Respondent contends that "(…) the properties excluded from subjection to AIMI (…) are those that perform an instrumental function to economic activities industrial, commercial or services, inasmuch as they constitute buildings that serve as support for the functioning of said activities, and are not themselves generators of income" whereby "although the taxed properties may prove to be instrumental to the Funds' activity, we have that the same are suitable to indicate that that collective person is holder of goods that, in themselves, evidence a specific abundance compared to other real property owners".

4.2.20

Thus, the Respondent understands that "the legislator within its margin of freedom to shape the factual and legal realities that constitute the basis of AIMI's scope shows concern to encompass only the urban properties classified as buildings for residential purposes held for sale, in the same state as they are acquired or after a transformation, assigned to rental or otherwise subject to exploitation and, also, land for construction held for sale or for constructions to be erected thereon, such realities being able to integrate, with greater or lesser weight, the assets of individuals or collective persons and other equivalent structures".

4.2.21

In these terms, the Respondent reiterates that "(…) the arguments presented by the Claimant are devoid of foundation, with no defect being able to be imputed to the disputed assessments", inasmuch as "(…) there is no place for any possibility here of judging the unconstitutionality of AIMI based on the violation of the principle of equality starting from premises that are based on a comparison between incomparable situations (…)".

4.2.22

Now, according to the Respondent's understanding, "with all the arguments presented by the Claimant lacking (…)" the "(…) disputed assessments should remain in the legal order".

4.2.23

Thus, and citing diverse arbitral case law, the Respondent understands that:

4.2.23.1

"(…) article 135-B/2 of CIMI is unconstitutional, when interpreted in the sense that the exclusion from taxation provided therein also applies to properties classified as land for construction whose potential purpose is not residential, as it violates the constitutional principle of separation and interdependence of powers (…), constituting itself as a reference and limit to the powers of cognition of the courts in the exercise of their function within the Rule of Law (…), as well as of the constitutional principle of equality (…) and, likewise, of the principle of legality (…), which is here deduced for all legal purposes";

4.2.23.2

"As well as it is considered that any interpretation that excludes the Claimant from the subjective scope of AIMI, given that the properties constitute the substratum of its activity, is also unconstitutional as it violates the constitutional principle of separation and interdependence of powers (…), constituting itself as a reference and limit to the powers of cognition of the courts in the exercise of their function within the Rule of Law (…), as well as of the constitutional principle of equality (…) and, likewise, of the principle of legality (…), which is here deduced for all legal purposes".

4.2.24

The Respondent also alleges that "(…) it is understood that the assessment acts are not affected by a defect that should dictate their annulment/declaration of nullity" whereby their payment will not be due but "(…) they are not due if it is concluded that the legal regime of AIMI is unconstitutional".

4.2.25

In these terms, the Respondent concludes that "(…) the present petition for arbitral decision should be judged inadmissible as unproven and, consequently, the Respondent should be absolved of all claims (…), all with the due legal consequences or, if not so deemed, it requests (…) that notification be made to the Public Prosecution Service of the learned arbitral decision".

5. GROUNDS FOR DECISION

As we have seen, the Claimant imputes to the AIMI assessments subject to the present petition, both defects of illegality (because they are based on a wrong interpretation of the applicable provisions), and defects of unconstitutionality (due to alleged violation of the principles of equality, fiscal equality and contributory capacity).

The wording of the provisions of the Property Tax Code (CIMI) that determined the assessments of the respective Additional – instituted by Law no. 42/2016, of 28 December (State Budget Law for 2017), which added to CIMI chapter XV integrated by articles 135-A to 135-K –, as they were in force on the date of the taxable event, was as follows:

"Article 135-B

Objective scope

1 - The additional to the municipal property tax bears on the sum of the tax property values of urban properties situated in Portuguese territory of which the tax subject is the holder.

2 - The following are excluded from the additional to the municipal property tax the urban properties 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".

Article 6

Types of urban properties

1 - Urban properties are divided into:

a) Residential;

b) Commercial, industrial or for services;

c) Land for construction;

d) Others.

(...)"

Additionally, it is important to consider the norm of subjective scope that was contained in article 135-A of CIMI:

"Article 135-A

Subjective scope

1 - The tax subjects of the additional to the municipal property tax are individuals or collective persons who are owners, usufructuaries or superficiaries of urban properties situated in Portuguese territory.

(...)"

Regarding the questions of illegality:

The Claimant's argument follows two axes:

• on the one hand, it understands that the holding of properties is excluded from the legal provision by reason of the economic activity it exercises, since the teleology of the creation of the additional would have been the taxation of manifestations of fortune, and not the exercise of economic activities – which, moreover, were intended to be safeguarded, by excluding them from the application of such additional;

• on the other, it understands that the exception for urban properties classified as «commercial, industrial or for services» and «others» cannot fail to include land that has as its purpose building for those very exact purposes.

Both these questions have already been the subject of decisions in this arbitral jurisdiction, with the solution to the first being settled and the solution to the second being less settled.

Thus it was written in the Decision of Case no. 664/2107-T:

"The exclusion from the tax encompasses, therefore, the properties classified as commercial, industrial or services, understanding as such the buildings or constructions licensed for these purposes or that have as their normal destination each of these purposes. Said exclusion encompasses, furthermore, the residual category referred to in paragraph d) of no. 1 of that article 6, including therein lands situated within or outside an urban agglomeration that are neither land for construction nor rural properties and also buildings and constructions that do not fit within any of the preceding classifications.

The scope of objective application, by effect of the referral to that article 6, was thus defined not only by reference to a certain type of urban property, but also by reference to the administrative procedure through which the classification was carried out or, in the absence of a license, to the normal destination of such properties for commercial, industrial and services purposes or others.

In all this context, the understanding according to which it was intended to exclude from the scope of the tax the properties assigned to economic activities, on the pretext that it was legislative intent not to place excessive tax burden on taxpayers who, by force of their corporate purpose, hold properties, has no support in the letter of the law nor in the rational and systematic elements of interpretation.

Such a reading would presuppose that the legislator, instead of having delimited the scope of the tax through characterized types, had opted for a case-by-case evaluation based on the actual, effective assignment of the property to an economic activity or to the functioning of a collective person.

Having the law defined the scope of the tax as it did, resorting to legal technical concepts used elsewhere in the system, it is surely with that meaning that the scope of application of the legal provision must be defined. Norms sometimes bear more than one meaning and then the positive function of the text is translated into giving stronger support or suggesting more strongly one of the possible meanings. But if the legislator resorted to a special legal technical language, to express its thought with greater precision, it falls to the interpreter to avail himself of the legal technical meaning of the expressions used, dispensing itself from using circumstantial elements that could only lead to an interpretive result not intended by the legislator (cf., in this sense, BAPTISTA MACHADO, Introduction to Law and the Legitimizing Discourse, Coimbra, 1993, p. 182).

As must be concluded, the intended extension of the legislative formula used to properties assigned to 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.

(...)

Having the legislator defined an exclusion clause by express and precise reference to certain types 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. It is not even possible to reach such an interpretive result on the basis of mere considerations of a pragmatic nature or of teleological identity.

Although it could be justified, from a fiscal policy perspective, to grant to land for construction intended for buildings for commercial, industrial or services purposes the same status that came to be attributed to properties classified as "commercial, industrial or services", the fact is that this was not the legislative option, which merely excluded from the scope of the tax these types of properties and not those others that could potentially be used for these same purposes."

This same understanding was followed by the arbitral decision issued in Case no. 676/2017-T, which, regarding the first question, further considered that:

"the literalness of articles 135-A/1 and 135-B/1 and 2 of CIMI is clear and does not lend itself to any interpretive doubt. Being the letter of the law, or grammatical element, the first element to be called upon in legal hermeneutics, and being presumed that the legislator knew how to express its thought in adequate terms (no. 3 of article 9 of the Civil Code), it will not be necessary to call upon other elements from among those available in the panoply of hermeneutics."

Nevertheless, it added:

It is true that the legislative concern to «avoid the impact of this tax on economic activity» was announced in the Bill for the State Budget for 2017 and was made concrete through the exclusion from the scope of «urban properties classified as the type "industrial", as well as urban properties licensed for tourist activity, the latter provided they are duly declared and verified as having that purpose» and the deduction from the taxable value of the amount of «€ 600,000.00, when the tax subject is a collective person with agricultural, industrial or commercial activity, for properties directly assigned to its functioning».

However, it was not on the basis of the activity to which the properties are assigned that the exclusion of scope came to be defined, for in the wording that came to be approved, the non-application was defined, as we have seen, only on the basis of the types of properties indicated in article 6 of CIMI, without any reference to the assignment or not to the functioning of collective persons.

Thus being, as was recorded in Arbitral Decision no. 675/2017-T, "if, in the final wording of the Budget, the legislative intent to exclude the scope from properties directly assigned to the functioning of collective persons had been maintained, it would surely have maintained the reference to this assignment that was contained in the proposal and that clearly expressed this legislative option.

"(...), as this reference to the assignment of properties was removed, there is no legal support to conclude that residential properties and land for construction assigned to the functioning of collective persons do not matter for the scope of AIMI.

"«In the absence of other elements that induce the choice of the less immediate meaning of the text, the interpreter should opt in principle for that meaning which best and most immediately corresponds to the natural meaning of the verbal expressions used, and in particular to their legal technical meaning, in the supposition (not always exact) that the legislator knew how to express its thought adequately.

"In the case at hand, in the face of the departure from the proposed wording in which relevance was given to the assignment of properties, there is no reason to conclude that the legislator did not know how to express its thought in adequate terms, as must be presumed, by force of the provisions of article 9, no. 3, of the Civil Code."

With respect to the second question, and although the preference for the argument sustained in the letter of the law has generally prevailed over that sustained in its invoked teleology, there have been divergent understandings. In the already cited decision issued in case no. 676/2017-T the following was written:

"Resuming again what was recorded in the Arbitral Decision, issued in case no. 664/2017-T, "it must be taken into account that we are faced with different taxable events. In one case, the law subjects to taxation lands that are capable of urbanization which constitute an economic asset by virtue of their aptitude for construction. In another case, the law excludes from the tax the built assets that perform an instrumental function in relation to productive activity.

"There is no necessary connection between these two realities. The land for construction has its own property value that constitutes, in itself, an indicator of contributory capacity that is susceptible to being the subject of an autonomous tax on assets, independently of its eventual and future use through the implantation of a building for commercial, industrial or services purposes. The already constructed assets that are classified as commercial, industrial or services property already have an instrumental function in relation to a certain productive activity that the legislator, within its margin of free discretion, may intend to safeguard within the framework of its duties to promote economic and social development, which have constitutional basis (article 81 of the Fundamental Law)."

In this context, it would make no sense to be exempting land for construction, as such, from AIMI, while enjoying a merely potential constructive capacity of the type of property to be built (for commerce, industry or services), for that would be the legislator incentivizing its non-building and effective use in a productive activity.

In sum, it is possible to discern a sufficiently material foundation to distinguish between these different taxable events for the purpose of asset taxation."

Considering nonetheless the argument produced to the contrary, it is understood that there are no reasons to change this understanding, neither by way of an extensive interpretation of the exclusion norm (such understanding does not appear preferable to what results directly from the letter of the law), nor by the invocation of criteria of constitutional compliance, which could eventually impose a correction to the infra-constitutional interpretive criteria – as will be seen below.

Regarding the questions of unconstitutionality:

The recent Decision no. 299/2019 of the Constitutional Court, issued in Plenary on 21 May without dissenting votes, in appeal of a decision issued in CAAD which likewise ruled on the constitutional conformity of the said Additional to the Municipal Property Tax, reminded that:

"In its final shape, and focusing attention on the taxation of collective entities, AIMI came to tax the entire real property assets of the tax subject, without deduction, while the norm of no. 2 of the provision came to attend only to the classification of the property in accordance with article 6 of the Property Tax Code, without consideration of the sector of activity or the actual destination. This meant the elimination of the element of progressivity of personal basis in the taxation of collective persons or equivalent entities contained in the Bill no. 37/XIII, compensated to some extent by the reduction of the objective scope of the tax, which came to subject to taxation only the types of urban properties not comprised in the provision of no. 2 of article 135-B, that is, in accordance with the division operated by article 6, no. 1, of the Property Tax Code, the urban properties «residential» and «land for construction»."

And further explains the contours of the norm of non-subjection to taxation enshrined in no. 2 of article 135-B of the Property Tax Code in the face of constitutional principles:

"By virtue of that norm, the urban properties classified by tax law as «commercial, industrial or for services» and «others» are excluded from the objective scope of AIMI — the sum of the tax property values of urban properties of which the tax subject is the holder — which introduces, as is proper to the normative typology, an inequality of treatment among the tax subjects of the tax: while holders of residential urban properties and land for construction (referred to in paragraphs a) and c) of article 6 of CIMI) are obligated to AIMI, holders of properties with commercial, industrial, services or other purposes, whose normal destination is not residential or construction (referred to in paragraphs b) and d) of article 6 of CIMI), are not obligated to such addition.

It can be said that, while an exception to the general rule of the scope of the corresponding tax, such norms live «in a permanent relation of tension with the principle of distribution of tax burdens according to the principle of contributory capacity», which binds them to a special legitimation: «the achievement of a certain economic objective of special importance») (SALDANHA SANCHES, Manual of Tax Law, Coimbra Ed., 3rd Ed., 2007, pp. 457-458).

Nevertheless, the relationship of equality presupposed in the norm of scope does not have the same content as the relationship of equality required by the norm of non-scope. That norm, because it describes the fact that generates the tax obligation, cannot fail to attend to the economic strength that the taxpayer has to support the tax; already the norm of non-scope, because it defines a negative element of the type legal of the tax fact, must attend to the criterion chosen by the legislator in the delimitation of that negative element. That is, the norms differentiate themselves both by their effects and by their purposes: while the norm of scope represents an interference in the taxpayer's patrimonial sphere, referring to the withdrawal of the pecuniary benefit from the taxpayer to the State, the norm of tax exclusion projects broader economic effects, of which the mitigation of the negative impact on the taxpayer's patrimonial sphere is an instrument; while the norm of scope has the objective of revenue collection, the norm of non-scope functionalizes the tax to other purposes.

These differences project onto the constitutional parameter in the face of which the justification of the norm must be assessed. The norm of scope, because it embodies a burden on the taxpayers' assets, is bound to distribute the tax burden based on the capacity each has to pay the tax — principle of tax capacity; already the norm of tax exclusion, because it creates situations of tax favoritism, beyond the need to ensure respect for the principle of proportionality, based on the purposes it proposes to achieve, must ensure that the criterion of tax relief applies to realities that appear equal in the light of that criterion — principle of equality. Thus, in the first typology, the relationship of equality is established through a comparison judgment of the taxpayers in light of the criterion of contributory capacity; in the norm of non-scope, the relationship of equality is established through confrontation of the persons or situations in light of the distinctive criterion or tertium comparationis of which the legislator made use for extra-fiscal reasons. In this latter, considering the effects of deburden or mitigation that tax exclusion provokes in the taxpayers' assets, no proper problem arises regarding the taxation without correspondence in the tax subject's contributory capacity; thus, by not electing the facts on which the tax bears, the problem does not reside in compliance with the principle of contributory capacity, as a presupposition of taxation.

1. The introduction of said differentiation in the internal structure of AIMI rests eminently on reasons of economic policy, to protect the economic activity of companies that hold urban properties.

In fact, it was through extra-fiscal considerations that the legislator justified in Bill no. 37/XIII the norm of tax exclusion, referring that with it the intention is «to avoid the impact of this tax on economic activity». The pursuit of that objective — the protection of the economy — in the modulation of a tax on assets is constitutionally legitimate, by virtue of being devoted to the realization of a priority incumbency of the State: the promotion of economic structures (articles 9, paragraph d) and 81, paragraph a) of the Constitution), which presupposes the proper functioning of economic activities."

And concluded:

"the rationale of the delimitation of the scope of the tax in question does not stem from the economic activity exercised by the tax subject, but rather, as in the IMI, from the social assignment of the urban property."

On the other hand, considering more specifically the question of the taxation of "land for construction", the following was considered:

"the bearing of the tax on «land for construction», as defined in no. 2 of article 6 of the Property Tax Code, stems from construction rights having been constituted therein or the carrying out of subdivision operations, either by way of an act of administrative granting of license or authorization, or by the tacit recognition resulting from the admission of prior notification, or still by the favorable response to a request for prior information or issuance of favorable prior information to a subdivision or construction operation. Accessorily, the legislator also took in as a criterion for the assignment of the land to construction, that it be acquired expressly for that purpose and that it possess constructive viability.

And, according to the normal functioning of the market, the holding of rights over a parcel of land with respect to which construction or subdivision rights have already been constituted or is recognized to meet conditions of constructive viability, configures wealth susceptible to autonomous evaluation from what may be built, by virtue of the legally founded expectation that comes to incorporate the legal-subjective sphere of its holder."

(...)

"within the scope of AIMI, even if guided by a personal perspective, cannot fail to be recognized that land for construction are quite distinct from already built urban properties and assigned to a specific purpose by way of licensing or normal use. In truth, and resting, as seen, the reason for the non-taxation of urban properties, commercial, industrial, services or others on the purpose of promoting the proper functioning of economic activities — which implies the creation of stimuli to the reallocation of resources to productive purposes, so as to boost economic growth -, land for construction can only contribute to that purpose in potency, in a hypothetical and conditional future, as even if a construction right has been formed, nothing prevents the change of will of its holder regarding the purpose to give to the property. Moreover, what is relevant for the purposes of annual taxation in AIMI is the tax property value of the existing property and contained in the matrix, as one cannot tax a future and eventual contributory capacity, but only the current and effective contributory capacity. Land for construction constitute an economic asset with property value, in itself revealing contributory capacity of its holder, being thus constitutionally legitimate its inclusion in the patrimonial collection globally subject to AIMI, regardless of what is effectively implanted therein."

Concluding that:

"Thus being, neither the term elected to compare the legal-subjective situations - the potential use of urban properties - carries relevance in the problematic core in equation, nor the holders of the two types of urban properties put in confrontation - land for construction with purposes of commerce, industry, services or related, on the one hand, and built properties classified, according to article 6 of the Property Tax Code, as «commercial, industrial or services» or «others», on the other - are in an equivalent position, according to the tax fact and the structure of objective scope of AIMI, whereby no foundation is found, also on this point, to support a judgment of unconstitutionality of the norm questioned, in the specific hypothesis under consideration.

1. By the foregoing, the taxation of AIMI does not merit censure in light of the principles of equality, proportionality and contributory capacity (articles 13, 18, no. 2 and 104, no. 3, of the Constitution)."

That is also the judgment of the present Tribunal, in terms of which the claim is inadmissible, with all legal consequences.

6. Of the reimbursement of the amount paid plus compensatory interest

Given the legal solution of the case, the claim for reimbursement of the amounts paid by way of additional to the IMI and the condemnation in the payment of compensatory interest becomes moot.

7. Of responsibility for payment of arbitral costs

In accordance with the provisions of article 22, no. 4, of RJAT, "the arbitral decision issued by the arbitral tribunal contains the fixing of the amount and the allocation among the parties of the costs directly resulting from the arbitral proceedings".

Thus, pursuant to the provisions of article 527, no. 1 of CPC (ex vi article 29, no. 1, paragraph e) of RJAT), it should be established that the party that gave cause to the costs shall be condemned, or, if there is no prevailing, whoever profited from the proceedings.

In this connection, no. 2 of the said article clarifies the expression "gave cause", according to the principle of failure to succeed, understanding that the losing party gives cause to the costs of the proceedings, in the proportion in which it failed.

In the case under analysis, having regard to the foregoing, in accordance with the provisions of article 12, no. 2 of RJAT and article 4, no. 4 of the Regulation of Costs in Tax Arbitration Proceedings, it is necessary that the entire responsibility for costs be attributed to the Claimant.

8. DECISION

In these terms, this Collective Arbitral Tribunal decides:

a) To judge the petition for arbitral decision as entirely inadmissible as unproven, absolving the Respondent of all claims, in the terms petitioned, maintaining in the legal order the AIMI assessment acts contested;

b) To condemn the Claimant in the payment of the costs of the present proceedings.

9. Value of the case: Having regard to the provisions of articles 306, no. 2 of CPC, article 97-A, no. 1 of CPPT and article 3, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at EUR 174,055.19.

10. Costs of proceedings: Pursuant to the provisions of Table I of the Regulations of Costs in Tax Arbitration Proceedings, the value of the costs of the Arbitral Proceedings is fixed at EUR 3,672.00, to be borne by the Claimant, in accordance with article 22, no. 4 of RJAT.

Let it be notified.

Lisbon, 12 June 2019.

Arbitrator-President

(Fernanda Maças)

Arbitrator-Member

(Prof. Doctor Vasco Valdez)

Arbitrator-Member

(Sílvia Oliveira)