AIMI Tax on Real Estate Companies & Building Land: Constitutionality and Subjection | CAAD 684/2017-T

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (President Arbitrator), António Pragal Colaço and Carla Castelo Trindade, designated by the Ethics Council of the Centre for Administrative Arbitration to form an Arbitral Tribunal, hereby decide as follows:

ARBITRAL DECISION (consult complete version in PDF)

I – REPORT

On 26 December 2017, A..., S.A., holder of tax identification number ..., B..., S.A., holder of tax identification number ... and C..., S.A., holder of tax identification number ..., all with registered office in ...-..., ...-..., ... (hereinafter briefly designated as "Claimants"), submitted an application 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, briefly designated as RJAT), seeking a declaration of illegality of the tax assessment acts for the Additional Municipal Property Tax ("AIMI") with numbers 2017..., 2017... and 2017..., issued by the Tax and Customs Authority ("AT"), with reference to the year 2017, in the total amount of € 259,751.48.

To substantiate its request, the Claimant alleges, in summary, that:

• it is illegal, due to errors in the factual and legal prerequisites, the application of AIMI to the Claimants, by virtue of their holding of real estate within the framework of their activity;

• subsidiarily, the taxation of "land for construction" intended for "commercial, industrial or services" purposes or "others" is illegal, insofar as they are not covered by the objective scope of the norms under analysis;

• subsidiarily, the legal regime of AIMI is unconstitutional, insofar as it applies to all "land for construction", as it contravenes the principle of equality, enshrined in article 13 of the Constitution of the Portuguese Republic (CRP) and the principle of fiscal equality and contributory capacity enshrined in article 104, paragraph 3 of that Fundamental Law.

On 28-12-2017, the application for constitution of the arbitral tribunal was accepted and automatically notified to the AT.

The Claimant did not proceed to appoint an arbitrator, wherefore, pursuant to article 6, paragraph 2, subparagraph a) and article 11, paragraph 1, subparagraph a) of RJAT, the President of the Ethics Council of CAAD designated the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable period.

On 14-02-2018, the parties were notified of these designations, having manifested no intention to challenge any of them.

In accordance with article 11, paragraph 1, subparagraph c) of RJAT, the collective Arbitral Tribunal was constituted on 06-03-2018.

On 17-04-2018, the Respondent, duly notified for that purpose, submitted its defence by way of challenge.

Pursuant to articles 16, subparagraphs c) and e), and article 29, paragraph 2, both of RJAT, the holding of the meeting referred to in article 18 of RJAT was dispensed with.

A period was granted for the submission of written arguments, from which the parties abstained.

A period of 30 days was set for the rendering of final decision, following the expiration of the period for submission of arguments by the Respondent. Subsequently, that first period was extended until the expiration of the period set in article 21, paragraph 1 of RJAT.

The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to articles 2, paragraph 1, subparagraph a), 5 and 6, paragraph 1, of RJAT.

The parties have legal personality and capacity, are legitimately constituted and are legally represented, pursuant to articles 4 and 10 of RJAT and article 1 of Ordinance 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.

All considered, it behoves us to render decision.

II. DECISION

A. MATTER OF FACT

A.1. Facts Established as Proven

• The Claimants are real estate companies whose corporate purpose includes the purchase, sale and leasing of real estate.

• In that capacity, the Claimants were notified of the tax assessment acts for AIMI, which are the subject of the present arbitral action, relating to the year 2017, with reference to the real estate assets held by them.

• In the aforementioned assessments, the AT included the following real estate:

[Table content omitted as per instruction to translate text content]

• The Claimants proceeded to make full and timely payment of the tax assessment acts in question, in the total amount of € 259,751.48.

A.2. Facts Established as Not Proven

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

A.3. Reasoning of the Established and Not Established Facts

With respect to the matter of fact, the Tribunal does not need to pronounce on everything that was alleged by the parties, as it falls to it to select the facts that matter for the decision and to distinguish the matter proven from that not proven (cf. article 123, paragraph 2, of CPPT and article 607, paragraph 3 of CPC, applicable by virtue of article 29, paragraph 1, subparagraphs a) and e), of RJAT).

Thus, the facts pertinent to the judgment of the case are chosen and delineated in function of their legal relevance, which is established in view of the various plausible solutions of the legal question(s) (cf. former article 511, paragraph 1, of CPC, corresponding to current article 596, applicable by virtue of article 29, paragraph 1, subparagraph e), of RJAT).

Thus, taking into account the positions assumed by the parties, in light of article 110/7 of CPPT, and the documentary evidence attached to the file, the facts listed above were deemed proven, with relevance for the decision.

Allegations made by the parties and presented as facts, consisting of strictly conclusive statements incapable of proof and whose veracity must be assessed in relation to the specific matter of fact consolidated above, were neither given as proven nor as not proven.

B. ON THE LAW

The State Budget Law for 2017 (Law No. 42/2016, of 28 December) introduced the "Additional Municipal Property Tax" ("AIMI"), which came into force on 1 January of that same year.

The regulation of AIMI was included in a specific section added to the Municipal Property Tax Code, comprising articles 135-A to 135-K.

For present purposes, paragraphs 1 and 3 of article 135-A of the Municipal Property Tax Code establish that the taxpayers subject to AIMI are "natural or legal persons who are owners, usufructuaries or holders of surface rights in urban real estate situated in Portuguese territory" on 1 January of the year to which the Additional refers.

Paragraph 2 of the same article provides that: "any structures or centres of collective interests without legal personality that appear in the registers as taxpayers of the municipal property tax, as well as undivided estates represented by the head of household, are assimilated to legal persons".

AIMI applies, according to paragraph 1 of article 135-B of the Municipal Property Tax Code, "to the sum of the tax values of urban real estate situated in Portuguese territory of which the taxpayer is the holder" – being that, from this sum, the amount of € 600,000 shall be deducted whenever the taxpayer is a natural person or an undivided estate.

Excluded from the objective scope of this Additional are "urban real estate classified as 'commercial, industrial or for services' and 'others' pursuant to subparagraphs b) and d) of paragraph 1 of article 6 of this Code", as provided in paragraph 2 of the same article.

The applicable rate is 0.4% for legal persons and 0.7% for natural persons and undivided estates, provided that the taxable value does not exceed € 1,000,000, pursuant to paragraph 1 of article 135-F of the Municipal Property Tax Code, being that, in cases where the taxable value exceeds € 1,000,000, a rate of 1% applies, when the taxpayer is a natural person.

Pursuant to paragraph 1 of article 135-G and article 135-H, both of the Municipal Property Tax Code, the additional tax in question is assessed annually, in the month of June, based on the tax values of the real estate subject to tax and in relation to the taxpayers appearing in the registers on 1 January of each year, and must be paid by the end of September.

As has been seen, the Claimants raise the following issues:

• illegality, due to errors in the factual and legal prerequisites, of the application of AIMI, by virtue of the holding of real estate within the framework of their activity;

• subsidiarily, the illegality of the taxation of "land for construction" intended for "commercial, industrial or services" purposes or "others", insofar as they are not covered by the objective scope of the norms under analysis;

• also subsidiarily, the unconstitutionality of the legal regime of AIMI, insofar as it applies to all "land for construction", as it contravenes the principle of equality, enshrined in article 13 of the CRP and the principle of fiscal equality and contributory capacity enshrined in article 104, paragraph 3 of that Fundamental Law.

The issues raised in the present arbitral proceedings have already been the subject of various arbitral decisions, in some parts of different import, and reference may be made, in this regard, to the arbitral awards rendered in cases 668/2017-T, 675/2017-T, 686/2017-T, 692/2017-T, 681/2017-T, 688/2017-T, 664/2017-T, 677/2017-T, 603/2017-T, 694/2017-T, 687/2017-T, 683/2017-T, 676/2017-T, 666/2017-T, 682/2017-T, 696/2017-T, and 6/2018-T[1].

Let us examine them, then.

a.

The Claimants believe that the legislature "in instituting AIMI, intended to create an effective tax on real estate wealth" and "sought to ensure that urban real estate devoted to economic activities would not be subject to taxation in AIMI, recognizing that the mere holding of such real estate does not constitute (and cannot constitute) a factor demonstrating wealth, nor a sufficient indicator of contributory capacity of the holders of such real estate" as well as that "it is evident that the ratio legis which underlay the rule of exclusion from objective scope, enshrined in paragraph 2 of article 135-B of the Municipal Property Tax Code, was based, essentially, on the intention not to impose excessive tax burdens on taxpayers who, by virtue of their economic activities, hold real estate for the pursuit of their corporate purpose".

With respect to themselves, the Claimants allege that the real estate held by them are the true elements of their "production process (...), whether as rental assets, whether as true inventories intended for future transformation, intended exclusively for the pursuit of the activity and never capable of being compared with elements demonstrative of wealth", that "the holding of such real estate represents, in truth, the substrate of all the activity of the Claimants – it is inherent, necessary, indispensable to the pursuit thereof", and that "to tax such real estate would mean to tax directly an 'economic activity' – something that the legislature expressly intended to avoid by creating AIMI".

On this basis, the Claimants conclude that they "cannot (...) accept – or understand – that the AT, through the assessment act now in dispute, has applied this new AIMI to the assets held by them" nor that that Authority "has considered, in determining the tax value of assets subject to AIMI, the 'land for construction' whose potential use coincides with the purposes of 'commercial, industrial or services'".

In short, in this part, the Claimants seek an exclusion from the subjective scope of AIMI, including in such exclusion "taxpayers who, by virtue of their economic activities, hold real estate for the pursuit of their corporate purpose" and, in particular and for present purposes, real estate companies.

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

a) with respect to Real Estate Investment Funds – Case No. 664/2017-T and Case No. 686/2017-T;

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

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

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

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

"In all this context, the view that it was intended to exclude from the scope of the tax real estate devoted to economic activities, on the pretext that it was the legislative intention not to impose excessive tax burdens on taxpayers who own real estate by virtue of their corporate purpose, has no support in the letter of the law nor in the rational and systematic elements of interpretation", concluding that "the alleged extension of the legislative formula used to real estate devoted to the economic activity of the company, regardless of the specific characterization as commercial, industrial or service real estate, has no place in light of general criteria of legal hermeneutics".

Here too the aforementioned understanding is followed, noting additionally that the argumentation presented by the Claimants is deficient in several of its premises.

Thus, the view that the legislature "in instituting AIMI, intended to create an effective tax on real estate wealth" is not subscribed to, and it is considered instead that AIMI corresponds in substance to form, being an additional to the Municipal Property Tax, implementing what had been the view of some, including the Constitutional Court[2], who considered that "item 28.1 of the TGIS assumed itself as a 'complementary rate of Municipal Property Tax'".

The conclusions of the Claimants, according to which the legislature "sought to ensure that urban real estate devoted to economic activities would not be subject to taxation in AIMI, recognizing that the mere holding of such real estate does not constitute (and cannot constitute) a factor demonstrating wealth, nor a sufficient indicator of contributory capacity of the holders of such real estate" are equally not subscribed to, as well as the view that "it is evident that the ratio legis which underlay the rule of exclusion from objective scope, enshrined in paragraph 2 of article 135-B of the Municipal Property Tax Code, was based, essentially, on the intention not to impose excessive tax burdens on taxpayers who, by virtue of their economic activities, hold real estate for the pursuit of their corporate purpose".

Indeed, in this regard, it is considered that the non-application of AIMI to economic activities was not an ultimate purpose of the legislature in creating AIMI, but rather a factor considered by it at various levels in the design of the legal regime thereof.

Thus, and in the first place, as the Claimants point out, the legislature excluded from the scope of AIMI the "urban real estate" classified as "commercial, industrial or for services" and "others".

Beyond that, however, the legislature created different rates for legal persons and natural persons, including an increase in cases where the taxable value exceeds € 1,000,000, restricted to the latter, which cannot but be based, if not wholly then at least in large part, on the consideration that real estate held by legal persons, as a rule, will be devoted to economic activities.

Indeed, as Professor José Maria Fernandes Pires points out, AIMI was intended 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"[3], so it should be considered that it was never the legislature's intention to exclude economic activities, but rather to exclude urban real estate classified according to a purpose.

In truth, if that were the intention, given that the majority of legal persons engage in economic activities, it would make no sense whatsoever to tax legal persons from a subjective standpoint.

From this it follows that, with the aforementioned Author, it should be considered that "AIMI applies, as we have already mentioned, only to wealth materialized in a small part of urban real estate, so it is a tribute that is only partial, but personal, on urban real estate wealth"[4].

The view that the legislature recognized "that the mere holding of such real estate does not constitute (and cannot constitute) a factor demonstrative of wealth, nor a sufficient indicator of contributory capacity of the holders of such real estate" is equally not deemed to be accepted. Indeed, and this will be a notorious and, as such, insurmountable reality, it will be undeniable that a legal person that holds real estate valued at €100,000,000.00 demonstrates a contributory capacity (in the context of the tax in question), manifestly superior, to another legal person that, with the same purpose, holds real estate valued at €100,000.00.

On the other hand, and as has already been mentioned, AIMI must be understood and treated as such, that is, as an additional to the Municipal Property Tax. Now, being that so, how will the contributory capacity evidenced by legal persons through the holding of real estate, even if devoted to their production activity, be precisely the same, both with respect to subjection to AIMI and with respect to subjection to Municipal Property Tax.

Thus, and in light of the foregoing, it is deemed that the arbitral request should be dismissed, in this part.

b.

With respect to the first subsidiary request formulated, the Claimants believe that "the legislature intended to tax real estate (...) with residential purposes. Such intention results from the drafting of the law and, indeed, underlay the creation of this additional".

The Claimants further state that "Given that the legislature's intention was clear in excluding, through paragraph 2 of article 135-B of the Municipal Property Tax Code, the application of AIMI to real estate devoted to economic activities, one should necessarily understand that the 'land for construction' devoted to those activities are equally included in that rule of exclusion", being that, for the Claimants, "To understand that 'land for construction' intended, in the terms of their respective real estate registries, for purposes of 'commerce, industry, services' or 'others', are subject to AIMI – as has come to be understood by the AT – is manifestly contrary to the spirit of the law and, indeed, illegal".

The Claimants also point out that "only by sheer absurdity would one consider it comprehensible and adequate to the purposes pursued by AIMI the hypothesis that the AT would tax a 'land for construction' with a potential use of 'industry' and not tax a real estate building with the same use – even if such real estate is not actually being exploited in the context of carrying out an economic activity".

In this context, for the Claimants, "the subjection of such land for construction to AIMI causes a greater tax burden on this type of urban real estate and, consequently, will certainly have an impact on the economic activities that will potentially be developed in such real estate", so that "the methodology of taxation adopted by the AT, in the sense of including in the taxable value for purposes of AIMI, the taxpayers holding 'land for construction' with the purposes identified by paragraph 2 of article 135-B of the Municipal Property Tax Code, constitutes a discriminatory treatment that infringes, without more, the principle of equality, constitutionally enshrined in articles 13 and 104, paragraph 3, of the Constitution of the Portuguese Republic ('CRP') and in articles 5 and 55 of the General Tax Law ('LGT')".

Thus, the Claimants conclude, "the tax assessment act of AIMI, in the portion that taxes the 'land for construction' intended for purposes of 'commercial, industrial or services' or 'others' – here corresponding to the amount of tax of € 28,896.63 (...) is vitiated by manifest illegality, due to error in the factual and legal prerequisites, and should be partially annulled".

With respect to this subsidiary request, the Claimants seek, in short, the broadening of the objective exclusions from subjection to AIMI, enshrined in paragraph 2 of article 135-B of the CIMI, so as to include, also, urban real estate classified as "land for construction", provided that the construction envisioned therein is one of the types referred to in the aforementioned paragraph 2, that is, urban real estate intended for purposes of "commercial, industrial or services" or "others".

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

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

That decision, based on the unity of the legal system, supports the possibility of an extensive interpretation of the exclusion provided for in paragraph 2 of article 135-B of the CIMI, in the case of those proceedings, with respect to urban real estate classified as "for services", "as expressing a legislative intention to also exclude from taxation the land intended for the construction of such real estate".

For the aforementioned Arbitral Tribunal, "Given that 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, especially since the value of the land is incorporated into the value of the buildings.

The same Tribunal further stated that, if it did not decide thus, it would conclude to the material unconstitutionality of the norm that provides for such taxation.

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

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

"Given that the legislature defined a clause of exclusion by express and precise reference to certain species of urban real estate, which are immediately identifiable in the context of the law, it is not possible to effect an extensive interpretation so as to include therein other typologies that the legislature manifestly did not wish to consider. Nor can one even arrive at that interpretive result on the basis of mere considerations of a pragmatic order or of teleological identity".

It is not contested that from the standpoint of fiscal policy the solution could have been different, and saving much respect for other opinions, it is deemed that the exclusion from taxation of all or part of the "land for construction" was not the solution adopted, since paragraph 2 of article 135-B of the CIMI only provides for exclusion from taxation with respect to AIMI of urban real estate classified as "commercial, industrial or for services" and "others", precisely in the terms of subparagraphs b) and d), of paragraph 1 of article 6, which leads, inevitably, to the taxation of the real estate provided for in the two remaining subparagraphs of that same article 6 of the CIMI, that is, urban real estate classified as "residential" (subparagraph a)) or as "land for construction" (subparagraph c)).

Covered by the taxation in question, in terms of the letter of the law, are all urban real estate classified as "residential" and all urban real estate classified as "land for construction", and not only some of them, being that if the legislature, in its rule of exclusion from taxation, intended to exclude part of the real estate referred to in subparagraphs a) and c), of paragraph 1 of article 6 of the CIMI, it would have had every opportunity to do so.

In the same way, the legislature could have altered the species of urban real estate provided for in article 6 of the CIMI, for example, by subdividing the land for construction depending on the purposes to which they were intended, which did not happen.

With respect to the possibility of an extensive interpretation of the exclusion enshrined in the aforementioned paragraph 2 of article 135-B of the CIMI, in order to encompass land for construction not intended for residential use – a solution adopted in the decisions that granted pretensions similar to those of the Claimants, now in question – it is deemed, always saving due respect to other understandings, that it should not be granted.

Thus, and in the first place, it is believed that the identity of situations does not obtain in light of the legally relevant criteria, necessary to effect the said extension of the exclusion clause from objective subjection, that is, it does not appear that land for construction find themselves in a situation identical to that of constructed real estate, from the point of view of the teleology of such exclusion clause.

From a teleological point of view, such clause will have as its background, in the first place[5], the purpose of not burdening with AIMI the real estate devoted, or susceptible to immediate devotion, to production processes, with land for construction not being endowed with such characteristics, given that while constructed real estate will be, or will be susceptible to being immediately, devoted to production processes, land for construction do not find themselves in such a situation.

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

In the words of that high Court[6]:

"For tax purposes, real estate (...) clearly distinguish themselves from land for construction, pursuant to article 6 of the Municipal Property Tax Code (CIMI), with the first of those categories consisting of buildings or constructions already existing (...), while 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 urban operation.

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

That is, the taxation of real estate (...) impinges on existing reality, on tangible things, unlike the taxation of land for construction, which impinges on construction rights, on future things, as is evident from article 45 of the CIMI, in establishing that the tax value of the latter is determined exclusively by the volume and quality of the building to be constructed on the land, and not by its present characteristics.

It will be said, correctly, that both correspond to real estate assets (...). And that, by their real estate value, both are apt to translate a certain form of wealth. But the comparisons end there, because, precisely, the different nature of these goods does not allow one to equate the contributory capacity of their respective owners, present or future, solely on the basis of their allocation and their tax value ('VPT')."

Indeed, already constructed real estate possesses a material reality corresponding to the typology that falls to it. That is, to constructed real estate licensed for, or having as its normal destination, commerce, industry or services, will correspond a material reality suited to such purposes and, for what matters, objectively distinct from constructed real estate licensed, or having normal destination, for residential purposes.

Land for construction, on the other hand, distinguish themselves from the remaining land on a merely legal plane, that is, in function of an action by a public entity (granting of license or authorization, acceptance of prior notice or issuance of favorable prior information of subdivision or construction operation - cf. articles 6/3 and 37/3 of the CIMI) or by the owners (declaration of purpose in the acquisition document; cf. article 6/3 of the CIMI), to which the Law attributes certain legal effects.

Thus, in function of the aforementioned material differentiation, the alteration of the allocation of land for construction, from the point of view of the notes relevant to the issue in question, may be simple, requiring, for example, merely a declaration in the acquisition document, the submission and acceptance of a prior notice, 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, under a point of view of normalcy, the performance of more or less profound works (and necessary licenses).

Furthermore, a constructed building has incorporated a significant value corresponding to the construction, which, even in cases where it is not concretely devoted to the use understood, will constitute a natural incentive to its economic exploitation since that, always from a point of view of normalcy, an constructed property will not only not generate income, but will deteriorate (in function of its degradation) by its non-use.

Land for construction, on the other hand, not only does not incorporate, of itself, any natural incentive for its construction and subsequent allocation to a productive activity, but, also from a point of view of normalcy, the opposite may occur precisely, that is, in function of certain market conditions that create expectations of merely speculative gains, there may exist incentives for their respective owners to maintain their condition as unbuilt land.

In this regard, the Claimants state that the subjection of such land for construction to AIMI "causes a greater tax burden on this type of urban real estate and, consequently, will certainly have an impact on the economic activities that will potentially be developed in such real estate".

Now, in light of the teleology discerned in the norm interpreted, set out above, the fact is that such impact may even be positive, in that the taxation of land for construction may constitute an incentive to their construction, thus accelerating the effective use of real estate in productive activities.

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

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

Let us see thus.

In the design of AIMI, and following what was the evolution of taxation under item 28.1 of the TGIS, the legislature made clear (by virtue, first and foremost, of the nomenclature and systematics of the taxation created, as well as the express reference to the applicable Municipal Property Tax norms) its intention that the relevant categories for the taxation in question be delineated in accordance with the criteria proper to the CIMI.

And, pursuant to this Code, land – which is the category now in question – may be part of the categories of:

• rustic; or

• urban:

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

• intended for "other" purposes.

The legislature, in the regime of AIMI created, excluded from subjection thereto the land qualified as "rustic", by virtue of the exclusive subjection of urban real estate in paragraph 1 of article 135-A, and the land qualified as "urban" intended for "other" purposes, by virtue of the exclusion clause of paragraph 2 of that aforementioned article, being that the non-exclusion of "land for construction" of buildings with certain destinations (namely commerce, services or industry) cannot fail to be considered sufficiently founded 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 (STA) has understood that for the determination of the VPT of land for construction it is irrelevant the allocation of the planned construction.

Thus, in the STA Award of 20-04-2016, rendered in case 0824/15[7], it was considered that:

"It follows from this norm that the formula above transcribed only has application to the urban real estate discriminated therein, that is, to those which, already built, are for residential, commercial, industrial and services purposes.

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

For the determination of the tax value thereof there is the aforementioned article 45, where only the implantation area of the building to be constructed and the adjacent land and the characteristics of paragraph 3 of article 42 are relevant.

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

The allocation coefficient can only be relevant in relation to the proven use of the constructed real estate and likewise the comfort and quality coefficient.

Such multiplication coefficients of the tax value only relate to constructed real estate but have no real basis of support in the potentiality that the land for construction offers".

And, further on, in the same decision:

"But taking into account reality, the legislature established for the determination of the tax value of this species of real estate a specific rule – that contained in article 45, where it reiterates that account is taken of the value of the implantation area of the building to be constructed and the value of the land adjacent to the implantation as well as the characteristics of accessibility, proximity, services and location described in paragraph 3 of article 42. Taking into account the approved construction project and the provision of paragraph 2 of article 45 of the CIMI.

Which means that in determining its tax value of land for construction, the mathematical formula enshrined in article 38 of the CIMI does not apply.

And being so, the allocation 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 allocation coefficient has to do with the type of use of already constructed real estate and the same applies to the quality and comfort coefficient.

In land under construction the approved buildings are merely potential and it is the value of this constructive capacity, generating increase of patrimonial value or wealth for its owner, that it is sought to tax. And not factors still not materialized."

The aforementioned understanding was sanctioned by an award of the Plenary of the Tax Contentious of the STA of 21-09-2016, rendered in case 01083/13[8], in whose summary is synthesized that:

"III - In determining the tax value of land for construction, the provision of article 45 of the Municipal Property Tax Code must be observed, with no place for consideration of the quality and comfort coefficient (cq).

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

V - The quality and comfort coefficient, multiplication factor of the tax value contained in the mathematical expression of article 38 of the CIMI with which the tax value of urban real estate for residential, commercial, industrial and services purposes is determined, cannot be applied analogically as it is susceptible to alter the tax base, interfering with the incidence of the tax."

Thus, it is concluded that in the context of assessment of the VPT within the CIMI the destination of the planned construction in "land for construction" is not relevant, not distinguishing, from the point of view of patrimonial taxation and, consequently, of the evidencing of contributory capacity, land for construction for residential buildings, from land for construction for commercial, industrial or services buildings.

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

Under AIMI, given what has already been set out regarding the nature of this taxation (as an additional to the Municipal Property Tax), there will be no justifications for diverging from such criterion, that is, for considering that the holding of "land for construction" with planned buildings of distinct purposes, signals different contributory capacities.

Taking into account what has been set out, considering that it is not to proceed with the broadening, through extensive interpretation, of the objective exclusions from subjection to AIMI, enshrined in paragraph 2 of article 135-B of the CIMI, so as to include therein, also, urban real estate classified as "land for construction", provided that the construction envisioned therein is one of the types referred to in the aforementioned paragraph 2, that is, urban real estate intended for purposes of "commercial, industrial or services" or "others", this arbitral request should also be dismissed.

c.

Also subsidiarily, the Claimants believe that the regime of taxation under AIMI is contrary to the principle of equality, enshrined in article 13, and the principle of fiscal equality and contributory capacity enshrined in article 104, paragraph 3, both of the CRP, in that, in their view, the legal regime of AIMI, in particular its articles 135-A and 135-B, both of the Municipal Property Tax Code, and the taxation resulting therefrom, promote differentiated treatment and an unjustified inequality among taxpayers, and "the application of AIMI to the real estate assets held by entities engaged in real estate exploitation (here understood as including purchase, sale, construction, promotion and leasing) could only result from the idea that such real estate, productive factors of these companies and means for the exercise of their economic activity, constitute an index of increased contributory capacity – which cannot be accepted".

The Claimants also rely, in this matter, on Award No. 250/2017 of the Constitutional Court, of 24 May 2017, rendered in case No. 156/2016, already cited above.

In this matter, the Claimants repeat in large part arguments previously presented.

Thus, the Claimants once again consider "evident that, in instituting AIMI, the legislature intended to tax real estate with residential purposes, as true manifestations of wealth" and that "it was clear the legislature's intention to exclude from the scope of application of AIMI all real estate devoted to economic activities", which, as has already been seen, is not subscribed to.

They also inquire whether "if 'commercial, industrial or services' and 'other' real estate are expressly excluded from the scope of application of AIMI – because devoted to economic activities, which the legislature did not wish to burden – how can 'land for construction' devoted to those same purposes be included in that scope?"

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

Thus, contrary to the Claimants, it is not believed that "In making that distinction – beyond going against the spirit of the law, as demonstrated above – we would be distinguishing realities that cannot be distinguished for this purpose: on the one hand, i) commercial, industrial, for services or other real estate, already built, and on the other, ii) land for construction with destination for commerce, industry, services or others", with no verification of the alleged violation of the principle of equality.

The Claimants also allege in this regard that "if the taxation under AIMI of real estate held by these entities were to be accepted, the real estate activity sector would be truly penalized, which, naturally, having no rational justification, cannot be accepted" and that "the entities in this sector would thus assume, in such 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 Municipal Property Tax, to which AIMI is added, being that the legislature opted for establishing lighter taxation rates for legal persons, in relation to natural persons.

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

Furthermore, in the case, contrary to what the Claimants point out, we are not facing a burden, but rather a non-alleviation.

That is, well considered, the normative structure created for AIMI consists of a general scope thereof, overlaying the real estate subject to the Municipal Property Tax, followed by the removal of the incidence with respect to certain types of real estate.

Thus, the Claimants – or the real estate held by them and on which tax was assessed – are not, in being taxed, facing an exceptional situation of burden, but rather the non-alleviation sought – by way of subjective or objective exclusion – which, if recognized, would be of an exceptional character.

Moreover, the argumentation of the Claimants on the matter of constitutionality ultimately reflects some argumentation contained in the constitutional case law relating to, since repealed, taxation under item 28.1 of the Stamp Tax Code, particularly that which was condensed in the already several times mentioned Award No. 250/2017 of the Constitutional Court, of 24 May 2017, rendered in case No. 156/2016, also invoked by the Claimant.

There, it is stated, among other things, the following, with correspondence to the issues now raised by the Claimants:

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

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

• "the different reality of the taxation of land for construction, which repercusses more on the economic activity carried out by its owner than on the value of the asset in itself. With the added aggravation that the respective tax burden, if it does not definitively make such activity unviable, will ultimately be borne by the end consumer of the real estate products resulting therefrom, about whose contributory capacity we cannot presume without knowing the respective building typology and value.".

And, further on:

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

Thus, from the aforementioned award of the Constitutional Court, it seems one can derive the understanding, sustained by the Claimants, that the non-consideration of the purpose of the holding of the real estate and/or the quality of the subject that holds it, may generate the unconstitutionality of the tax.

Such understanding is not subscribed to, however, in line with the dissenting opinion set out in the aforementioned award, by the Illustrious Counselor Manuel da Costa Andrade.

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

The type of arguments presented by the Constitutional Court in the matter in question, is based essentially on personalization needs that appear, as formulated, not only impracticable, but also, in some way, subversive.

Indeed, the aforementioned considerations will be, first and foremost, and without more, directly, transposable, to the Municipal Property Tax, to the Vehicle Tax, to the Automobile Circulation Tax, to the Luxury Goods Taxes, to the Stamp Tax and even, in some way, to the Value Added Tax. Also there the taxable events abstract, often in exactly the same manner, if not in an even more pronounced manner, from the personal situation of their respective taxpayers.

Thus, also under those taxes, one does not distinguish, as a rule, manifestations of wealth (contributory capacity) from factors of production of that same wealth (that is: a taxable event subject to Municipal Property Tax, Vehicle Tax, Automobile Circulation Tax, Luxury Goods Taxes, Stamp Tax, will abstract, as a rule, from the circumstance that the same has occurred in the framework of "consumption" [broadly understood] or of "production of wealth"), being that the differentiation will occur, as in the case of AIMI, through the consideration of the cost of the tax borne, under the income tax (cf. article 23/2/f) of the Corporate Income Tax Code).

Furthermore, there are other situations peacefully accepted - precisely in honor of the principle of practicability - of abstraction from the personal situation of the taxpayers, significantly more evident than those pointed out by the Constitutional Court, and which, if the understanding of that High Court were to be accepted, would be irremediably vitiated by unconstitutionality. Consider, first and foremost, the situation of someone who acquires real estate with recourse to credit guaranteed by the mortgage of the same real estate, being, from a point of view not only personal, but patrimonial, evident the disparity of contributory capacity ("wealth") between the said taxpayer, and the holder of real estate of equal value, but wholly paid.

On the other hand, properly understood, it is believed that the concerns of the Constitutional Court relate more to the manner of assessment of the assets, than to their subjection. That is: if the patrimonial value is justly fixed, and using the example used by the Constitutional Court, the owner of a luxury residential property in a tourist venture in the Algarve and of land for construction of a collective residential building in cooperative regime in the metropolitan suburbs of Lisbon or Porto, will evidence, from the point of view of patrimonial, the same contributory capacity, that is, will be holders of an asset with identical patrimonial value.

Note, finally, that item 28.1 of the TGIS, as it was conceived in addendum of application to land for construction by Law No. 83-C/2013, was found unconstitutional, essentially due to 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 one did not refer to article 6 of the CIMI, and spoke of "residential allocation"), as well as the different structure and ratio of the stamp tax and the "additional to the Municipal Property Tax", all of which will point in the direction that the issue of unconstitutionality is now overcome.

Thus, and in light of the foregoing, it is deemed that no consequences should be drawn from the Constitutional Court case law in question, in terms of constitutionality of the norms of AIMI, applied in the case, in particular with respect to the violation of the constitutional norms pointed out by the Claimants, and therefore, also in this part, the arbitral request is improcedent.

C. DECISION

Wherefore it is decided in this Arbitral Tribunal to judge wholly improcedent the arbitral request formulated and, consequently:

• Absolve the Respondent from the request;

• Maintain in the legal order the tax assessment acts which are the subject of the present arbitral action; and

• Condemn the Claimants in the costs of the proceedings, in the amount fixed below.

D. Value of the Proceedings

The value of the proceedings is set at € 259,751.48, pursuant to article 97-A, paragraph 1, subparagraph a), of the Code of Tax Procedure and Process, applicable by virtue of subparagraphs a) and b) of paragraph 1 of article 29 of RJAT and paragraph 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The value of the arbitration fee is set at € 4,896.00, pursuant to Table I of the Regulation of Costs of Tax Arbitration Proceedings, to be paid by the Claimants, since the request was wholly improcedent, pursuant to articles 12, paragraph 2, and 22, paragraph 4, both of RJAT, and article 4, paragraph 4, of the aforementioned Regulation.

Notice is hereby given.

Lisbon, 6 September 2018

The President Arbitrator

(José Pedro Carvalho)

The Arbitrator Member

(António Pragal Colaço)

The Arbitrator Member

(Carla Castelo Trindade)

[1] All available at https://caad.org.pt/tributario/decisoes/.

[2] Cf. Award of 24-05-2017, rendered in case 250/2017, available at: http://www.tribunalconstitucional.pt/tc/acordaos/.

[3] "The additional to the Municipal Property Tax and personal taxation of assets", Almedina, 2017, p. 7.

[4] Idem, p. 8.

[5] Saving some marginal situations concerning real estate devoted to public services, or non-business activities, covered by the species "others".

[6] Cf. Award rendered in case 250/2017, already cited.

[7] Available at www.dgsi.pt.

[8] Idem.

[9] Excepting, from 2018, municipal companies; cf. paragraph 4 of article 135-A of the CIMI.