AIMI on Real Estate Investment Funds and Land for Construction: CAAD Case 684/2018-T Ruling

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Arbitrator President), Ricardo Marques Candeias and Cristina Aragão Seia, designated by the Deontological Council of the Administrative Arbitration Centre to form an Arbitral Court, hereby agree on the following:

I – REPORT

1. On 23 December 2018, A..., S.A., NIPC..., with registered office at ..., ..., ..., ...-... ..., in its capacity as managing company and in representation of the OPEN REAL ESTATE INVESTMENT FUND – B..., NIPC..., filed a request for constitution of an arbitral court, under the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking declaration of illegality of the tax act for assessment of the Additional Tax on Municipal Property Tax (AIMI) No. 2018..., relating to the year 2018, in the amount of €69,013.46.

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

i. the partial illegality of the assessment act because it affects urban properties which, in the previous year, benefited from suspension of commencement of taxation in IMI, thereby violating the provisions of subsection a) of paragraph 3 of article 135-C of the IMI Code;

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

iii. subsidiarily, the illegality of the taxation of "land for construction" destined for "commercial, industrial or service" purposes or "other" purposes, insofar as they are not covered by the objective scope of application of the rules under analysis;

iv. subsidiarily, the unconstitutionality of the legal regime of AIMI, to the extent that it applies to all "land for construction", as contrary to the principle of equality, enshrined in article 13 of the CRP and to the principle of tax equality and contributive capacity enshrined in article 104, paragraph 3 of that Fundamental Law.

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

2. The Claimant did not proceed to appoint an arbitrator, wherefore, under the provisions of subsection a) of paragraph 2 of article 6 and subsection a) of paragraph 1 of article 11 of the RJAT, the President of the Deontological Council of CAAD designated the undersigned as arbitrators of the collective arbitral court, who communicated acceptance of the appointment within the applicable period.

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

4. In accordance with the provision of subsection c) of paragraph 1 of article 11 of the RJAT, the collective Arbitral Court was constituted on 06-03-2019.

5. On 08-04-2018, the Defendant, duly notified for this purpose, submitted its reply defending itself by impugning.

6. Under the provisions of subsections c) and e) of article 16, and paragraph 2 of article 29, both of the RJAT, the convening of the meeting referred to in article 18 of the RJAT was dispensed with, as well as the presentation of written submissions.

7. It was indicated that the final decision would be notified by the deadline set out in article 21/1 of the RJAT.

8. The Arbitral Court is materially competent and is regularly constituted, under the terms of articles 2, paragraph 1, subsection a), 5 and 6, paragraph 2, subsection a), of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, under the terms of articles 4 and 10 of the RJAT and article 1 of Regulation No. 112-A/2011, of 22 March.

The proceedings are not affected by any nullities.

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

Everything considered, it is necessary to render

II. DECISION

A. FACTS

A.1. Facts established as proven

1. The "Open Real Estate Investment Fund – B..." (hereinafter, "Fund") is a real estate investment fund managed and administered by the Claimant.

2. The Fund is, and was in 2018, in the context of the activity it develops, the holder of a portfolio of properties.

3. The Fund is regulated by the General Regime for Collective Investment Undertakings ("CIU"), approved by Law No. 16/2015, of 24 February.

4. In June 2018, the Fund was notified of the tax act for assessment of AIMI No. 2018..., relating to the year 2018.

5. Subsequently, the AT reversed the said assessment, having issued a new assessment with reference to the year 2018, through the assessment act No. 2018..., in the total amount of €69,013.46.

6. The said tax act affected properties which, in the previous year, benefited from suspension of commencement of taxation in IMI, by virtue of having come to be included in the inventory of a company whose object is their sale.

7. In the said assessment, the AT included, among others, the following properties, registered in the respective property register as "land for construction":

Parish / Registry Article / Location and Allocation Coefficients / Tax Property Value / AIMI Collection

Union of Parishes of ... and ... (...) / U-... / Industry / €281,804.13 / €1,127.22

Union of Parishes of..., ..., ..., ..., ... and ... (...) / U-... / Services / €130,061.90 / €520.25

Union of Parishes of..., ..., ..., ..., ... and ... (...) / U-... / Commerce / €792,180.00 / €3,168.72

Union of Parishes of..., ..., ..., ..., ... and ... (...) / U-... / Commerce / €1,745,430.00 / €6,981.72

Union of Parishes of..., ..., ..., ..., ... and ... (...) / U-... / Services / €42,848.20 / €171.39

Total / €2,992,324.23 / €11,969.30

1. The properties corresponding to the registry articles ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ... and ..., all in the district of Setúbal and municipality and parish of ..., were also included in the aforementioned IMT assessment, with a total corresponding tax assessed of €5,877.16.

2. In the property record books relating to the properties indicated in the preceding paragraph, there is, among other things, mention of "SUSPENSION OF COMMENCEMENT OF TAXATION (Property for Resale)", with a duration of 3 years, covering the years 2016, 2017 and 2018.

3. The Fund proceeded to full and timely payment of the assessment at issue in the amount of €69,013.46.

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. Substantiation of facts proven and not proven

With respect to the facts, the Court does not have to pronounce on everything that was alleged by the parties, but rather it has the duty to select the facts that matter for the decision and to distinguish established facts from those not established (see article 123, paragraph 2, of the CPPT and article 607, paragraph 3 of the CPC, applicable ex vi article 29, paragraph 1, subsections a) and e), of the RJAT).

Thus, the facts pertinent to the judgment of the case are chosen and delimited in function of their legal relevance, which is established in consideration of the various plausible solutions to the legal question(s) (see former article 511, paragraph 1, of the CPC, corresponding to current article 596, applicable ex vi article 29, paragraph 1, subsection e), of the RJAT).

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

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

B. LAW

The main issue that arises to be resolved in the present arbitral proceeding concerns the determination of the scope of subjection of the "Additional Tax on Municipal Property Tax" ("AIMI"), which the State Budget Law for 2017 (Law No. 42/2016, of 28 December) introduced, and which came into force on 1 January of that same year.

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

For the purposes herein, paragraphs 1 and 3 of article 135-A of the IMI Code establish that the taxpayers of AIMI are "natural or legal persons who are owners, usufructuaries or surface holders of urban properties situated in Portuguese territory" on 1 January of the year to which the Additional relates.

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

The AIMI is imposed, in accordance with paragraph 1 of article 135-B of the IMI Code, "on the sum of the tax property values of urban properties situated in Portuguese territory of which the taxpayer is the holder" – with this sum, the amount of €600,000.00 must be deducted whenever the taxpayer is a natural person or an undivided inheritance (see paragraph 2 of article 135-C of this same Code).

Urban properties classified as "commercial, industrial or for service purposes" and "other purposes" were excluded from the objective scope of this Additional "in accordance with subsections b) and d) of paragraph 1 of article 6 of this Code", as provided in paragraph 2 of that same article.

The applicable rate is 0.4% for legal persons and 0.7% for natural persons and undivided inheritances, provided that the taxable value does not exceed €1,000,000.00, under the terms of paragraph 1 of article 135-F of the IMI Code, being that, in cases where the taxable value exceeds €1,000,000.00, a rate of 1% is applicable when the taxpayer is a natural person (see paragraph 2 of the same article).

Under the combined terms of paragraph 1 of article 135-G and article 135-H, both of the IMI Code, the additional tax in question is assessed annually, in the month of June, based on the tax property values of the properties subject to tax and in relation to the taxpayers that appear in the registers on 1 January of each year, with the same to be paid by the end of the month of September.

As already noted, the Claimant begins by arguing the partial illegality of the assessment act because it affects urban properties which, in the previous year, benefited from suspension of commencement of taxation in IMI, thereby violating the provisions of subsection a) of paragraph 3 of article 135-C of the IMI Code.

With a view to greater clarity of exposition, this question will be analyzed in last place, beginning with the analysis of the other questions raised by the Claimant, which are as follows:

a. illegality, due to errors in the factual and legal assumptions, of the application of AIMI to investment funds, by virtue of the holding of properties within the scope of their activity;

b. subsidiarily, the illegality of the taxation of "land for construction" destined for "commercial, industrial or service" purposes or "other" purposes, insofar as they are not covered by the objective scope of application of the rules under analysis;

c. also subsidiarily, the unconstitutionality of the legal regime of AIMI, to the extent that it applies to all "land for construction", as contrary to the principle of equality, enshrined in article 13 of the CRP and to the principle of tax equality and contributive capacity enshrined in article 104, paragraph 3 of that Fundamental Law.

These questions have already been subject to various arbitral decisions, in some respects of differing import, and reference may be made, in this regard and among others, to the arbitral awards rendered in proceedings 668/2017-T, 675/2017-T, 686/2017-T, 692/2017-T, 681/2017-T, 688/2017-T, 664/2017-T, 677/2017-T, 603/2017-T, 694/2017-T, 687/2017-T, 683/2017-T, 676/2017-T, 666/2017-T, 682/2017-T, 696/2017-T, and 6/2018-T and more recently 438/2018-T, 342/2018-T, 291/2018-T, 521/2018 and 631/2018-T.

Let us proceed, then.

a.

The Claimant considers that "the legislator, in instituting the AIMI, intended to create an effective tax on real estate wealth" and "aimed to ensure that properties affected by economic activities would not be subject to taxation in AIMI, recognizing that the mere holding of such properties does not constitute (and cannot constitute) a factor demonstrative of wealth, nor a sufficient indicator of contributive capacity of the holders of such properties" as well as that "it is evident that the legislative intent that was behind the exclusion rule, enshrined in paragraph 2 of article 135-B of the IMI Code, was based, essentially, on the intention not to place additional tax burden on taxpayers who, by virtue of their economic activities, hold properties for the pursuit of their corporate purpose".

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

On this basis, the Claimant concludes that it "cannot (...) accept – or understand – that the AT, through the assessment act now contested, has made this new AIMI apply to the assets held by the Real Estate Investment Funds represented here" nor that that Authority "has considered, in determining the tax property value subject to AIMI, the 'land for construction' whose potential use coincides with 'commercial, industrial or service' purposes".

The Claimant thus seeks, in this part, exclusion from the subjective scope of application of AIMI, including within it taxpayers who, by virtue of their economic activities, hold properties for the pursuit of their corporate purpose and, specifically and for the purposes herein, Real Estate Investment Funds.

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

a) with respect to real estate investment funds – Proc. No. 664/2017-T and Proc. No. 686/2017-T;

b) with respect to financial institutions – Proc. No. 676/2017-T;

c) with respect to financial leasing institutions – Proc. No. 696/2017-T;

d) with respect to construction and development companies – Proc. No. 6/2018-T.

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

"In all this context, the understanding that it was intended to exclude from the scope of application of the tax the properties affected to economic activities, under the pretence that it was legislative intention not to place additional tax burden on taxpayers who own properties by effect of their corporate purpose, has no support whatsoever in the letter of the law nor in the rational and systematic elements of interpretation", concluding that "the intended extension of the legislative formula used to properties affected to the economic activity of the company, independently of the specific characterization as commercial, industrial or service properties, has no place whatsoever in light of the general criteria of legal hermeneutics".

This understanding is also defended in Arbitral Decision No. 420/2018-T of 05-01-2019, under the terms of which it is considered that although the legislator has demonstrated concern in avoiding the impact of AIMI on economic activity, "(…) it was not on the basis of the activity to which the properties are affected that the exclusion of application was defined, for in the wording that was approved the non-application was defined solely on the basis of the types of properties indicated in article 6 of the CIMI without any allusion to the application to the functioning of legal persons". That Decision goes on to state that "They are distinct concepts, the application of a property which presupposes a use, and the purpose to which it is destined, the 'normal destination', underlying the classifications of properties, to which paragraph 2 of article 6 of the CIMI refers". It concludes by stating that "If, in the final wording of the Budget, the legislative intention to distance application from properties directly affected to the functioning of legal persons had been maintained, it would certainly have been maintained the reference to this application that appeared in the proposal and which expressly expressed this legislative choice. Thus, having been suppressed that allusion to the application of properties, there is no legal support to conclude that residential properties and land for construction affected to the activity of legal persons do not have bearing on the application of AIMI".

Also here this understanding is followed, noting, additionally, that the argumentation presented by the Claimant is deficient in several of its premises.

Thus, the understanding that the legislator "in instituting the AIMI, intended to create an effective tax on real estate wealth" is not subscribed to, and it is rather considered that the AIMI corresponds in substance to form, being an additional to IMI, implementing what had been the understanding of some, including the Constitutional Court, which considered that "the item 28.1 of the TGIS stood as a 'supplementary IMI rate'".

Similarly, the Claimant's conclusions are not subscribed to, according to which the legislator "aimed to ensure that urban properties affected by economic activities would not be subject to taxation in AIMI, recognizing that the mere holding of such properties does not constitute (and cannot constitute) a factor demonstrative of wealth, nor a sufficient indicator of contributive capacity of the holders of such properties", as well as that "it is evident that the legislative intent that was behind the exclusion rule, enshrined in paragraph 2 of article 135-B of the IMI Code, was based, essentially, on the intention not to place additional tax burden on taxpayers who, by virtue of their economic activities, hold properties for the pursuit of their corporate purpose".

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

Thus, and in the first place, as pointed out by the Claimant, the legislator excluded from the application of AIMI "urban properties" classified as "commercial, industrial or for service purposes" and "other purposes".

Beyond this, however, the legislator created distinct rates for legal persons and for natural persons, including an increase in cases where the taxable value exceeds €1,000,000.00, restricted to the latter, which cannot fail to be grounded, if not totally then at least in large part, in the consideration that properties held by legal persons will, as a rule, be affected to economic activities.

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

In truth, if that were the intention, knowing that the majority of legal persons practice economic activities, it would cease to make any sense to tax legal persons from the subjective point of view.

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

The understanding is similarly not to be accepted that the legislator recognized "that the mere holding of such properties does not constitute (and cannot constitute) a factor demonstrative of wealth, nor a sufficient indicator of contributive capacity of the holders of such properties". Indeed, and this will be a notorious reality and, as such insurmountable, it is undeniable that a legal person that holds properties in the value of €100,000,000.00 reveals a contributive capacity (in the perspective of the tax at issue), manifestly superior, to another legal person which, with the same purpose, holds properties in the value of €100,000.00.

On the other hand, and as has already been mentioned, the AIMI should be understood and treated as such, that is, as an additional to IMI. Now, if this is the case, how will the contributive capacity evidenced by legal persons through the holding of properties, albeit affected to their productive activity, be precisely the same, whether with respect to subjection to AIMI or with respect to subjection to IMI.

Thus, and given all that has been set out, it is believed that, in this part, the arbitral request should not proceed.

b.

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

The Claimant further states that "having been clear the legislator's intention to exclude, through paragraph 2 of article 135-B of the IMI Code, the application of AIMI to properties affected by economic activities, it should necessarily be understood that the 'land for construction' affected to those activities are likewise included in that exclusion rule", and that, for the Claimant, "To understand that 'land for construction' destined, according to the terms of their respective property record books, for purposes of 'commerce, industry, services' or 'other', are subject to AIMI – as has come to be understood by the AT – is manifestly contrary to the spirit of the law and, moreover, illegal" and that "the applicability of AIMI to this type of 'land for construction' would always demonstrate a manifest inconsistency of the legal regime in question".

The Claimant further points out that "only by mere absurdity, would it be considered comprehensible and adequate to the purposes sought by AIMI the hypothesis that the AT would tax a 'land for construction' with a potential use of 'industry' and not tax a property (built) with the same use – even if that property is not actually being exploited within the exercise of an economic activity".

In this context, for the Claimant, "the subjection of this land for construction to AIMI causes a greater tax burden on this type of urban properties and, consequently, will certainly not fail to have an impact on the economic activities that will potentially be developed in these properties", whereby "the taxation methodology 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 IMI Code, configures a discriminatory treatment that impairs, without further ado, 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 Claimant concludes, "the tax act of AIMI at issue, in that it affects 'land for construction' destined for the purpose of 'commerce', 'industry' or 'services' is tainted by manifest illegality, due to error in the factual and legal assumptions, and should be annulled".

With respect to this subsidiary request, the Claimant seeks, in summary, the extension of the objective exclusions from the subjection of AIMI, enshrined in paragraph 2 of article 135-B of the CIMI, so as to include therein, also, urban properties classified as "land for construction", provided that the construction therein envisaged falls under some of the types to which that paragraph 2 refers, that is, to urban properties intended for "commercial, industrial or service" purposes or "other" purposes.

With respect to this question, now presented by the Claimant, arbitral jurisprudence has been divided.

Thus, for example, the decision rendered in proceeding 686/2017-T, concluded that "land for construction" without residential application, that is, for "commercial, industrial or service" purposes or "other" purposes, should be excluded from taxation in the context of AIMI.

This decision, based on the unity of the legal system, defends 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, regarding urban properties classified as "for service purposes", "as expressing a legislative intention to exclude also from taxation the land destined for the construction of such properties".

For the said Arbitral Court, "Being the taxable fact chosen as an index of contributive capacity the ownership of real estate assets of value considered high…", it would be a lack of consistency not to apply the AIMI to buildings destined for commerce, industry or services and to apply it to the land destined for their construction, all the more so that the value of the land is incorporated into the value of the buildings.

The same Court further stated that, if it did not so decide, it would conclude for the material unconstitutionality of the rule that provides for such taxation.

Already in the decisions rendered in proceedings Nos. 676/2017-T and 664/2017-T (the first concerns Real Estate Investment Funds and the second concerns a credit institution), the pretensions of the claimants therein to exclude the taxation of "land for construction", even if the envisaged construction is for "commercial, industrial or service" purposes, were decided unfavourably.

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

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

Not contesting that from the point of view of fiscal policy the solution could have been different, and with the utmost respect for other opinions, it is believed that the exclusion from taxation of all or part of the "land for construction" was not the solution adopted, already that paragraph 2 of article 135-B of the CIMI only provides for the exclusion from taxation with respect to AIMI of urban properties classified as "commercial, industrial or for service purposes" and "other purposes", precisely in accordance with subsections b) and d), of paragraph 1 of article 6, which leads, inevitably, to the taxation of the properties provided for in the two remaining subsections of that same article 6 of the CIMI, that is, urban properties classified as "residential" (subsection a)) or as "land for construction" (subsection c)).

Covered by the taxation in question, in accordance with the letter of the law, are all urban properties classified as "residential" and all urban properties classified as "land for construction", and not merely some of them, and were the legislator, in its rule excluding taxation, intended to exclude some of the properties referred to in subsections a) and c), of paragraph 1 of article 6 of the CIMI, it would have had all the means to do so.

In the same way, the legislator could have altered the species of urban properties provided for in article 6 of the CIMI, for example, by sub-dividing the land for construction according to the purposes to which they were destined, which did not happen.

With respect to the possibility of extensive interpretation of the exclusion enshrined in the said paragraph 2 of article 135-B of the CIMI, in order to encompass land for construction not intended for residential purposes – a solution adopted in the decisions that accepted pretensions similar to that of the Claimant now at issue – it is believed, always with the utmost respect due to other understandings, that it is not to be accepted.

Thus, and from the outset, it is believed that there is not the identity of situations 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 the land for construction are in a situation identical to that of built properties, from the point of view of the teleology of that exclusion clause.

From a teleological point of view, such exclusion clause will have underlying, in the first place, the purpose of not burdening with the AIMI properties affected, or capable of being affected immediately, to productive processes, the land for construction not being possessed of such characteristics, given that while a built property will be, or will be capable of being immediately, affected to productive processes, land for construction is not in such a situation.

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

In the words of that high Court:

"For fiscal purposes, properties (...) are clearly distinguished from land for construction, under the terms of article 6 of the Municipal Property Tax Code (CIMI), the first of those categories being composed of buildings or existing constructions (...), while the second consists exclusively of land for which it is consolidated by an administrative act of prior control of an urban operation the right to construct buildings destined for that or other purposes.

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

That is, the taxation of properties (...) impinges on existing reality, on corporeal things, as opposed to the taxation of land for construction, which impinges on construction rights, on future things, as indeed evidenced by article 45 of the CIMI, which establishes that the tax property value of the latter is determined exclusively by the volume and quality of the construction to be erected on the land, and not by its current characteristics.

One would say, with accuracy, that both correspond to real estate assets (...). And that, by their real estate value, both are apt to reflect a certain form of wealth. But the comparisons end there, because, precisely, the different nature of these assets does not permit equating the contributive capacity of their respective owners, current or future, solely on the basis of their application and their tax property value (TPV)".

Indeed, already built properties possess a material reality corresponding to the typology that befalls them. That is, to a property built and licensed for, or which has as its normal destination, commerce, industry or services, will correspond a material reality adequate to such purposes and, for the purposes at issue, objectively distinct from a property built and licensed, or with normal destination, for residential purposes.

Land for construction, on the other hand, is distinguished from other land, on a purely legal plane, that is, on the basis of an action of a public entity (granting of a license or authorization, admission of prior notice or issuance of favorable prior information of a subdivision or construction operation - see article 6/3 and 37/3 of the CIMI) or of the owners (declaration of purpose in the acquisitive title; see 2nd paragraph of article 6/3 of the CIMI), to which the Law attributes certain legal effects.

Thus, in function of the noted material differentiation, the alteration of the application of land for construction, from the point of view of the notes relevant to the problem at issue, may be simple, requiring, for example, only a mere declaration in the acquisitive title, the presentation and admission of a prior notice, or the presentation and approval of a prior information request.

Already the alteration of the purpose of a built property, from residential to commerce/industry/services, or vice versa, will imply, from the point of view of normality, the carrying out of more or less profound works (and necessary licensing).

Furthermore, a built property has incorporated a significant value corresponding to the construction, which, even in cases where it is not concretely affected to the intended use, will constitute a natural incentive to its economic exploitation since, always from the point of view of normality, a built property will not only generate no returns, but will become devalued (due to its deterioration) by its non-use.

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

In this regard, the Claimant affirms the subjection of the land for construction at issue to AIMI "causes a greater tax burden on this type of urban properties and, consequently, will certainly not fail to have an impact on the economic activities that will potentially be developed in these properties".

Now, in light of the teleology uncovered from the interpreted rule, above set out, it is true that such impact may even be positive, in that the taxation of land for construction may constitute an incentive for its erection, thereby accelerating the effective use of the properties in productive activities.

All that has been set out, it is believed, will justify a distinction in treatment, in line with the legal regime enshrined, and in contrast with the extension of the non-objective subjection clause by way of interpretative extension.

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

Let us see this.

In the design of the AIMI, and following what was the evolution of taxation under item 28.1 of the CIS, the legislator made it very clear (by force, from the outset, of the nomenclature and systematic nature of the taxation created, as well as the express reference to the relevant IMI rules) its intention that the categories relevant for the taxation in question would be delineated in accordance with the criteria specific to the CIMI.

And, under the terms of this Code, land – which is the category that now concerns us – may be included in the categories of:

a) rural; or

b) urban;

i. "for construction" of buildings intended for residential purposes, commerce, services or industry;

ii. intended for "other" purposes.

The legislator, in the AIMI regime created, excluded from subjection to that regime land classified as "rural", by virtue of the exclusive subjection of urban properties in paragraph 1 of article 135-A, and land classified as "urban" intended for "other" purposes, by virtue of the exclusion clause of paragraph 2 of that referred article, being that the non-exclusion of "land for construction" of buildings with certain destinations (specifically commerce, services or industry), cannot fail to be considered sufficiently grounded in considerations of a material order, as has already been seen.

Finally, it cannot fail to be considered relevant in this matter, that the STA has understood that for the determination of the TPV of land for construction it is irrelevant the application of the projected construction.

Thus, in the Decision of the STA of 20-04-2016, rendered in proceeding 0824/15, it was considered that:

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

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

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

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

The application coefficient can only be relevant in the face of proven use of the built property and similarly the one of comfort and quality.

Such multiplier coefficients of the tax property value apply only to the built property but have no real basis of support in the potential that the land for construction offers".

And, further on, in the same decision:

"But taking into account reality, the legislator established for the determination of the tax property value of this species of property a specific rule – that contained in article 45 where it is reiterated that account is taken of the value of the construction area of the building to be erected and the value of the land adjacent to the construction 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 in paragraph 2 of article 45 of the C.I.M.I.

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

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

Indeed the application coefficient has to do with the type of use of the property already built and the same is said of the comfort and quality coefficient.

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

The said understanding was ratified by a decision of the Plenary of the Tax Contentious Division of the STA of 21-09-2016, rendered in proceeding 01083/13, in whose summary it is synthesized that:

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

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

V - The comfort and quality coefficient, multiplier factor of the tax property value contained in the mathematical expression of article 38 of the CIMI with which the tax property value of urban properties for residential purposes, commerce, industry and services is determined, cannot be applied analogously as it is capable of altering the tax base interfering with the incidence of the tax".

Thus, it is concluded that in the assessment of the TPV within the framework of the CIMI, the destination of the projected construction in "land for construction" is not relevant, not distinguishing, from the point of view of patrimony taxation and, consequently, of the evidencing of contributive capacity, land for construction of residential buildings from land for construction of buildings for commerce, industry or services.

On the contrary, and in function of the application of the application coefficient enshrined in article 41 of the CIMI, in built buildings, the designation of the buildings repercusses on the tax property value, and consequently on the contributive capacity, considered for purposes of taxation.

In the context of AIMI, given what has already been set out regarding the nature of this taxation (as additional to IMI), there will be no justifications for diverging from such a criterion, that is, for considering that the holding of "land for construction" with projected buildings of distinct purposes signals different contributive capacities.

Given all that has been set out, considering that it is not to extend, by way of extensive interpretation, the objective exclusions from the subjection of AIMI, enshrined in paragraph 2 of article 135-B of the CIMI, so as to include therein, also, urban properties classified as "land for construction", provided that the construction therein envisaged falls under some of the types to which that paragraph 2 refers, that is, to urban properties intended for "commercial, industrial or service" purposes or "other" purposes, this arbitral request should also not proceed.

c.

Also subsidiarily, the Claimant understands that the regime of taxation in AIMI is contrary to the principle of equality, enshrined in article 13, and to the principle of tax equality and contributive capacity enshrined in article 104, paragraph 3, both of the CRP, insofar as, in its view, the legal regime of AIMI, specifically its articles 135-A and 135-B, both of the IMI Code, and the taxation resulting therefrom, promote differentiated treatment and unjustified inequality between taxpayers, and "the application of AIMI to the real estate assets held by those entities dedicated to real estate exploitation (here including the purchase, sale, construction, promotion and leasing), could only result from the idea that those properties, productive factors of these companies and means for the exercise of their economic activity, constitute an indication of increased contributive capacity – which cannot be accepted".

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

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

The answer to such a question, as has also been seen, goes in the direction that there is a substantial difference between land for construction and already built buildings, the latter being capable of being, or being immediately, affected to the activities to which they are destined, as opposed to the former.

Thus, it is not believed that "By making that distinction – besides impinging on the spirit of the law, above already demonstrated – we would be distinguishing realities that cannot be distinguished for this purpose: on the one hand, i) commercial, industrial, service or other properties already built and on the other, ii) land for construction destined for commerce, industry, services or other", with the alleged violation of the principle of equality not being verified.

The Claimant further alleges in this regard that "if the taxation in AIMI of the properties 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 assume, in this way, an additional tax burden in relation to the generality of companies, based on a 'hypothetical index of contributive capacity' that has no correspondence with reality".

In this regard, as has also been seen, the contributive capacity sought is the same as that of IMI, to which the AIMI is added, and the legislator opted to enshrine more lenient taxation rates for legal persons, in relation to natural persons.

As for the tax burden of the real estate sector, in relation to other sectors, note that, from the outset, within the economic sector in question, the companies are treated equally, and that it is contained within the scope of the legislator's freedom of action, being, moreover, common and accepted practice, interference with economic activities, fiscally incentivizing some, and fiscally burdening others.

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

Furthermore, it should be added that, in the case at issue, contrary to what the Claimant points out, we are not faced with a burden, but with a non-exemption.

That is, when all is said and done, the normative structure created for the AIMI consists of a rule of general coverage of it, superimposed on properties subject to IMI, followed by an exception from incidence with respect to certain types of properties.

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

Moreover, the Claimant's argumentation on the matter of constitutionality ends up reflecting some argumentation contained in the constitutional jurisprudence relating to, in the meantime revoked, taxation under item 28.1 of the Tax Stamp Code, specifically that which was condensed in Decision No. 250/2017 of the Constitutional Court, of 24 May 2017, rendered in proceeding No. 156/20, also invoked by the Claimant.

There it is stated, among others, the following, with correspondence in the questions now raised by the Claimant:

• "the rule whose validity is disputed confused manifestations of wealth with factors of production of that same wealth";

• "if behind the tax imposed on the owner of a residential house with tax property value exceeding one million euros there may be a taxpayer with sufficient economic force to support the respective tax burden, behind the tax imposed on the owner of land for construction there will normally be an entrepreneur, as a rule in the form of a commercial company dedicated to real estate promotion, on whose economic force we know nothing. In truth, we cannot presume that such 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 derive from its exercise, if they are in legal and economic conditions to develop it, or whether 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 developed by its owner than on the value of the asset in itself. With the aggravating circumstance that the respective tax burden, if it does not definitively render that activity unfeasible, will end up being borne by the final consumer of the real estate products resulting therefrom, of whose contributive 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 impact indiscriminately, for example, on a luxury dwelling in a tourism development in the Algarve and on land for construction of a collective residential building in a cooperative regime in the metropolitan suburbs of Lisbon or Porto".

Thus, from the said decision of the Constitutional Court, it seems possible to withdraw the understanding, sustained by the Claimant, that the failure to consider the purpose of the holding of the property and/or the quality of the subject holding it, may generate the unconstitutionality of the tax.

This understanding is not subscribed to, however, in line with the dissenting vote recorded in the said decision, by the Illustrious Counsellor Manuel da Costa Andrade.

Indeed, the considerations pointed out will be, from the outset and without further ado, directly transposable to IMI, ISV, IUC, IECs, IS and even, in some way, to VAT. There too the taxable facts abstract, often in exactly the same way, if not in a manner even more pronounced, from the personal situation of their respective taxpayers.

Thus, also in the context of those taxes, there is generally no distinction between manifestations of wealth (contributive capacity) and factors of production of that same wealth (that is: a taxable fact subject to IMI, ISV, IUC, IECs, IS, will as a rule abstract from the circumstance that it occurred within the context of "consumption" [broadly speaking] or of "production of wealth"), and the differentiation will occur, as in the case of AIMI, by way of the consideration of the cost of the tax borne, in the context of income tax (see article 23/2/f) of the CIRC).

As for the understanding advocated by the Claimant, grounded in Decision No. 250/2017 of the Constitutional Court, of 24 May 2017, rendered in proceeding No. 156/2016, it should be noted 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 judged unconstitutional, essentially for the lack of personalization of the tax, a situation which with the creation of the AIMI was resolved, and it is further to be considered the different legal structure (in the IS it did not refer to article 6 of the CIMI, and spoke of "residential application"), as well as the different structure and ratio of the tax on documents and the "additional to IMI", all of which will point in the direction that the issue of unconstitutionality is now superseded.

Subsequently, the Constitutional Court in the context of Decision No. 378/2018 came to understand that, after all, there is no unconstitutionality of Item 28 of the TGIS, considering that "the tax provided for in Item 28.1, as is appropriate for taxes on assets, delimits its scope of application by exclusive reference to the ownership of certain asset values 'independently of the function performed by such assets (productive capital, investment of funds, or durable consumption'. On the other hand, being a tax on assets, it also does not individualize or distinguish the respective taxpayers by any criterion other than precisely the ownership of those asset values".

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

This line of argument has been reinforced in the most recent jurisprudence of the Constitutional Court, which even in its Decision No. 22/2019, of 9 January 2019, decided "Not to judge unconstitutional the rule contained in item 28.1 of the General Table of Tax on Documents, attached to the Tax on Documents Code, as worded by Law No. 83-C/2013, of 31 December, to the extent that it applies to situations in which land for construction belongs to companies dedicated to the commercialization of land for resale".

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

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

Finally, in the recent Decision of the Constitutional Court No. 299/2019, regarding AIMI, it is stated that "(…) within the scope of the application of AIMI, even if guided by a personal optic, it cannot fail to be recognized that land for construction is very distinct from already built urban properties and affected to a specific purpose by way of licensing or normal use. In truth, and adding, as has been seen, the reason for the non-taxation of commercial, industrial, service or other urban properties in the purpose of promoting the proper functioning of economic activities (…), land for construction can only contribute to that desideratum in potential, in a hypothetical and conditional future, because even if a right to build has been formed, nothing prevents the change of will of its holder with respect to the destination to be given to the property. The said Decision concludes that "Land for construction constitutes an economic asset with tax property value, in itself revealing the contributive capacity of its holder, and is therefore constitutionally legitimate its inclusion in the global asset subject to AIMI, regardless of what may be effectively implemented therein".

Thus, and given all that has been set out, it is believed that no consequences should be drawn from the constitutional jurisprudence invoked by the Claimant, in the context of the constitutionality of the AIMI rules, applied in the case, specifically with respect to the violation of the constitutional rules pointed out by the Claimant, and instead the more recent jurisprudence of that High Court is to be applied, with this arbitral request therefore also not proceeding in this part.

Given this, it is now necessary to appreciate the Claimant's request, regarding the partial illegality of the assessment act because it affects urban properties which, in the previous year, benefited from suspension of commencement of taxation in IMI, thereby violating the provisions of subsection b) of paragraph 3 of article 135-C of the IMI Code, which, as worded, provides that:

"3 - The following are not counted in the sum referred to in paragraph 1 of article 135-B: (...)

a) The value of properties which in the previous year were exempt or not subject to taxation in IMI".

The Defendant in its Reply does not pronounce on this question, generically acknowledging, however, that "they are not counted in the sum referred to in paragraph 1 of article 135-B, the value of properties which in the previous year were exempt or not subject to taxation in IMI, as provided in article 135-C, paragraph 3, subsection a) of the IMI Code".

As emerges from the facts established as proven, the properties corresponding to the registry articles..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ... and ..., all in the district of Setúbal and municipality and parish of ..., were included in the IMT assessment now at issue, with a total corresponding tax assessed of €5,877.16.

It is further established that the property record books relating to the properties indicated bear the mention "SUSPENSION OF COMMENCEMENT OF TAXATION (Property for Resale)", with a duration of 3 years, covering the years 2016, 2017 and 2018.

Given the above, there are no doubts that, in this part, the arbitral request should proceed.

As to the request for compensatory interest formulated by the Claimant, article 43, paragraph 1, of the LGT establishes that compensatory interest is due when it is determined that there was an error attributable to the services from which results payment of the tax liability in an amount greater than that legally due.

In the case at issue, the error that affects the partially annulled assessment is attributable to the Tax Authority and Customs Authority, which issued it without the necessary legal support.

The Claimant has, therefore, the right to be reimbursed of the amount paid (in accordance with the provisions of articles 100 of the LGT and 24, paragraph 1, of the RJAT) by virtue of the act partially annulled and, furthermore, to be compensated for the undue payment through the payment of compensatory interest, by the Defendant, from the date of that payment, until its reimbursement, at the supplementary legal rate, in accordance with articles 43, paragraphs 1 and 4, and 35, paragraph 10, of the LGT, article 559 of the Civil Code and Regulation No. 291/2003, of 8 April.

C. DECISION

For which reasons, this Arbitral Court decides to judge the arbitral request formulated partially well-founded and, consequently:

a) Partially annul the tax act for assessment of the Additional Tax on Municipal Property Tax (AIMI) No. 2018..., relating to the year 2018, in the part that affects the tax property value of the properties corresponding to the registry articles..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ... and ..., all in the district of Setúbal and municipality and parish of ..., in the amount of tax of €5,877.16;

b) Judge the remaining arbitral requests not well-founded, absconding the Defendant therefrom;

c) Condemn the Defendant to the payment of compensatory interest in the terms above indicated; and

d) Condemn the parties to the costs of the proceedings, in the proportion of their respective unsuccessful portions, fixing the amount of €2,240.00, at the charge of the Claimant, and €208.00, at the charge of the Defendant.

D. Value of the proceedings

The value of the proceedings is fixed at €69,013.46, in accordance with article 97-A, paragraph 1, a), of the Code of Procedure and Tax Process, applicable by virtue of subsections a) and b) of paragraph 1 of article 29 of the RJAT and paragraph 3 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The amount of the arbitration fee is fixed at €2,448.00, in accordance with Table I of the Regulation of Costs of Tax Arbitration Proceedings, to be paid by the parties in the proportion of their respective unsuccessful portions above fixed, since the request was partially not well-founded, in accordance with articles 12, paragraph 2, and 22, paragraph 4, both of the RJAT, and article 4, paragraph 5, of the cited Regulation.

Let notification be made.

Lisbon, 8 July 2019

The Arbitrator President

(José Pedro Carvalho)

The Arbitrator Member

(Ricardo Marques Candeias)

The Arbitrator Member

(Cristina Aragão Seia)