Summary
Full Decision
ARBITRAL DECISION
The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Jorge Carita and Hélder Faustino, designated by the Deontological Council of the Centre for Administrative Arbitration to form an Arbitral Tribunal, hereby decide as follows:
I – REPORT
On 27-12-2017, A...- Real Estate Investment Fund Management Company, S.A. (hereinafter abbreviated as "Claimant"), holder of tax identification number..., with registered office at..., n.º..., ...-... Lisbon, in its capacity as managing company and in representation of B...- Special Closed Real Estate Investment Fund, holder of tax identification number..., C...- Special Closed Real Estate Investment Fund, holder of tax identification number..., D...- Special Closed Real Estate Investment Fund, holder of tax identification number..., E...- Special Closed Real Estate Investment Fund, holder of tax identification number..., F...- Closed Real Estate Investment Fund, holder of tax identification number..., G...- Closed Real Estate Investment Fund, holder of tax identification number..., H...- Real Estate Asset Management Fund; holder of tax identification number..., I...- Real Estate Asset Management Fund, holder of tax identification number..., J...- Special Closed Real Estate Investment Fund, holder of tax identification number..., K...- Special Closed Real Estate Investment Fund, holder of tax identification number..., L...- Special Closed Real Estate Investment Fund, holder of tax identification number..., M...- Special Closed Real Estate Investment Fund, holder of tax identification number..., N...- Closed Real Estate Investment Fund, holder of tax identification number..., O...- Open Real Estate Investment Fund, holder of tax identification number..., P...- Closed Real Estate Investment Fund, holder of tax identification number..., Q...- Closed Real Estate Investment Fund, holder of tax identification number..., R...- Special Closed Real Estate Investment Fund, holder of tax identification number..., S...- Special Closed Real Estate Investment Fund, holder of tax identification number..., T...- Closed Real Estate Investment Fund, holder of tax identification number... and U...- Special Closed Real Estate Investment Fund, holder of tax identification number..., (hereinafter jointly designated as "Funds"), filed a request for the establishment of an arbitral tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011 of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by Article 228 of Law No. 66-B/2012 of 31 December (hereinafter, abbreviated as LRAT), seeking the declaration of illegality of the tax assessment acts for the Additional Municipal Property Tax ("AIMI") with numbers 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017... and 2017..., issued by the Tax and Customs Authority ("TA"), with reference to the year 2017, in the total amount of €807,057.25.
In order to substantiate its request, the Claimant alleges, in summary, that:
it is unlawful, due to errors in the factual and legal premises, the application of AIMI to investment funds, due to the holding of immovable property within the scope of their activity;
subsidiarily, it is unlawful to subject "land for construction" intended for "commercial, industrial or service" purposes or "other" purposes, insofar as they are not covered by the objective scope of the rules under analysis;
subsidiarily, the legal regime of AIMI is unconstitutional, insofar as 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 fiscal equality and contributory capacity enshrined in Article 104, No. 3 of that Fundamental Law.
On 28-12-2017, the request for the establishment of the arbitral tribunal was accepted and automatically notified to the TA.
The Claimant did not appoint an arbitrator, so, pursuant to the provisions of paragraph a) of Article 6, No. 2 and paragraph a) of Article 11, No. 1 of the LRAT, the President of the Deontological Council of CAAD designated the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the assignment within the applicable period.
On 14-02-2018, the parties were notified of these designations and did not express a desire to challenge any of them.
In accordance with the provisions of paragraph c) of Article 11, No. 1 of the LRAT, the collective Arbitral Tribunal was constituted on 06-03-2018.
On 18-04-2018, the Respondent, duly notified for this purpose, submitted its response defending itself by way of objection.
Pursuant to the provisions of paragraphs c) and e) of Article 16 and No. 2 of Article 29, both of the LRAT, the holding of the meeting referred to in Article 18 of the LRAT was dispensed with.
Having been granted a period for the submission of written submissions, the parties refrained from doing so.
A period of 30 days was fixed for the issuance of the final decision, after the expiry of the period for submission of submissions by the Respondent. Subsequently, that first period was extended until the expiry of the period fixed in Article 21(1) of the LRAT.
The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to Articles 2, No. 1, subparagraph a), 5 and 6, No. 1, of the LRAT.
The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to Articles 4 and 10 of the LRAT and Article 1 of Ordinance No. 112-A/2011 of 22 March.
The case does not suffer from any nullities.
Thus, there is no obstacle to the hearing of the case.
Everything having been duly considered, it is necessary to deliver:
II. DECISION
A. MATTER OF FACT
A.1. Facts Established as Proven
The Funds notified of the AIMI assessments subject to the present arbitral action are real estate investment funds, managed and administered by the Claimant.
In the context of the activity they carry out, the said Funds are, and were in 2017, holders of a portfolio of immovable properties, and the holding of this type of assets constitutes the substrate of all the activity of those investment funds.
In that capacity, the Funds were notified of the tax assessment acts for AIMI, subject of the present arbitral action relating to the year 2017, with reference to the real estate assets held by them.
In the said assessments the TA included the following immovable properties:
[table reference]
The Funds made full and timely payment of the described tax assessment acts, in the total amount of €807,057.25.
A.2. Facts Established as Not Proven
Regarding the matter of fact, there are no facts that should be considered as not proven and relevant to the decision.
A.3. Reasoning for the Factual Matter Proven and Not Proven
With respect to the matter of fact, the Tribunal does not need to rule on everything that was alleged by the parties; rather, it falls to it to select the facts that matter for the decision and to distinguish the proven from the unproven matter (cf. Article 123, No. 2 of the TCPT and Article 607, No. 3 of the CPC, applicable by virtue of Article 29, No. 1, subparagraphs a) and e), of the LRAT).
In this way, the facts relevant to the adjudication of the case are selected and defined based on their legal relevance, which is established in light of the various plausible solutions to the legal question(s) (cf. former Article 511, No. 1 of the CPC, corresponding to current Article 596, applicable by virtue of Article 29, No. 1, subparagraph e), of the LRAT).
Therefore, taking into account the positions assumed by the parties, in light of Article 110(7) of the TCPT, and the documentary evidence attached to the case file, the facts listed above were considered proven, insofar as they are relevant to the decision.
No consideration was given to allegations made by the parties and presented as facts consisting of strictly conclusive statements, incapable of proof and whose truthfulness must be assessed in relation to the concrete factual matter consolidated above.
B. 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 Property Tax Code, comprising Articles 135-A to 135-K.
For present purposes, Articles 135-A(1) and (3) of the Property Tax Code establish that the taxpayers subject to AIMI are "natural or legal persons who are owners, usufructuaries or emphyteutes of urban properties situated in Portuguese territory" on 1 January of the year to which the Additional relates.
Article 135-A(2) of the same article provides that: "any structures or centres of collective interests without legal personality that appear in the matrices as taxpayers of the municipal property tax, as well as undivided inheritance represented by the head of household, shall be equated with legal persons".
The AIMI is assessed, in accordance with Article 135-B(1) of the Property Tax Code, "on the sum of the tax values of urban properties situated in Portuguese territory of which the taxpayer is the holder" – and from this sum, the amount of €600,000.00 must be deducted whenever the taxpayer is a natural person or an undivided inheritance.
Excluded from the objective scope of this Additional are "urban properties classified as 'commercial, industrial or service properties' and 'other properties' in accordance with subparagraphs b) and d) of Article 6(1) of this Code", as provided in Article 135-B(2).
The applicable rate is 0.4% for legal persons and 0.7% for natural persons and undivided inheritances, whenever the taxable value does not exceed €1,000,000.00, pursuant to Article 135-F(1) of the Property Tax Code, provided that, in cases where the taxable value exceeds €1,000,000.00, a rate of 1% applies when the taxpayer is a natural person.
Pursuant to Article 135-G(1) and Article 135-H of the Property Tax Code, the additional tax in question is assessed annually, in the month of June, based on the tax values of the properties subject to tax and in relation to the taxpayers listed in the matrices on 1 January of each year, and must be paid by the end of September.
As already noted, the Claimant raises the following issues:
illegality, due to errors in the factual and legal premises, of the application of AIMI to investment funds, due to the holding of immovable property within the scope of their activity;
subsidiarily, the illegality of the assessment of "land for construction" intended for "commercial, industrial or service" purposes or "other" purposes, insofar as they are not covered by the objective scope of the rules under analysis;
also subsidiarily, the unconstitutionality of the legal regime of AIMI, insofar as 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 fiscal equality and contributory capacity enshrined in Article 104, No. 3 of that Fundamental Law.
The issues raised in these arbitral proceedings have already been the subject of several arbitral decisions, in some parts with diverse outcomes, and reference may be made, in this regard, to the arbitral awards delivered 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 then examine the matter.
a.
The Claimant contends that the legislator "in establishing AIMI, intended to create an effective tax on real estate wealth" and "aimed to ensure that urban properties dedicated to economic activities would not be subject to AIMI taxation, recognizing that the mere holding of such properties does not constitute (and cannot constitute) a factor demonstrating wealth, nor a sufficient indicator of the contributory capacity of the holders of such properties" and that "it is evident that the legislative intent underlying the rule of exclusion from objective scope, enshrined in Article 135-B(2) of the Property Tax Code, was based essentially on the intention not to impose additional fiscal burden on taxpayers who, by virtue of their economic activities, hold properties for the pursuit of their respective corporate purpose".
As regards the Claimant itself, it alleges that the properties it holds are the true elements of its "production process (...), whether as rental properties, whether as true inventories intended for future transformation, intended exclusively for the pursuit of the activity of these funds and never capable of being compared with elements demonstrating wealth", that "the holding of this type of assets constitutes the substrate of all the activity of these funds", and that "taxing these properties would mean directly taxing an 'economic activity' – something that the legislator expressly intended to avoid when creating AIMI."
On this basis, the Claimant concludes that "it cannot (...) accept – or understand – that the TA, through the assessment acts now in dispute, has applied this new AIMI to the assets held by the Real Estate Investment Funds represented here" nor that that Authority "has considered, in determining the tax value subject to AIMI, the 'land for construction' whose potential use coincides with 'commercial, industrial or service' purposes".
In summary, on this point, the Claimant seeks an exclusion from the subjective scope of AIMI, including therein "taxpayers who, by virtue of their economic activities, hold properties for the pursuit of their respective corporate purpose." and, in particular and for present purposes, Real Estate Investment Funds.
On this issue, the orientation of CAAD jurisprudence has been that taxation operates regardless of the nature of the activity carried out, and reference may be made, by way of example, to the following decisions (regardless of the final decision on the merits or otherwise of the arbitral request):
a) regarding 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 development companies – Case No. 6/2018-T.
In this regard, it was written in the aforementioned case 664/2017-T that:
"In all this context, the understanding according to which it was intended to exclude from the scope of the tax properties dedicated to economic activities, on the pretext that it was legislative intent not to impose additional fiscal burden on taxpayers who own properties as a result 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 intended extension of the legislative formula used to properties dedicated to the economic activity of the company, regardless of the specific characterization as commercial, industrial or service properties, has no place in light of the general criteria of legal hermeneutics."
Also here we follow the said understanding, noting additionally that the argument presented by the Claimant is flawed in several of its premises.
Thus, the understanding that the legislator "in establishing AIMI, intended to create an effective tax on real estate wealth" is not subscribed to; rather, it is considered that AIMI corresponds in substance to its form, being an additional to the Property Tax, concretizing what had been the understanding of some, including the Constitutional Court[2], which considered that "item 28.1 of the TGIS was assumed to be a 'complementary Property Tax rate'".
Neither are the conclusions of the Claimant subscribed to, according to which the legislator "aimed to ensure that urban properties dedicated to economic activities would not be subject to AIMI taxation, recognizing that the mere holding of such properties does not constitute (and cannot constitute) a factor demonstrating wealth, nor a sufficient indicator of the contributory capacity of the holders of such properties" and that "it is evident that the legislative intent underlying the rule of exclusion from objective scope, enshrined in Article 135-B(2) of the Property Tax Code, was based essentially on the intention not to impose additional fiscal burden on taxpayers who, by virtue of their economic activities, hold properties for the pursuit of their respective corporate purpose".
Indeed, in this regard, it is considered that the non-application of economic activities to AIMI was not an ultimate purpose of the legislator in creating AIMI, but rather a factor considered by the legislator at various levels in the design of the legal regime of that tax.
Thus, and in the first place, as pointed out by the Claimant, the legislator excluded from the scope of AIMI the "urban properties" classified as "commercial, industrial or service properties" and "other properties".
Beyond that, however, the legislator created different 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 be based other than entirely, at least in large part, on the consideration that properties held by legal persons, as a rule, will be dedicated to economic activities.
The understanding is not accepted either that the legislator recognized "that the mere holding of such properties does not constitute (and cannot constitute) a factor demonstrating wealth, nor a sufficient indicator of the contributory capacity of the holders of such properties". Indeed, and this is a notorious and thus insurmountable reality, it will be undeniable that a legal person holding properties valued at €100,000,000.00 reveals a contributory capacity (in the perspective of the tax in question), manifestly superior to another legal person who, with the same purpose, holds properties valued at €100,000.00.
On the other hand, and as already mentioned, AIMI must be understood and treated as such, namely as an additional to the Property Tax. Now, if this is the case, the contributory capacity evidenced by legal persons through the holding of properties, even if dedicated to their productive activity, is precisely the same, both with respect to AIMI taxation and with respect to Property Tax taxation.
In this manner, and in light of all that has been set out, the arbitral request is deemed to be unfounded on this point.
b.
With respect to the first subsidiary request formulated, the Claimant considers that "the legislator intended to tax properties for residential purposes. This intention results from the wording of the law and, indeed, was at the genesis of the creation of this additional".
The Claimant further states that "given that the legislator's intention was clear in excluding, through Article 135-B(2) of the Property Tax Code, the application of AIMI to properties dedicated to economic activities, it should necessarily be understood that 'land for construction' dedicated to those activities is equally included in that exclusion rule", and that, for the Claimant, "Understanding that 'land for construction' intended, according to their respective property records, for 'commerce, industry, services' or 'other' purposes, are subject to AIMI – as has been understood by the TA – is manifestly contrary to the spirit of the law and, indeed, unlawful" 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 understandable and adequate to the purposes of AIMI the hypothesis that the TA would tax a 'land for construction' with a potential use of 'industry' and not tax a property (built) with the same use".
In this context, for the Claimant, "the subjection of this land for construction to AIMI creates a greater fiscal burden on this type of urban properties and, consequently, will inevitably have an impact on the economic activities that may potentially be developed in these properties", so that "the taxation methodology adopted by the TA, to the extent of including in the taxable value for AIMI purposes, taxpayers holding 'land for construction' with the purposes identified by Article 135-B(2) of the Property Tax Code, constitutes discriminatory treatment that violates, without more, the principle of equality, constitutionally enshrined in Articles 13 and 104, No. 3 of the Constitution of the Portuguese Republic ("CRP") and in Articles 5 and 55 of the General Tax Law ("LGT")".
Therefore, the Claimant concludes, "the AIMI tax assessment acts, to the extent that they tax 'land for construction' intended for 'commercial, industrial or service' purposes or 'other' – here corresponding to the amount of tax of €345,317.98 (...) are tainted with manifest illegality, due to error in factual and legal premises, and should be promptly annulled."
With regard to this subsidiary request, the Claimant seeks, in summary, the broadening of the objective exclusions from AIMI taxation, enshrined in Article 135-B(2) of the Property Tax Code, so as to also include therein urban properties classified as "land for construction", provided that the construction envisaged therein falls within one of the types referred to in said No. 2, that is, urban properties intended for "commercial, industrial or service" purposes or "other" purposes.
With respect to this issue, now presented by the decision of the Claimant, arbitral jurisprudence has been divided.
Thus, for example, the decision delivered in case 686/2017-T concluded that "land for construction" without residential dedication, that is, intended for "commercial, industrial or service" purposes or "other" purposes, should be excluded from AIMI taxation.
This decision, on the basis of the unity of the legal system, defends the possibility of extensive interpretation of the exclusion provided for in Article 135-B(2) of the Property Tax Code, in that case, with respect to urban properties classified as "service properties", "as expressing a legislative intent to also exclude from taxation land intended for the construction of such properties".
For the said Arbitral Tribunal, "Since the taxable fact 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 had not so decided, it would have concluded for the material unconstitutionality of the rule providing for such taxation.
Already in the decisions delivered in cases 676/2017-T and 664/2017-T (the first concerns Real Estate Investment Funds and the second a credit institution), the claims of the claimants there were decided unfavorably, in the sense of precluding the taxation of "land for construction", even if the envisaged construction is for "commercial, industrial or service" purposes.
Regarding the taxation of land for construction for non-residential purposes, both of the said decisions converge, and the following can be read in the first:
"Having the legislator defined an exclusion clause by express and precise reference to certain species of urban properties, which are immediately identifiable in the context of the law, it is not possible to carry out an extensive interpretation so as to include therein other typologies that the legislator manifestly did not wish to consider. Nor can such an interpretive result even be reached 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 might have been different, and saving the utmost respect for other opinions, it is considered that the exclusion of taxation of all or part of "land for construction" was not the solution adopted, since Article 135-B(2) of the Property Tax Code only provides for the exclusion of taxation with respect to AIMI of urban properties classified as "commercial, industrial or service properties" and "other properties", precisely in accordance with subparagraphs b) and d) of Article 6(1), which inevitably leads to the taxation of properties provided for in the two remaining subparagraphs of that same Article 6 of the Property Tax Code, namely urban properties classified as "residential" (subparagraph a)) or as "land for construction" (subparagraph 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 only some of them, and if the legislator, in its rule of exclusion from taxation, intended to exclude a part of the properties referred to in subparagraphs a) and c) of Article 6(1) of the Property Tax Code, it would have had all the possibility to do so.
In the same way, the legislator could have altered the species of urban properties provided for in Article 6 of the Property Tax Code, for example, by subdividing land for construction according to the purposes to which they were intended, which did not happen.
Regarding the possibility of extensive interpretation of the exclusion enshrined in Article 135-B(2) of the Property Tax Code, in order to encompass land for construction not intended for residential purposes – the solution adopted in the decisions that upheld claims similar to the Claimant's, now in question – it is considered, always saving the respect due to other understandings, that it should not be accepted.
Thus, and to begin with, it is believed that the identity of situations is not verified in light of the legally relevant criteria, necessary to operate the said extension of the exclusion clause from objective scope, that is, it does not appear that land for construction is 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 an exclusion clause would have underlying, in the first place[3], the purpose of not burdening with AIMI properties dedicated, or susceptible of immediate dedication, to productive processes, land for construction not being characterized by such characteristics, given that while a built property will be, or will be susceptible to being immediately, dedicated to productive processes, land for construction is not in such a situation.
As, moreover, the Constitutional Court itself has recognized, there are fundamental and relevant differences between a built property and land for construction.
In the words of that high Court[4]:
"For tax purposes, properties (...) are clearly distinguished from land for construction, in accordance with Article 6 of the Property Tax Code (CIMI), the first of these categories being constituted by buildings or existing constructions (...), while the second consists exclusively of land for which the right to build buildings intended for that or other purposes has been consolidated by an administrative act of prior control of an urban development operation.
Thus, while buildings (...) correspond to actual buildability, definitively incorporated into the legal sphere of their holder, land for construction corresponds to merely potential buildability, legally consolidated in the legal sphere of the owner of the land, but not yet materialized.
That is, the taxation of properties (...) falls on the existing reality, on tangible things, unlike the taxation of land for construction, which falls on construction rights, on future things, as indeed is evidenced by Article 45 of the Property Tax Code, by establishing that the tax value of these latter is determined exclusively by the volume and quality of the construction to be built on the land, and not by its current characteristics.
It will be said, correctly, that both correspond to real estate assets (...). And that, because of 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 assets does not allow equating the contributory capacity of their respective owners, present or future, based solely on their dedication and their tax value (VPT)."
Indeed, already built properties possess a material reality corresponding to the typology that is theirs. That is, to a built property licensed for, or having as its normal destination, commerce, industry or services, will correspond a material reality adequate to such purposes and, for what is relevant, objectively distinct from a built property licensed for, or having as its normal destination, residential purposes.
Land for construction, on the other hand, is distinguished from other land on a purely legal plane, that is, based on an action of a public entity (granting of license or authorization, admission of prior notification or issuance of favorable prior information for development or construction operation - cf. Article 6(3) and 37(3) of the Property Tax Code) or of the owners (declaration of purpose in the acquisition title; cf. Article 6(3) of the Property Tax Code), to which the Law attributes certain legal effects.
In this way, based on the noted material differentiation, the alteration of the dedication of land for construction, from the point of view of the notes relevant to the issue at hand, may be simple, requiring, for example, a mere declaration in the acquisition title, the presentation and admission of a prior notification, or the presentation and approval of a request for prior information.
On the other hand, the alteration of the purpose of a built building, from residential to commerce/industry/services, or vice versa, will imply, from the perspective of normality, the carrying out of more or less profound works (and necessary licensing).
It further adds that a built property has incorporated a significant value corresponding to the construction, which, even in cases where it is not concretely dedicated to the intended use, will constitute a natural incentive for its economic exploitation since, always from the perspective of normality, a built property will not only generate no income, but will depreciate (due to its deterioration) through non-use.
On the other hand, land for construction not only does not incorporate, in itself, any natural incentive for its construction and subsequent dedication to a productive activity, but, also from the perspective of normality, the opposite may occur, that is, due to certain market conditions that create expectations of merely speculative gains, there may be incentives for their respective owners to maintain their status as unbuilt land.
In this regard, the Claimant states that the subjection of the land for construction in question to AIMI "creates a greater fiscal burden on this type of urban properties and, consequently, will inevitably have an impact on the economic activities that may potentially be developed in these properties".
Now, in light of the teleology found in the rule being interpreted, set out above, the fact is that such impact may even be positive, to the extent that the taxation of land for construction may constitute an incentive for its construction, thereby accelerating the actual use of the properties in productive activities.
Everything that has been set out, it is considered, will justify a differentiation of treatment, in line with the legally enshrined regime, and against the extension of the non-subject clause through interpretive extension.
Notwithstanding, it will always be added that a comprehensive understanding of AIMI within the framework of the Property Tax regime will, precisely, point towards the real purpose of the legislator to subject to the former all land for construction, and not merely that intended for residential use.
If not, let us see.
In the design of AIMI, and following what was the evolution of taxation under item 28.1 of the Stamp Tax Code, the legislator made clear (by virtue, above all, of the nomenclature and systematization of the taxation created, as well as the express reference to the relevant Property Tax rules) its intention that the categories relevant to the taxation in question be delineated according to the criteria of the Property Tax Code itself.
And, under the terms of this Code, land – which is the category we are now concerned with – may fall into the categories of:
rustic land; or
urban land;
"for construction" of buildings intended for residential, commercial, service or industrial purposes;
intended for "other" purposes.
The legislator, in the AIMI regime created, excluded from subjection thereto land qualified as "rustic", by virtue of the exclusive subjection of urban properties in Article 135-A(1), and land qualified as "urban" intended for "other" purposes, by virtue of the exclusion clause in No. 2 of that same article, and the non-exclusion of land "for construction" of buildings with certain destinies (namely commerce, services or industry), cannot but be considered sufficiently founded in considerations of a material order, as already noted.
Finally, it cannot fail to be considered relevant in this matter that the Administrative Court of Appeals (STA) has understood that for the determination of the tax value of land for construction it is irrelevant the dedication of the planned construction.
Thus, in the Judgment of the STA of 20-04-2016, delivered in case 0824/15[5], it was considered that:
"It follows from this rule that the formula transcribed above only applies to the urban properties therein discriminated, that is, those that already built are for residential, commercial, industrial and service purposes.
However, the legislator did not include therein land for construction which it also classifies as urban properties in Article 6 of the Property Tax Code.
For the determination of the tax value of the same there is the rule of Article 45 already mentioned where only the area of implantation of the building to be constructed and the adjacent land and the characteristics of No. 3 of Article 42 are relevant.
The remaining coefficients are not included therein because they can only relate to buildings, as such.
The dedication coefficient can only be relevant in light of the proven use of the built property and likewise the comfort and quality coefficient.
Such multiplier coefficients of the tax value only relate to the built property but do not have a real basis of support in the potential that the land for construction offers."
And, further on, in the same judgment:
"But taking reality into account, the legislator established for the determination of the tax value of this species of properties a specific rule – that contained in Article 45 where it is reiterated that the area of implantation 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 No. 3 of Article 42 are taken into account. Taking into account the approved construction project and the provisions of No. 2 of Article 45 of the Property Tax Code.
Which means that in determining their tax value of land for construction, the mathematical formula enshrined in Article 38 of the Property Tax Code does not apply.
And being so, the dedication and quality and comfort coefficients related to the building to be constructed cannot and should not be taken into account in that evaluation.
Indeed, the dedication coefficient relates to the type of use of the already built property and the same is true of the quality and comfort coefficient.
In construction land, the approved buildings are merely potential and it is the value of that constructive capacity, generating an increase in tax value or wealth for its owner, that is sought to be taxed. And not factors still not materialized."
The said understanding was sanctioned by judgment of the Plenary of the Tax Contentious Chamber of the STA of 21-09-2016, delivered in case 01083/13[6], in whose summary it is synthesized that:
"III - In determining the tax value of land for construction, the provisions of Article 45 of the Property Tax Code must be observed, with the quality and comfort coefficient (cq) not being considered.
IV - Article 45 of the Property Tax Code is the specific rule that regulates the determination of the tax value of land for construction.
V - The quality and comfort coefficient, a factor multiplying the tax value contained in the mathematical expression of Article 38 of the Property Tax Code with which the tax value of urban properties for residential, commercial, industrial and service purposes is determined cannot be applied by analogy as it is capable of altering the taxable base, interfering in the incidence of the tax."
In this manner, it is concluded that in the context of determining the tax value under the Property Tax Code, the destination of the planned construction in "land for construction" is not relevant, with no distinction being made, from the point of view of property taxation and, consequently, the demonstration of contributory capacity, between land for construction of residential buildings and land for construction of commercial, industrial or service buildings.
On the contrary, and due to the application of the dedication coefficient enshrined in Article 41 of the Property Tax Code, in built buildings, the dedication of the buildings is reflected in the tax value, and consequently in the contributory capacity, considered for taxation purposes.
In the AIMI context, given what has already been stated regarding the nature of this taxation (as an additional to the Property Tax), there will be no justifications for diverging from such a criterion, that is, for considering that the holding of "land for construction" with planned buildings of distinct purposes signals different contributory capacities.
Having in mind what has been set out, considering that it is not appropriate to broaden, through extensive interpretation, the objective exclusions from AIMI taxation, enshrined in Article 135-B(2) of the Property Tax Code, so as to also include therein urban properties classified as "land for construction", provided that the construction therein envisaged falls within one of the types referred to in said No. 2, that is, urban properties intended for "commercial, industrial or service" purposes or "other" purposes, this arbitral request should also be dismissed as unfounded.
c.
Also on a subsidiary basis, the Claimant understands that the AIMI taxation regime is contrary to the principle of equality, enshrined in Article 13, and to the principle of fiscal equality and contributory capacity enshrined in Article 104, No. 3, both of the CRP, because, in its view, the legal regime of AIMI, specifically Articles 135-A and 135-B thereof, both of the Property Tax Code, and the taxation resulting therefrom, promote differentiated treatment and unjustified inequality among taxpayers, and "the application of AIMI to real estate assets held by entities dedicated to real estate exploitation (here including the purchase, sale, construction, development and rental), could only result from the idea that such properties, 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 Claimant also relies, on this matter, on Judgment No. 250/2017 of the Constitutional Court of 24 May 2017, delivered in case No. 156/20, already cited above.
On this matter, the Claimant repeats in large part arguments previously presented.
Thus, the Claimant again considers "evident that, in establishing AIMI, the legislator intended to tax properties for residential purposes, as true manifestations of wealth" and that "it was clear the legislator's intention to exclude from the scope of application of AIMI all properties dedicated to economic activities", which, as already noted, is not subscribed to.
The Claimant also questions whether "if 'commercial, industrial or service properties' and 'other properties' are expressly excluded from the scope of application of AIMI – because dedicated to economic activities, which the legislator did not wish to burden – how can 'land for construction' intended for those same purposes be included in that scope?"
The answer to such question, as also already noted, goes in the direction of there being a substantial difference between land for construction and already-built buildings, the latter being susceptible of being, or being immediately dedicated to, the activities to which they are intended, unlike the former.
In this manner, contrary to the Claimant, it is not believed that "In making that distinction – besides violating the spirit of the law, above already demonstrated – we would be distinguishing realities that cannot be distinguished for this purpose: on one hand, i) commercial, industrial, service or other already-built properties and on the other, ii) land for construction intended for commerce, industry, services or others.", with the alleged violation of the principle of equality not being verified.
The Claimant further alleges in this regard that "if the taxation of AIMI of 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 "entities in this sector would thereby assume an additional burden in relation to the generality of companies, based on a 'hypothetical index of contributory capacity' that has no correspondence with reality".
In this regard, as also already noted, the contributory capacity at issue is the same as that of the Property Tax, to which AIMI is added, and the legislator chose to enshrine 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, it should be noted, first and foremost, that within the economic sector in question, companies are treated equally, and that it is within the scope of the legislator's freedom of action, and is, moreover, common practice and accepted, the interference in economic activities, fiscally incentivizing some and fiscally burdening others.
Further, in the present case, contrary to what the Claimant points out, we are not faced with a burden, but with a lack of relief.
That is, viewed properly, the normative structure created for AIMI consists of a general coverage thereof, overlying properties subject to Property Tax, followed by the preclusion of incidence with respect to certain types of properties, seeking, in the first place, that an exclusion from the subjective scope of taxation be recognized, and arising, in the second place, against the scope of said exclusion clause from objective incidence.
In this manner, it is not the Claimant – or the properties it holds and on which tax was assessed – that finds itself, upon being taxed, in an exceptional situation of burden, but rather the lack of burden sought – through subjective or objective exclusion – which, if recognized, would be of an exceptional character.
Moreover, the Claimant's argumentation on constitutionality ultimately reflects some arguments found in constitutional jurisprudence relating to, subsequently repealed, taxation under item 28.1 of the Stamp Tax Code, in particular that which was condensed in the already several times mentioned Judgment No. 250/2017 of the Constitutional Court of 24 May 2017, delivered in case No. 156/2016, also invoked by the Claimant.
There it is stated, among other things, as follows, with correspondence in the issues now raised by the Claimant:
"the rule whose validity is questioned confused manifestations of wealth with factors of production of that same wealth.";
"if behind the tax imposed on the owner of a residential property with a tax value exceeding one million euros there may be a taxpayer with sufficient economic strength to bear the respective fiscal 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 development, about whose economic strength we know nothing. In truth, we cannot presume that that taxpayer has economic strength proportional to the value of the land, which is merely instrumental in relation to its economic activity. We are unaware what profit margin it will derive from its exercise, if it is even in legal and economic conditions to develop it, or if it will not even have a negative net situation.";
"the different reality of the taxation of land for construction, which has a greater impact on the economic activity carried out by its owner than on the value of the asset itself. With the aggravating factor that the respective fiscal burden, if it does not definitively render inviable that activity, will end up being borne by the final 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 taxpayers, not distinguishing individual subjects from legal persons, nor the specific purpose pursued by the latter, it will apply indiscriminately, for example, to a luxury dwelling in a tourist development in the Algarve and to land for construction of a collective housing building in a cooperative regime in the metropolitan suburbs of Lisbon or Porto."
Thus, from the said judgment of the Constitutional Court, it seems possible to draw the understanding, sustained by the Claimant, that the non-consideration of 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 the line of the dissenting opinion issued in the said judgment by the Illustrious Counselor Manuel da Costa Andrade.
Thus, and the Constitutional Court itself makes this evident, one thing is the taxation of income, another that of assets, the latter, by nature, will essentially attend to the tax value of the assets held, and not to the personal situation of its holder, being, even due to reasons of practicability, reduced the factors of personalization.
The type of arguments presented by the Constitutional Court on the matter in question is based essentially on needs for personalization which appear, as formulated, not only impractical, but also, in some way, subversive.
Indeed, the said considerations will be, immediately and without more, directly transposable to the Property Tax, to the Inheritance and Gift Tax, to the Vehicle Tax, to Capital Gains Tax, to Corporate Income Tax and even, in some way, to VAT. Also there the taxable facts abstract, often precisely in the same manner, not to say in an even more pronounced manner, from the personal situation of the respective taxpayers.
Thus, also in respect of those taxes, there is no distinction, as a rule, of manifestations of wealth (contributory capacity) from factors of production of that same wealth (that is: a taxable fact subject to Property Tax, Inheritance and Gift Tax, Vehicle Tax, Capital Gains Tax, Corporate Income Tax, would abstract, as a rule, from the circumstance that it occurred within the framework of "consumption" [broadly speaking] or "production of wealth"), and the differentiation will occur, as in the case of AIMI, through the consideration of the tax as a cost supported, under income tax (cf. Article 23(2)(f) of the Corporate Income Tax Code).
Further, there are other pacifically accepted situations - precisely in homage to 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 accepted, would be irremediably injured by unconstitutionality. Think, above all, of the situation of someone who acquires a property with recourse to credit guaranteed by the mortgage of the same property, and it is evident, not only from a personal point of view, but also patrimonial, the disparity in contributory capacity ("wealth") between the said taxpayer and the holder of a property of equal value, but fully paid.
On the other hand, duly understood, it is believed that the concerns of the Constitutional Court relate more to the manner of valuation of the assets than to their subjection. That is: if the tax value is properly fixed, and using the example used by the Constitutional Court, the owner of a luxury dwelling in a tourist development in the Algarve and of land for construction of a collective housing building in a cooperative regime in the metropolitan suburbs of Lisbon or Porto would evidence, from the point of view of assets, the same contributory capacity, that is, would be holders of an asset with identical tax value.
In this manner, and in light of the foregoing, it is considered that consequences should not be drawn from the constitutional jurisprudence in question, in respect of the constitutionality of the AIMI rules, applied in the case, in particular with respect to the violation of the constitutional rules pointed out by the Claimant, and the arbitral request should therefore also be dismissed as unfounded on this point.
C. DECISION
Whereupon, this Arbitral Tribunal decides to uphold the dismissal in full of the arbitral request formulated and, in consequence:
to absolve the Respondent of the request;
to maintain in the legal order the tax assessment acts subject of the present arbitral action; and
to condemn the Claimant to the costs of the proceedings, in the amount fixed below.
D. Value of the Proceedings
The value of the proceedings is fixed at €807,057.25, pursuant to Article 97-A(1)(a) of the Tax Procedure and Process Code, applicable by virtue of subparagraphs a) and b) of Article 29(1) of the LRAT and No. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.
E. Costs
The amount of the arbitration fee is fixed at €11,628.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Claimant, since the request was wholly unfounded, pursuant to Articles 12(2) and 22(4), both of the LRAT, and Article 4(4) of the said Regulation.
Let it be notified.
Lisbon, 6 September 2018
The Presiding Arbitrator
(José Pedro Carvalho)
Arbitrator Member
(Hélder Faustino)
Arbitrator Member
(Jorge Carita)
[1] All available at https://caad.org.pt/tributario/decisoes/.
[2] Cf. Judgment of 24-05-2017, delivered in case 250/2017, available at: http://www.tribunalconstitucional.pt/tc/acordaos/.
[3] Without prejudice to some marginal situations relating to properties dedicated to public services or non-business activities, covered by the species "other".
[4] Cf. Judgment delivered in case 250/2017, already cited.
[5] Available at www.dgsi.pt.
[6] Ibid.
[7] With the exception, from 2018 onwards, of municipal companies; cf. No. 4 of Article 135-A of the Property Tax Code.
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