Process: 686/2017-T

Date: May 7, 2018

Tax Type: IMI

Source: Original CAAD Decision

Summary

In CAAD arbitration process 686/2017-T, a real estate investment fund management company challenged AIMI (Additional Tax on Real Estate) assessments totaling €152,336.94 for 2017, representing two separate real estate funds. The company claimed the AIMI taxation was unconstitutional and requested reimbursement with compensatory interest. The Tax Authority challenged the tribunal's jurisdiction, arguing it lacked competence to rule on legality of taxation for certain construction land designated for commerce, industry or services. The arbitral tribunal, constituted under CAAD in March 2018, firmly rejected jurisdictional objections, clarifying that under Article 2(1)(a) of the Legal Regime for Arbitration in Tax Matters (LRAT), it possessed full jurisdiction to assess legality of assessment acts. The tribunal emphasized that taxpayers have the right to challenge entire assessments with any alleged illegalities, and partial applicability of grounds to only some properties relates to merit, not jurisdiction. Importantly, the tribunal addressed the Tax Authority's separation of powers argument, asserting that courts—not administrative or legislative bodies—hold constitutional responsibility for administering justice, interpreting laws, and controlling constitutionality under Articles 202 and 204 of the Portuguese Constitution. The tribunal emphasized its interpretative independence, bound only by law as interpreted through legal criteria in Article 9 of the Civil Code and Article 11 of the General Tax Law, not by the Tax Authority's preferred interpretation. This decision reinforces real estate fund management companies' standing to represent funds in tax arbitration and establishes important precedents regarding CAAD's jurisdictional scope and interpretative autonomy in constitutional challenges to AIMI assessments.

Full Decision

ARBITRAL DECISION (consult complete version in PDF)

The arbitrators Cons. Jorge Lopes de Sousa (arbitrator-president), Dr. Pedro Miguel Bastos Rosado and Prof. Doctor Paulo Jorge Nogueira da Costa (arbitrator members), appointed by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 06-03-2018, agree as follows:

1. Report

A... – REAL ESTATE INVESTMENT FUND MANAGEMENT COMPANY S.A., with Tax Identification Number..., with registered office at..., no...., ...-... Lisbon (hereinafter "Claimant"), came as manager and representative of B... - REAL ESTATE ASSET MANAGEMENT FUND, holder of tax identification number ... (hereinafter referred to as "Fund B...") and C... - CLOSED REAL ESTATE INVESTMENT FUND, holder of tax identification number ... (hereinafter referred to as "Fund C...") (hereinafter jointly referred to as "Funds") under the terms of article 2(1)(a) and articles 10 et seq. of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters or "LRAT"), to submit a request for arbitral pronouncement seeking the declaration of illegality of the assessment acts for the Additional Municipal Tax on Real Estate ("AIMI") with the numbers ... (in the amount of € 103,408.19) and 2017 ... (in the amount of € 48,928.75), issued by the Tax and Customs Authority ("AT") with reference to the year 2017, in the total amount of € 152,336.94.

The Claimant further requests reimbursement of the amounts paid, with compensatory interest.

The Tax and Customs Authority is the Respondent.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 28-12-2017.

Pursuant to article 6(2)(a) and article 11(1)(b) of the LRAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council appointed as arbitrators of the collective arbitral tribunal the signatories hereto, who communicated acceptance of the assignment within the applicable time period.

On 14-02-2018, the parties were duly notified of this appointment and did not manifest the will to refuse the appointment of the arbitrators, in accordance with article 11(1)(a) and (b) of the LRAT and articles 6 and 7 of the Deontological Code.

Thus, in compliance with article 11(1)(c) of the LRAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 06-03-2018.

On 17-04-2018, the Tax and Customs Authority submitted a response in which it argued that the request should be dismissed as unfounded and that the final decision should be notified to the Public Prosecutor's Office.

By order of 19-04-2018, a hearing was dispensed with and it was decided that the proceedings would continue with written submissions.

Having the Claimant declared that it did not intend to submit further allegations, it was decided that the proceedings would proceed to final decision with dispensation of allegations.

The arbitral tribunal was duly constituted in accordance with articles 2(1)(a) and 10(1) of Decree-Law no. 10/2011, of 20 January.

The parties are duly represented and possess legal personality and capacity and have standing (articles 4 and 10(2) of the same statute and article 1 of Regulation no. 112-A/2011, of 22 March).

The proceedings are not subject to any voidness.

Before anything else, it is important to clarify the issue of jurisdiction raised by the Tax and Customs Authority and the scope of the powers of cognition of this Arbitral Tribunal.

2. Issue of Jurisdiction of the Arbitral Tribunal

The Tax and Customs Authority, in articles 90 to 92, alleges the lack of jurisdiction of the Arbitral Tribunal to rule on the issue of legality of taxation of land for construction whose potential use is commerce, industry or services, given that only part of the real estate on which AIMI was levied is in that situation.

The Arbitral Tribunal has jurisdiction to assess the legality of assessment acts as results from article 2(1)(a) of the LRAT.

In the case at hand, assessment acts are being challenged and the Taxpayer has the right to impute to them the illegalities it considers appropriate, even if it is concluded that it has no grounds, and the Arbitral Tribunal has jurisdiction to assess whether they affect or do not affect the assessments.

The fact that only part of the land for construction is in the conditions referred to by the Claimant may relate to the scope of acceptance of its claim, in the event that some part should be judged acceptable, but has nothing to do with the issue of the jurisdiction of the Arbitral Tribunal, since the Claimant may impute the illegalities it considers to the entirety of the assessments.

On the other hand, the fact that only some of the land is in the circumstances referred to by the Claimant is sufficient to conclude that all questions of unconstitutionality that have as their basis such circumstances are questions of concrete unconstitutionality and not abstract unconstitutionality, since their resolution has potential effects on the assessment challenged.

In these terms, there is no lack of jurisdiction of the Arbitral Tribunal to assess any issue raised.

3. Powers of Cognition of the Arbitral Tribunal

The Tax and Customs Authority invokes the principle of separation and interdependence of powers as an obstacle to the powers of cognition of this Arbitral Tribunal.

There is certainly some misunderstanding, since, in a Rule of Law State, it is the Courts and not any other bodies, particularly those with legislative and executive competences, that are responsible for administering justice, "ensuring the protection of the rights and legally protected interests of citizens, suppressing violations of democratic legality and settling conflicts of public and private interests" (articles 202(1) and (2) of the CRP), for which they must interpret and apply the laws to settle disputes between citizens and the Administration.

It is also to the Courts that the CRP assigns the power to control the constitutionality of laws issued by bodies with legislative power (article 204 of the CRP).

This decision is rendered by a Court, therefore it has jurisdictional character, and in the exercise of its jurisdictional power it is incumbent upon it to apply the law according to its interpretation, being only subject to the law as it interprets it, and is not obliged to adopt the interpretation adopted by the Tax and Customs Authority or that hypothetically the bodies with legislative power would adopt if they were assigned the competence to apply the law to disputes pending in Courts.

On the other hand, in the exercise of its interpretative activity the Arbitral Tribunal is not limited by the letter of the law and must adopt all criteria of interpretation provided by law, particularly those indicated in article 9 of the Civil Code and article 11 of the LGT: "interpretation must not be confined to the letter of the law, but must reconstruct from the texts the legislative intent, taking especially into account the unity of the legal system, the circumstances in which the law was drawn up and the specific conditions of the time in which it is applied", only being unable to consider "the legislative intent that does not have in the letter of the law a minimum of verbal correspondence", which may even be "imperfectly expressed".

It is the exercise of this jurisdictional power that is concretized in this arbitral decision, in the light of the legal criteria of interpretation.

4. Factual Matter

4.1. Proven Facts

  • In the year 2017, Fund B... was owner of the real estate whose registration articles are indicated in the AIMI assessment no. 2017 ..., which is contained in document no. 1 attached with the request for arbitral pronouncement, the contents of which are given as reproduced;

  • In the year 2017, Fund C... was owner of the real estate whose registration articles are indicated in the AIMI assessment no. 2017 ..., which is contained in document no. 2 attached with the request for arbitral pronouncement, the contents of which are given as reproduced;

  • The Funds were notified of their respective AIMI assessments mentioned:

– in the amount of € 103,409.18, determined on the basis of taxable matter of € 25,852,847.66, as regards Fund B...;

– in the amount of € 48,928.75, determined on the basis of taxable matter of € 12,232,187.96, as regards Fund C... (documents nos. 1 and 2 attached with the request for arbitral pronouncement, the contents of which are given as reproduced);

  • On 27-09-2017, Fund B... paid the amount assessed in the assessment addressed to it (document no. 1);

  • On 28-09-2017, Fund C... paid the amount assessed in the assessment addressed to it (document no. 2);

  • Fund B... is governed by the Management Regulations contained in document no. 4 attached with the request for arbitral pronouncement, the contents of which are given as reproduced;

  • Of the real estate held by Fund B..., those indicated in the following table were land for construction intended for the purposes indicated, different from housing:

[Table with property details omitted for brevity]

  • Of the real estate held by Fund C..., those indicated in the following table were land for construction intended for the purposes indicated, different from housing:

[Table with property details omitted for brevity]

  • The Claimant requested suspension of IMI taxation under article 9(1)(d) of the IMI Code, which was granted to it in relation to the real estate referred to in document no. 5 attached with the request for arbitral pronouncement, the contents of which are given as reproduced;

  • On 27-12-2017, the Claimant, in its capacity as manager and representative of the Funds, submitted the request for arbitral pronouncement that gave rise to the present proceedings.

4.2. Unproven Facts and Justification of the Establishment of Factual Matter

There are no facts relevant to the decision of the case that have not been proven.

The proven facts are based on the documents attached by the Claimant with the request for arbitral pronouncement.

The Tax and Customs Authority did not attach the administrative file and does not dispute what is affirmed by the Claimant regarding the nature of the real estate indicated in the tables contained in items (g) and (h) of the factual matter, therefore it is considered established that these are lands for construction with the purposes indicated therein.

As regards the request for suspension of IMI in relation to the real estate referred to in document no. 5 attached with the request for arbitral pronouncement, the Tax and Customs Authority said nothing in its Response, therefore it is considered proven, as the Claimant states, that in the year prior to 2017 the real estate indicated in this document were not subject to IMI, under article 9(1)(d) of the IMI Code.

5. Legal Matter

5.1. Positions of the Parties

The Claimant argues, in summary:

– the real estate in question were not subject to IMI in the year prior to 2017, therefore they are not subject to AIMI, by force of article 135-C of the IMI Code;

– the legal regime established by Law no. 42/2016, of 28 December, excludes from the scope of AIMI "urban real estate classified as 'commercial, industrial or for services' and 'other'" under items (b) and (d) of article 6(1)" of the Municipal Tax on Real Estate Code (IMI Code), therefore only urban real estate used for housing purposes and land for construction, as defined in that article 6, are covered;

– it was intended to create a tax on real estate wealth, in which urban real estate used for economic activities would not be subject to AIMI taxation, recognizing that the mere holding of such real estate does not constitute a factor demonstrating wealth, nor a sufficient indicator of the taxpayers' contributive capacity for such real estate;

– the ratio legis that was at the genesis of the rule excluding objective scope of incidence, enshrined in article 135-B(2) of the IMI Code, was essentially based on the intention not to overburden taxpayers who, by force of their economic activities, hold real estate for the pursuit of their business purpose;

– AIMI cannot be levied on the real estate of the Funds.

Subsidiarily, the Claimant argues that in calculating the tax value of real estate subject to AIMI, "land for construction" whose potential use coincides with purposes of "commerce, industry or services" cannot be considered, which is the case with the land for construction with registration article 2117. The Claimant holds that taxation levied on land for construction with these purposes is incompatible with the constitutional principle of equality.

Subsidiarily, the Claimant holds that the legal regime of AIMI is contrary to the constitutional principle of equality and to the principle of fiscal equality and contributive capacity, enshrined in articles 13 and 104(3) of the CRP.

The Tax and Customs Authority argues the following, in summary:

– AIMI is real and not personal in nature;

– the legislator excluded from scope the urban real estate classified as "industrial, commercial or for services" and "other" but expressly chose to maintain other real estate that also forms part of business assets, such as those classified as residential or land for construction, by not including them in the negative delimitation established, therefore did not exclude from scope all real estate used for economic activities;

– the restriction was made taking into account the classification of the real estate and not its connection with a particular economic activity;

– the Claimant seeks an abrogating interpretation of the norm, introducing into it a meaning that was not established by the legislator in the letter of the law, even if merely in an imperfectly expressed manner, thus broadening the scope of the exclusion from taxation to encompass all real estate held by the Funds;

– as for the ratio legis, AIMI is intended to reach a portion of the assets of the tax subjects of the tax, being levied on real estate assets constituting the assets of a given entity (singular or collective), recognizable in legal terms as capital of a given entity (singular or collective), but it was decided in article 135-B(2) to adopt a negative delimitation of scope, excluding from AIMI real estate that, by their potential use, can be economically recognized as factors of production, in the capacity of capital, that is, as intermediate goods which, combined with other factors of production, produce new utilities – economic goods that satisfy needs;

– in this delimitation of real scope it is clear that the criterion adopted is intended to be universally objective, inducing greater uniformity and equality in the treatment of real estate subject to taxation, to the detriment of other criteria that would appeal to case-by-case verifications of the actual destination given to the real estate;

– within its margin of legislative discretion, the legislator excluded from the scope of the tax real estate intended for purposes other than residential;

– the criterion chosen by the legislator – the classification of urban real estate as industrial, commercial or for services and other – was adopted to the detriment of others that would appeal to case-by-case verifications of the actual destination given to the real estate;

– the intention to ensure "the absence of impact on economic activity" did not, however, lead to the exclusion from the scope of the tax of commercial societies and other equivalent entities that, by having as their purpose the pursuit of economic activities would be affected to a greater or lesser degree by the burden of the tax;

– the negative delimitation of scope was established in objective scope and not in subjective scope;

– the goods in question and especially land for construction are not merely instrumental to the exercise of the Fund's activity, they form part of the very core of economic activity, they are the object of commerce or industry, since they are intended for resale or, in the case of land for construction, also for transformation in case constructions are erected thereon for subsequent sale;

– the real estate excluded from subjection to AIMI, under article 135-B(2) of the IMI Code, are those that perform an instrumental function to industrial, commercial or service economic activities, in that they constitute buildings that serve as support for the functioning of such activities, and are not themselves generators of income;

– the Funds, like the one represented here by the Claimant, are collective investment structures of capital obtained from investors, and the paradigm underlying the tax regime applicable to them has been guided by the principle of neutrality which consists in designing the taxation of Funds, as much as possible, in the same manner in which they would be taxed by persons directly investing in the real and moveable assets that constitute the funds' assets;

– since the substrate of the activity of Real Estate Investment Funds is constituted by real rights over real estate, if the legislator had granted them an exceptional regime, it would be privileging indirect investment in real assets through recourse to this financial product and opening the door to tax evasion behavior;

– the Claimant's interpretation is clearly abrogating the law, stemming from a legislative impulse and, if accepted, violates the constitutional principle of separation and interdependence of powers, established in articles 2 and 111 of the CRP, constituting itself as a reference and limit to the powers of cognition of the courts in the exercise of its function within the Rule of Law State (cf. articles 202 and 203 of the CRP);

– there is no unconstitutionality due to violation of the principles of equality and contributive capacity;

– the Tax and Customs Authority cannot refrain from applying the law on the grounds of unconstitutionality, as it is subject to the principle of legality;

– compensatory interest is not owed if it is concluded that the AIMI legal regime is unconstitutional.

Indicating the Claimant an order of subsidiarity in the imputation of vices to the assessment challenged, it should be observed in its assessment, as results from article 124(2)(b) of the CPTPT, applicable to tax arbitral proceedings by force of article 29(1)(c) of the LRAT.

5.2. Issue of Real Estate Not Being Subject to IMI in the Year 2017

The first issue raised by the Claimant is whether the real estate is covered by exemption from IMI in 2016 and, therefore, their values should not be accounted for in determining the taxable value of AIMI.

Article 135-C(3) of the IMI Code, as worded in 2017, established the following:

"3 - The value of real estate that in the previous year were exempt or not subject to taxation in IMI is not accounted for in the sum referred to in article 135-B(1)."

Having the Tax and Customs Authority not questioned the Claimant's statements on this matter, it was considered proven that the real estate referred to in document no. 5 attached with the request for arbitral pronouncement were not subject to taxation in IMI in the year prior to 2017, under article 9(1)(d) of the IMI Code.

These are, in light of the mentioned document no. 5, all the real estate of Fund C... and some of the real estate of Fund B..., namely the following:

[Property registration numbers listed with dots for anonymization]

In these terms, the entire assessment relating to the real estate of Fund C... is illegal and the assessment relating to the real estate of Fund B... is partially illegal, to the extent that it is based on the tax value of the real estate referred to, which total € 9,492,611.56.

5.3. Issue of the Scope of Objective Incidence of AIMI as a Function of Use for Economic Activities of Residential Real Estate and Land for Construction

Law no. 42/2016, of 28 December (State Budget for 2017) added to the IMI Code chapter XV, containing articles 135-A to 135-K, including the regime of the Additional Municipal Tax on Real Estate (AIMI).

Article 135-A defines the subjective scope of this tax, establishing that "tax subjects of the additional municipal tax on real estate are natural or legal persons who are owners, usufructuaries or superficiaries of urban real estate situated in Portuguese territory", with "any structures or centers of collective interests without legal personality that appear on the matrices as tax subjects of the municipal tax on real estate being equated with legal persons".

Article 135-B defines the objective scope of this additional tax establishing the following:

"Article 135-B
Objective Scope

1 - The additional municipal tax on real estate is levied on the sum of the tax values of urban real estate situated in Portuguese territory of which the tax subject is the owner.

2 - Urban real estate classified as 'commercial, industrial or for services' and 'other' under items (b) and (d) of article 6(1) of this Code are excluded from the additional municipal tax on real estate."

The Claimant argues that this regime excludes from the scope of AIMI "urban real estate classified as 'commercial, industrial or for services' and 'other' under items (b) and (d) of article 6(1)" of the Municipal Tax on Real Estate Code (IMI Code), therefore only urban real estate used for housing purposes and land for construction, as defined in that article 6, are covered.

Article 6 of the IMI Code establishes the following:

"1 - Urban real estate is divided into:

a) Residential;

b) Commercial, industrial or for services;

c) Land for construction;

d) Other.

2 - Residential, commercial, industrial or for services are buildings or constructions licensed for such purpose or, in the absence of a license, which have as their normal purpose each of these uses.

3 - Land for construction is considered to be land located within or outside an urban agglomeration, for which a license or authorization has been granted, prior notification admitted or favorable prior information issued for subdivision or construction operation, and also those that have been declared as such in the acquisition title, except for land where the competent entities prohibit any of those operations, namely those located in green areas, protected areas or which, in accordance with municipal land management plans, are allocated to public spaces, infrastructure or equipment.

4 - The provision of item (d) of article 6(1) encompasses land situated within an urban agglomeration that is not land for construction nor is covered by article 3(2) and also buildings and constructions licensed or, in the absence of a license, that have as their normal purpose uses other than those referred to in article 6(2) and also those of the exception of article 6(3)."

From this negative delimitation of scope, the Claimant extracts the conclusion that it was intended to create a tax on real estate wealth, in which urban real estate used for economic activities would not be subject to AIMI taxation.

The legislative concern to "avoid the impact of this tax on economic activity" was announced in the Bill for the State Budget for 2017 and was implemented through the exclusion from the scope of "urban real estate classified in the category 'industrial', as well as urban real estate licensed for tourist activity, the latter provided that their use is properly declared and proven" and the deduction from the taxable value of the amount of "€ 600,000.00, when the tax subject is a legal person with agricultural, industrial or commercial activity, for real estate directly affected by its functioning".

However, it was not on the basis of the activity to which the real estate are devoted that the exclusion from scope came to be defined, since in the version that was finally approved the non-incidence was defined only on the basis of the types of real estate indicated in article 6 of the IMI Code, without any reference to the use or non-use for the functioning of legal persons.

Had it been intended to maintain, in the final version of the Budget, the legislative intent to exclude the scope of real estate directly affected by the functioning of legal persons, the reference to this use that was in the proposal and that clearly expressed this legislative option would surely have been maintained.

Thus, having suppressed this reference to the use of real estate, there is no legal support to conclude that residential real estate and land for construction devoted to the functioning of legal persons are not relevant to the scope of AIMI.

"In the absence of other elements that lead to choosing the less immediate meaning of the text, the interpreter should in principle opt for that meaning that better and more directly corresponds to the natural meaning of the verbal expressions used, and especially to their legal-technical meaning, on the assumption (not always exact) that the legislator knew how to correctly express its intent. ( [1] )

In the case at hand, given the departure from the proposed version in which relevance was given to the use of real estate, there is no reason to conclude that the legislator did not know how to express its intent in adequate terms, as must be presumed, by force of article 9(3) of the Civil Code.

Therefore, it must be concluded that the fact that the Fund is devoting the real estate referred to in the case to its economic activities does not exclude the scope of AIMI.

5.4. Issue of Not Being Able to Consider in the Calculation of Tax Value of Real Estate Subject to AIMI, "Land for Construction" Whose Potential Use Coincides with Purposes of "Commerce, Industry or Services"

The Claimant argues that article 135-B of the IMI Code should be interpreted in the sense that the tax value of land for construction not intended for housing is not relevant for the purposes of AIMI in consistency with the legislative choice to exclude from scope real estate classified as "commercial, industrial or for services".

Furthermore, the Claimant argues that the application of AIMI to land for construction for the purposes referred to, in parallel with the exclusion of real estate with those purposes, is incompatible with the constitutional and legal principle of equality (articles 13 and 104(3) of the CRP and articles 5 and 55 of the LGT).

Therefore, the Claimant argues that the value of land for construction referred to in document no. 6 attached with the request for arbitral pronouncement should not be relevant for determining the taxable value of AIMI, land intended for services, commerce and industry.

It is not questioned by the Tax and Customs Authority that the real estate referred to in document no. 6 are lands for construction intended for the purposes indicated therein.

Since the fact chosen as an index of contributive capacity is the holding of real estate assets of value considered elevated, it would not be coherent not to apply the tax to buildings intended for commerce, industry or services and to apply it to the land intended for their construction, whose value is incorporated in the value of the buildings.

Thus, in a perspective taking into account the unity of the legal system (article 9(1) of the Civil Code), which has decisive interpretative value, required by the principle of value or axiological coherence of the legal order ( [2] ), the exclusion provided for in article 135-B(2) of the IMI Code relating to urban real estate classified as "for services" should be interpreted extensively as expressing a legislative intention to also exclude from taxation land intended for the construction of such real estate.

In any case, if an extensive interpretation of this norm is adopted, with the meaning that all land for construction is covered by the scope of AIMI, it will be materially unconstitutional, being incompatible with the principle of equality (article 13 of the CRP), by considering as a tax fact the holding of land for construction of real estate intended for commerce, industry and services and not the holding of the real estate constructed thereon, as it constitutes underprivileged treatment of taxpayers found in the first situation, without material justification, since it is necessarily lesser the contributive capacity indicated by real estate assets in that situation, which must be present, and with increase, in the second.

In situations of unjustified discriminatory treatment, resulting in the imposition of a duty or burden in violation of the principle of equality, what is illegitimate is, in principle, the act of imposing the duty only on some taxpayers, and inequality should be resolved by elimination of duties or burdens for those who were discriminatorily burdened with them. ( [3] )

For the above, the entire assessment relating to Fund C... is also illegal for this reason, since all the land for construction whose tax value was considered in the assessment are intended for services.

For the same reason, the assessment relating to the real estate of Fund B... is illegal to the extent that it includes in the taxable value the tax value of land for construction indicated in document no. 6 intended for services, commerce and industry.

5.5. Issue of Unconstitutionality of AIMI

Subsidiarily, the Claimant invokes the unconstitutionality of AIMI, with dual argumentation, which should be assessed separately.

5.5.1. Indiscriminate Taxation of All "Land for Construction": the (Illegal) Disregard of the Legal Criterion of the Use of the Real Estate

The Claimant argues "that the AIMI taxation regime is contrary to the fundamental principle of equality, enshrined in article 13 of the CRP and, in parallel, contrary to the principle of fiscal equality and contributive capacity enshrined in article 104(3) of the same statute", also referred to in articles 5 and 55 of the LGT.

Clarifying its imputation of unconstitutionality, the Claimant argues, in first instance, that "the legal regime of AIMI, specifically its article 135-B of the IMI Code – when interpreted in the sense of including in the scope of application of AIMI 'land for construction' for purposes of commerce, industry, services or other – is manifestly contrary to the principle of equality, constitutionally established.

This is the issue that was already assessed in the previous point, therefore reference is made to what was stated there.

5.5.2. Unconstitutionality Due to Taxation of the Substrate of an Economic Activity

In the Claimant's view, in summary:

– the nature of the tax subjects burdened by the taxation resulting therefrom should be taken into account, specifically the fact that this Additional Tax encompasses entities that exercise, as activity included in their statutory objects, the activity of buying, selling, construction and leasing of real estate;

– in the case of commercial societies (or other equivalent entities) that develop activity of that nature, the ownership of real estate constitutes the patrimonial substrate of the economic activity itself, being an essential (almost sole) means for its pursuit, therefore the essential taxation prerequisite is not met, i.e., the prerequisite that the ownership of such real estate constitutes an indication of increased contributive capacity or wealth;

– in the case of real estate investment funds, given the activity they may legally develop, the real estate are productive factors and means for the exercise of their economic activity that are not an indication of increased contributive capacity;

– this Additional Tax penalizes in an unjustifiably aggravated manner this sector of activity, to the detriment of the others;

– the imposition of this taxation has no relationship with the actual income of the activity developed by these entities - at most, burdening them even if they have negative results;

– article 135-A of the IMI Code - when interpreted in the sense of including in the subjective scope of application of AIMI entities that develop an activity in real estate - promotes differentiated treatment and unjustified inequality between taxpayers, in manifest violation of the principle of equality, enshrined in article 13 of the CRP and the principle of fiscal equality and contributive capacity, enshrined in article 104(3) of the same statute;

– especially concerning land for construction the reasons on which the Constitutional Court based itself in Decision no. 250/2017, of 24-05-2017 are applicable.

The Tax and Customs Authority argues, in first instance, that it is obliged to apply the law and cannot disapply it on the grounds of unconstitutionality.

Furthermore, the Tax and Customs Authority argues, in the essential:

– that the choices underlying the delimitation of the objective scope of AIMI were made within the margin of "legislative discretion" and do not violate the principles of equality and taxation according to contributive capacity, in light of the doctrine and jurisprudence of the Constitutional Court;

– one is dealing with a "partial tax on certain manifestations of contributive capacity", therefore it is not "normatively appropriate to make a comparison between the global value of the assets of other taxpayers", but rather should take as the basis of comparison, to assess compliance with the principle of equality, the assets of other Funds with the same business purpose;

– "the different valuation and taxation of real estate with residential use compared to real estate intended for commerce, industry or services results from the different suitability of the real estate in question, which supports the different treatment given by the legislator which, for economic and social reasons, decided, within its margin of legislative discretion, to exclude from the scope of the tax real estate intended for purposes other than residential";

– the circumstance that other taxpayers holding similarly valuable real estate assets would be exempted from the tax is what would justify a specific constitutional censure to the norm under scrutiny;

– real estate investment funds are holders of goods considered by the legislator as a manifestation of particular wealth;

– real estate are not merely instrumental to the exercise of the Funds' activity, as they form part of the very core of economic activity, they are the object of commerce or industry, since they are intended for resale or, in the case of land for construction, for transformation in case constructions are erected thereon for subsequent resale;

– differently, real estate excluded from subjection to AIMI, under article 135-B(2) of the IMI Code, perform an instrumental function to industrial, commercial or service economic activities, in that they constitute buildings that serve as support for the functioning of such activities, and are not themselves generators of income;

– the circumstance that a given good is worth, as a "factor of production of wealth" is not sufficient to contradict the finding that the corresponding holder holds real estate only accessible to a holder of particular wealth and thus capable of bearing an additional contribution for the desired budget consolidation;

– the principle of equality imposes horizontal equality, that is, that all those who are holders of the same form of wealth are taxed in the same manner;

– like any tax on assets, AIMI is dissociated from a possible realization of profit from the sale of the real estate, as well as from the existence or non-existence of a negative or positive net situation, being relevant, for the economy of the tax, only the tax value of the land.

As regards the invoked obligation of the Tax and Customs Authority to apply the law, with it not being incumbent upon it to supervise constitutionality, this is irrelevant to the assessment of the legality of the assessment challenged, since this Arbitral Tribunal has such competence, as it cannot "apply norms that infringe what is provided in the Constitution or the principles established therein" (article 204 of the CRP).

Therefore, the obligation of the Tax and Customs Authority to apply the law does not constitute grounds for excluding the possible illegality of the assessment.

Article 13 of the Constitution of the Portuguese Republic proclaims the principle of equality of citizens before the law and article 104(3) of the CRP establishes that "taxation of assets should contribute to equality among citizens".

As 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, so as not to create arbitrary and unreasonable discriminations, because they lack sufficient material justification. The principle of equality does not prohibit distinctions from being established, but rather distinctions devoid of objective and rational justification. ( [4] )

The creation of AIMI, as a complementary tax on real estate assets, which aimed to introduce into taxation "a progressive element of personal basis, taxing higher the largest assets" (Report of the Budget for 2017, page 60) is compatible with the objective that taxation of assets should contribute to equality among citizens, stated in article 104(3) of the CRP, since progressivity has as a corollary, tendencially, to impose greater taxation on those with greater contributive capacity.

On the other hand, the exclusion from taxation of real estate especially designed for productive activity, particularly "commercial, industrial or for services", finds constitutionally acceptable grounds in the obligation of the State to promote the increase of economic welfare, which presupposes good functioning of productive activities and constitutes one of its priority incumbencies within the economic sphere [article 81(a) of the CRP].

Furthermore, in line with what was understood in the arbitral decision of 17-03-2016, rendered in case no. 507/2015-T, it should be understood that, while the holding of real estate assets intended for housing of elevated value is a tendencially reliable indication of economic prosperity, superior to that of the generality of citizens, one cannot consider that there is a reliable indication of superior contributive capacity when one is dealing with the holding of rights over real estate intended for the exercise of economic activities (commercial, industrial, provision of services or similar), since they must be adequate to the functioning of their respective companies, and their size and corresponding value is not an indication of prosperity.

Thus, the restriction of the scope of AIMI to residential real estate and land for construction of residential real estate, which came to be established in the version approved for article 135-B(2) of the IMI Code, in the interpretation that was adopted above, shall have constitutionally acceptable grounds.

The specific situation of real estate investment funds, as collective investment entities holding real estate assets intended for housing, does not appear to merit special treatment in relation to the generality of citizens that individually find themselves in the same situation.

In fact, the activities that the funds may develop, indicated in article 210 of the General Regime of Collective Investment Organisms, approved by Law no. 16/2015, of 24 February (acquisition of real estate for rent or intended for other forms of onerous exploitation; acquisition of real estate for resale; acquisition of other rights over real estate with a view to their economic exploitation; execution of works for improvement, expansion and requalification of real estate; development of projects for construction and rehabilitation of real estate), are freely accessible to the generality of real estate owners, even outside business structures.

On the other hand, the holding of real estate assets of elevated value by real estate investment funds evidences, as in relation to any owner of real estate intended for housing, special economic capacity to contribute additionally to the Financial Stabilization Fund of Social Security, to which the AIMI revenue is assigned, and which "corresponds to the objective of the government program to broaden the financing base of Social Security" (Report of the Budget for 2017, page 57).

Therefore, the non-incidence of AIMI on the values of residential real estate or land for construction of housing belonging to real estate investment funds would constitute an unjustified privileged fiscal treatment in relation to the generality of the remaining owners of real estate with those characteristics.

For the above, the imposition on real estate investment funds of AIMI regarding their assets constituted by residential real estate and land for construction intended for housing does not appear to be materially unconstitutional, in light of the principles of equality and contributive capacity.

6. Request for Restitution of Amount Paid and Compensatory Interest

The Claimant formulates a request for restitution of the amounts collected by the Tax and Customs Authority, as well as payment of compensatory interest.

The Tax and Customs Authority argues, in summary, that "in its capacity as body of the Public Administration, it has no competence to decide on the non-application of norms regarding which questions of constitutionality are raised" and "consequently, the AT services cannot be imputed any error of fact or law, given the obedience to the law that informs all its activity".

6.1. Possibility of Assessment in Tax Arbitral Proceedings of Requests for Reimbursement of Tax Paid and Compensatory Interest

In harmony with article 24(b) of the LRAT, the arbitral decision on the merits of the claim for which no appeal or challenge is available binds the Tax Administration from the end of the deadline provided for appeal or challenge, and this must, in the exact terms of the acceptance of the arbitral decision in favor of the taxpayer and until the end of the deadline for spontaneous execution of the decisions of the tax courts, "re-establish the situation that would have existed if the tax act subject of the arbitral decision had not been performed, adopting the necessary acts and operations for that purpose", which is in harmony with article 100 of the LGT [applicable by force of article 29(1)(c) of the LRAT] which establishes that "the tax administration is obliged, in case of total or partial acceptance of complaint, judicial challenge or appeal in favor of the taxpayer, to the immediate and full reconstitution of the legality of the act or situation subject of the dispute, comprising the payment of compensatory interest, if applicable, from the end of the deadline for execution of the decision".

Although article 2(1)(a) and (b) of the LRAT uses the expression "declaration of illegality" to define the competence of the arbitral tribunals operating at CAAD, not making reference to condemnatory decisions, it should be understood that the powers that in proceedings of judicial challenge are attributed to tax courts are comprised in its competences, and this is the interpretation that accords with the sense of the legislative authorization on which the Government based itself to approve the LRAT, in which it proclaims, as the first guideline, that "the tax arbitral proceeding must constitute an alternative processing means to the proceedings of judicial challenge and the action for recognition of a right or legitimate interest in tax matters".

The proceeding of judicial challenge, although essentially a proceeding for annulment of tax acts, admits the condemnation of the Tax Administration in the payment of compensatory interest, as can be gathered from article 43(1) of the LGT, in which it is established that "compensatory interest is owed when it is determined, in gracious complaint or judicial challenge, that there was error imputable to the services from which results payment of the tax debt in amount superior to the legally owed" and article 61(4) of the CPTPT (as amended by Law no. 55-A/2010, of 31 December, to which corresponds article 61(2) in the original version), which establishes that "if the decision recognizing the right to compensatory interest is judicial, the deadline for payment is counted from the beginning of the deadline of its spontaneous execution".

Thus, article 24(5) of the LRAT, in stating that "payment of interest is owed, regardless of its nature, in the terms provided in the general tax law and in the Code of Procedure and Tax Process", must be understood as allowing recognition of the right to compensatory interest in the arbitral proceeding.

On the other hand, depending the right to compensatory interest on the right to reimbursement of amounts paid wrongfully, which are its basis for calculation, implicit in the possibility of recognition of the right to compensatory interest is the possibility of assessment of the right to reimbursement of such amounts.

It is therefore necessary to assess the request for reimbursement of the amounts wrongfully paid and payment of compensatory interest.

6.2. Right to Reimbursement and Interest as to Assessment no. 2017 ...

For what has been stated, the request for arbitral pronouncement is entirely acceptable as to assessment no. 2017 ..., relating to the real estate of Fund C..., in the amount of € 48,928.75.

Therefore, the Claimant has the right to be reimbursed of this amount, by force of articles 24(1)(b) of the LRAT and 100 of the LGT, as this is essential to "re-establish the situation that would have existed if the tax act subject of the arbitral decision had not been performed".

For the above, the request for reimbursement of the amount of € 48,928.75 is acceptable.

The illegality of the assessment does not result from unconstitutionality, but rather from the interpretation that should be made of article 135-B(2) and article 135-C(3) of the IMI Code.

Thus, the jurisprudence invoked by the Tax and Customs Authority on the non-existence of the right to compensatory interest in cases where the illegality of the assessment derives from unconstitutionality does not apply here.

The illegality of this assessment is imputable to the Tax and Customs Authority, since it issued it on its own initiative, with erroneous interpretation of the law.

Consequently, the Claimant has the right to compensatory interest, under articles 43(1) of the LGT and article 61 of the CPTPT, regarding the amount to be reimbursed.

Compensatory interest shall be paid from the date the Claimant made the payment until full payment of the amount that should be reimbursed, at the legal suppletive rate, under articles 43(4) and 35(10) of the LGT, article 61 of the CPTPT, article 559 of the Civil Code and Regulation no. 291/2003, of 8 April.

6.3. Right to Reimbursement and Interest as to Assessment no. 2017 ...

Regarding this assessment relating to the real estate of Fund B..., the illegality is only partial, to the extent that in determining the taxable value of AIMI the values of land for construction intended for commerce, industry and services were considered and to the extent that it considered the values of real estate that in the year 2016 were not subject to IMI.

The tax values of real estate that were not subject to IMI, mentioned above, total € 9,492,611.56, to which corresponds the AIMI levy of € 37,390.45 (rate of 0.4%).

The assessment is further illegal regarding the value of € 8,150.31, corresponding to the AIMI levy relating to land for construction that were subject to IMI in 2016, but that are not intended for housing, which are the following:

[Property registration numbers listed with dots for anonymization]

Thus, assessment no. 2017 ... is illegal as to the amount of € 45,540.76 (€ 37,390.45 + € 8,150.31), therefore the Claimant has the right to reimbursement of this amount, plus compensatory interest, for the reasons indicated as to assessment no. 2017 ... .

7. Decision

In these terms, the Arbitral Tribunal agrees to:

  1. Judge the request for arbitral pronouncement entirely acceptable as to the illegality of assessment no. 2017..., in the amount of € 48,928.75;

  2. Annul this assessment no. 2017 ...;

  3. Judge the request for arbitral pronouncement partially acceptable as to assessment no. 2017 ..., concerning the amount of € 45,540.76, and unacceptable in the remaining part;

  4. Annul this assessment no. 2017 ... as to the amount of € 45,540.76;

  5. Judge acceptable the request for restitution to the Claimant of the amount of € 48,928.75, paid in relation to assessment no. 2017 ..., as well as the request for compensatory interest, and condemn the Tax and Customs Authority to pay to the Claimant that amount plus compensatory interest calculated thereon, at the legal rate, from the date of payment (28-09-2017) until issuance of the respective credit note;

  6. Judge partially acceptable, as to the amount of € 45,540.76, the request for restitution of the amount paid in relation to assessment no. 2017 ..., as well as the request for compensatory interest, and condemn the Tax and Customs Authority to pay to the Claimant that amount plus compensatory interest calculated thereon, at the legal rate, from the date of payment (27-09-2017) until issuance of the respective credit note;

  7. Judge the request for arbitral pronouncement unacceptable as to the remaining part of the requests relating to assessment no. 2017 ... and acquit the Tax and Customs Authority of such requests.

8. Value of the Proceedings

In harmony with article 305(2) of the CPC and article 97-A(1)(a) of the CPTPT and article 3(2) of the Regulation of € 152,336.94.

9. Costs

Under article 22(4) of the LRAT, the amount of costs is fixed at € 3,672.00, under Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, at the charge of the Claimant and the Tax and Customs Authority in the percentages of 37.99% and 62.01%, respectively.

10. Notification to the Public Prosecutor's Office

The Tax and Customs Authority requests notification of this arbitral decision to the Public Prosecutor's Office.

Since the Public Prosecutor's Office does not have special representation before the arbitral tribunals operating at CAAD (article 4(1) of the Statute of the Public Prosecutor's Office), this decision shall be communicated to the Attorney General's Office, for such purposes as it may deem convenient.

Lisbon, 07-05-2018

The Arbitrators

(Jorge Lopes de Sousa)

(Pedro Miguel Bastos Rosado)

(Paulo Jorge Nogueira da Costa)

Frequently Asked Questions

Automatically Created

What is AIMI (Adicional ao Imposto Municipal sobre Imóveis) and how does it apply to real estate investment funds in Portugal?
AIMI (Adicional ao Imposto Municipal sobre Imóveis) is an additional tax levied on real estate property in Portugal, introduced as a supplementary charge beyond the standard IMI (Municipal Property Tax). For real estate investment funds, AIMI applies to the taxable value of properties held in their portfolios when aggregate values exceed statutory thresholds. Fund management companies (sociedades gestoras) act as legal representatives of the funds for tax purposes and are responsible for AIMI compliance. The tax applies to various property types including residential, commercial, and construction land, with rates varying depending on property classification and total portfolio value. Real estate funds, despite their specific regulatory regime, are subject to AIMI on properties owned as of January 1st of each tax year, calculated based on patrimonial values registered in the tax matrix.
Can real estate investment funds challenge the constitutionality of AIMI through tax arbitration at CAAD?
Yes, real estate investment funds can challenge AIMI constitutionality through CAAD (Centro de Arbitragem Administrativa) tax arbitration. Fund management companies have legal standing under Article 2(1)(a) and Articles 10 et seq. of Decree-Law 10/2011 (LRAT - Legal Regime for Arbitration in Tax Matters) to represent funds in arbitral proceedings. In process 686/2017-T, the tribunal confirmed that arbitral courts possess full jurisdiction to assess constitutionality questions in concrete cases involving assessment acts. The tribunal clarified that constitutional challenges are admissible when they have potential effects on the contested assessments, distinguishing concrete from abstract unconstitutionality review. CAAD arbitration provides an alternative to judicial courts for resolving tax disputes, with tribunals empowered under Article 204 of the Portuguese Constitution to control constitutionality of laws. The Tax Authority cannot limit this jurisdiction through separation of powers arguments, as courts hold constitutional responsibility for administering justice and protecting taxpayer rights.
What were the grounds for claiming AIMI unconstitutionality in CAAD process 686/2017-T?
While the complete decision text is truncated, process 686/2017-T involved constitutional challenges to AIMI taxation of specific property categories. The primary ground mentioned concerned taxation of construction land (terrenos para construção) with potential commercial, industrial or services use. The claimant argued this taxation violated constitutional principles, though the specific constitutional provisions invoked are not detailed in the excerpt. The Tax Authority attempted to limit the tribunal's scope by arguing only part of the real estate portfolio fell within the challenged category. However, the tribunal ruled that partial applicability affects the merit and scope of claim acceptance, not jurisdictional competence. The tribunal emphasized that taxpayers may attribute any illegalities they consider appropriate to entire assessments, and the arbitral court must assess whether such illegalities affect the challenged acts. Constitutional grounds in AIMI cases typically involve principles of equality, proportionality, property rights protection, and legitimate expectations regarding tax burdens on investment funds.
How does the CAAD arbitration procedure work for disputes involving IMI and AIMI tax assessments?
CAAD arbitration for IMI and AIMI disputes follows the procedure established in Decree-Law 10/2011 (LRAT). The process begins when taxpayers submit arbitration requests to CAAD's President, who notifies the Tax Authority automatically (as occurred on 28-12-2017 in this case). The Deontological Council appoints arbitrators—either a single arbitrator or collective tribunal of three members—under Article 6(2)(a) and Article 11(1)(b) LRAT. Parties receive notification of appointments and may refuse arbitrators within established timeframes per Articles 6-7 of the Deontological Code. Once constituted (here on 06-03-2018), the tribunal follows procedural steps: the Tax Authority submits a response (submitted 17-04-2018 in this case); the tribunal may order hearings or dispense with them, proceeding with written submissions; parties may submit additional allegations; and finally the tribunal issues its arbitral decision. The tribunal must verify jurisdiction, legal personality, capacity and standing of parties under Article 10(2) LRAT. Importantly, the tribunal emphasized its interpretative independence, applying legal interpretation criteria from Article 9 Civil Code and Article 11 General Tax Law, unconstrained by administrative interpretations and empowered to assess constitutionality of challenged tax assessments.
Are real estate fund management companies (sociedades gestoras) entitled to claim reimbursement and compensatory interest on AIMI payments?
Yes, real estate fund management companies (sociedades gestoras) are entitled to claim reimbursement and compensatory interest on AIMI payments when acting as legal representatives of the funds. In process 686/2017-T, the management company A... explicitly requested reimbursement of amounts paid (€152,336.94 total) plus compensatory interest for Funds B... and C.... This standing derives from the management company's legal representation role under Portuguese investment fund regulations and Article 2(1)(a) LRAT, which grants taxpayer representatives access to tax arbitration. When assessment acts are declared illegal, the corresponding principle of restitution applies: taxpayers are entitled to recover illegally collected amounts. Compensatory interest (juros indemnizatórios) compensates for the State's unjustified retention of amounts not legally due, calculated from payment date until reimbursement according to rates established in tax law. The tribunal confirmed the management company's legal personality, capacity and standing under Article 10(2) LRAT and Article 1 of Regulation 112-A/2011. This entitlement extends to both principal tax amounts and accrued interest, ensuring complete restitution when taxpayers successfully challenge AIMI assessments through arbitration, protecting investment funds from unconstitutional or illegal taxation.