AIMI Tax on Real Estate Investment Funds & Construction Land: CAAD Case 690/2017-T Ruling

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (President Arbitrator), Olívio Mota Amador and Paulo Ferreira Alves, appointed by the Deontological Council of the Centre for Administrative Arbitration to form an Arbitral Tribunal, hereby agree upon the following:

ARBITRAL DECISION (consult full version in PDF)

I – REPORT

On 29 December 2017, A..., S.A., legal entity no. ... with registered office at ... no. ..., ...-... Lisbon, in its capacity as managing company and in representation of B...- Closed Real Estate Investment Fund, legal entity no. ... (hereinafter designated as "Fund"), filed a request for constitution of an arbitral tribunal, under the combined provisions of Articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime for Tax Arbitration, as amended by Article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the tax act for assessment of the Supplementary Municipal Property Tax ("AIMI" – Adicional ao Imposto Municipal sobre Imóveis) no. 2017..., issued by the Tax and Customs Authority ("AT" – Autoridade Tributária e Aduaneira), with reference to the year 2017, in the total amount of €116,874.15.

To support its request, the Applicant alleges, in summary, that:

• it is illegal, due to errors in the substantive and legal assumptions, the application of AIMI to investment funds for the ownership of real property within the scope of their activity;

• subsidiarily, it is illegal to tax "land for construction" intended for "commercial, industrial or service" purposes or "other" purposes, insofar as they are not encompassed by the objective scope of the norms under analysis;

• subsidiarily, the legal regime of AIMI is unconstitutional, insofar as it applies to all "land for construction", as contrary to the principle of equality, enshrined in Article 13 of the Constitution of the Portuguese Republic (CRP) and to the principle of tax equality and contributive capacity enshrined in Article 104, no. 3 of that Fundamental Law.

On 29-12-2017, the request for constitution of the arbitral tribunal was accepted and automatically notified to AT.

The Applicant did not proceed to appoint an arbitrator, therefore, under the provisions of Article 6, no. 2, paragraph a) and Article 11, no. 1, paragraph a) of RJAT, the President of the Deontological Council of CAAD appointed the signatories 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 such appointments, neither manifesting an intention to challenge any of them.

In accordance with the provisions of Article 11, no. 1, paragraph c) of RJAT, the collective Arbitral Tribunal was constituted on 06-03-2018.

On 17-04-2018, the Respondent, duly notified for such purpose, submitted its response defending itself by way of objection.

Under the provisions of Article 16, paragraphs c) and e), and Article 29, no. 2, both of RJAT, the holding of the meeting referred to in Article 18 of RJAT was dispensed with.

Having been granted a period for submission of written submissions, the parties abstained from doing so.

A period of 30 days was set for the issuance of the final decision, following the expiry of the period for submission of submissions by the Respondent. Subsequently, that first period was extended until the end of the period set in Article 21/1 of RJAT.

The Arbitral Tribunal is materially competent and is duly constituted, under the terms of Articles 2, no. 1, paragraph a), 5 and 6, no. 1, of RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, under the terms of Articles 4 and 10 of RJAT 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 consideration of the case.

Everything considered, it is necessary to issue

II. DECISION

A. SUBSTANTIVE FACTS

A.1. Facts established as proven

The Fund notified of the AIMI assessment that is the subject of the present arbitral action is a real estate investment fund, managed and administered by the Applicant.

Within the scope of the activity it develops, the said Fund is, and was in 2017, holder of a portfolio of real properties, and the ownership of this type of assets constitutes the substratum of the entire activity of that investment fund.

In such capacity, the Fund was notified of the tax act for assessment of AIMI, which is the subject of the present arbitral action relating to the year 2017, with reference to the real estate assets held by it.

In the said assessments, AT included the following real properties:

[details of properties omitted in original]

The Fund proceeded to pay, in full and in a timely manner, the tax act referred to, in a total amount of €116,874.15.

A.2. Facts established as not proven

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

A.3. Substantiation of the proven and not proven factual matter

With regard to the substantive facts, the Tribunal does not need to rule on everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and distinguish proven from unproven facts (cf. Article 123, no. 2, of CPPT and Article 607, no. 3 of CPC, applicable ex vi Article 29, no. 1, paragraphs a) and e), of RJAT).

Thus, the facts relevant to the trial of the case are chosen and delimited in function of their legal relevance, which is established in light of the various plausible solutions of the legal question(s) (cf. former Article 511, no. 1, of CPC, corresponding to current Article 596, applicable ex vi Article 29, no. 1, paragraph e), of RJAT).

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

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

B. ON THE LAW

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

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

For present purposes, Articles 135-A, nos. 1 and 3 of the IMI Code establish that the passive taxpayers of AIMI are "natural or legal persons who are owners, usufructuaries or superficiaries of urban properties situated in Portuguese territory" on 1 January of the year to which the Supplementary Tax refers.

Article 135-A, no. 2 provides that: "any structures or centres of collective interests without legal personality that appear in the matrices as passive taxpayers of the municipal property tax are treated as legal persons, as is an undivided estate represented by the household head".

AIMI is incurred, according to Article 135-B, no. 1 of the IMI Code, "on the sum of the taxable patrimonial values of the urban properties situated in Portuguese territory of which the passive taxpayer is the owner" – being that, from this sum, the amount of €600,000 should be deducted whenever the passive taxpayer is a natural person or an undivided estate.

Excluded from the objective scope of this Supplementary Tax are "urban properties classified as 'commercial, industrial or for services' and 'other' in accordance with paragraphs b) and d) of Article 6, no. 1 of this Code", as provided for in Article 135-B, no. 2 of the same Code.

The applicable rate is 0.4% for legal persons and 0.7% for natural persons and undivided estates, as long as the taxable value does not exceed €1,000,000, under Article 135-F, no. 1 of the IMI Code; in cases where the taxable value exceeds €1,000,000, a rate of 1% applies when the passive taxpayer is a natural person.

Under Article 135-G, no. 1 and Article 135-H of the IMI Code, the supplementary tax in question is assessed annually in the month of June, based on the taxable patrimonial values of the properties subject to tax and in relation to the passive taxpayers listed in the matrices on 1 January of each year, and must be paid by the end of September.

As noted above, the Applicant raises the following issues:

• illegality, due to errors in the substantive and legal assumptions, of the application of AIMI to investment funds for the ownership of real property within the scope of their activity;

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

• also subsidiarily, the unconstitutionality of the legal regime of AIMI, insofar as it applies to all "land for construction", as contrary to the principle of equality, enshrined in Article 13 of the CRP and to the principle of tax equality and contributive capacity enshrined in Article 104, no. 3 of that Fundamental Law.

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

Let us then examine these matters.

a.

The Applicant contends that the legislator "in establishing AIMI, intended to create an effective tax on real estate wealth" and "aimed to ensure that properties used for economic activities would not be subject to AIMI taxation, recognizing that mere ownership of such properties does not constitute (and cannot constitute) a factor demonstrating wealth, nor a sufficient indicator of contributive capacity of the owners of such properties" and that "it is evident that the legislative rationale underlying the rule of exclusion, enshrined in no. 2 of Article 135-B of the IMI Code, was based, essentially, on the intention not to overburden fiscally the passive taxpayers who, by virtue of their economic activities, own properties for the pursuit of their corporate purpose".

As for itself, the Applicant alleges that the properties it owns are the true elements of its "productive process (...), whether as rental assets or as true inventories destined for future transformation, intended exclusively for the pursuit of the activity of the same and never to be compared with elements demonstrating wealth", that "ownership of this type of assets constitutes the substratum of all the activity of this Fund", and that "taxing these properties would mean taxing directly an 'economic activity' – something that the legislator expressly intended to avoid by creating AIMI."

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

The Applicant seeks, in summary, in this part, an exclusion from the subjective scope of AIMI, including therein "passive taxpayers who, by virtue of their economic activities, own properties for the pursuit of their corporate purpose" and, specifically and for present purposes, Real Estate Investment Funds.

On this question, the orientation of CAAD jurisprudence has been that taxation operates independently of the nature of the activity developed, and the following decisions may be consulted as examples (regardless of the final decision on the merits or otherwise of the arbitral request):

a) regarding Real Estate Investment Funds – Proc. no. 664/2017-T and Proc. no. 686/2017-T;

b) financial institutions – Proc. no. 676/2017-T;

c) financial leasing institutions – Proc. no. 696/2017-T;

d) construction and urbanization companies – Proc. no. 6/2018-T.

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

"In all this context, the understanding that it was intended to exclude from the scope of the tax properties used for economic activities, under the pretext that it was legislative intent not to overburden fiscally passive taxpayers who own properties by virtue of their corporate purpose, has no support whatsoever in the letter of the law nor in the rational and systematic elements of interpretation." concluding that "the intended extension of the legislative formula used to properties used for the economic activity of the company, regardless of the specific characterization as commercial, industrial or service properties, has no place whatsoever in light of general criteria of legal hermeneutics."

Also in this case, this understanding is followed, noting additionally that the argumentation presented by the Applicant is deficient in several of its assumptions.

Thus, it is not subscribed to that the legislator "in establishing AIMI, intended to create an effective tax on real estate wealth" and it is rather believed that AIMI corresponds in substance to its form, being a supplementary tax to IMI, concretizing what had been the understanding of some, including the Constitutional Court[2], which considered that "item 28.1 of the TGIS was assumed as a 'complementary rate of IMI'".

The conclusions of the Applicant are also not subscribed to, according to which the legislator "aimed to ensure that urban properties used for economic activities would not be subject to AIMI taxation, recognizing that mere ownership of such properties does not constitute (and cannot constitute) a factor demonstrating wealth, nor a sufficient indicator of contributive capacity of the owners of such properties" and that "it is evident that the legislative rationale underlying the rule of exclusion from objective scope, enshrined in no. 2 of Article 135-B of the IMI Code, was based, essentially, on the intention not to overburden fiscally passive taxpayers who, by virtue of their economic activities, own properties for the pursuit of their corporate purpose".

In fact, in this regard, it is believed that the non-impact on economic activities by AIMI was not the ultimate purpose of the legislator in creating AIMI, but rather a factor considered by the legislator at various levels in the design of that legal regime.

Thus, and in the first place, as the Applicant points out, the legislator excluded from AIMI taxation the "urban properties" classified as "commercial, industrial or for services" and "other".

Beyond this, however, the legislator created distinct rates for legal persons and for natural persons, including a surcharge in cases where the taxable value exceeds €1,000,000, restricted to the latter, which cannot fail to be founded, if not entirely, at least largely, on the consideration that the properties owned by legal persons, as a rule, will be used for economic activities.

It is also not believed to be acceptable the understanding that the legislator recognized "that mere ownership of such properties does not constitute (and cannot constitute) a factor demonstrating wealth, nor a sufficient indicator of contributive capacity of the owners of such properties". Indeed, and this will be a notorious reality and, as such, insurmountable, it will be undeniable that a legal person that owns properties valued at €100,000,000.00 manifests a contributive capacity (from the perspective of the tax in question), plainly superior, to another legal person which, with the same purpose, owns properties valued at €100,000.00.

On the other hand, and as already mentioned, AIMI must be understood and treated as such, that is, as a supplementary tax to IMI. Thus, the contributive capacity evidenced by legal persons through the ownership of properties, even if used for their productive activity, is precisely the same, whether with regard to AIMI taxation or with regard to IMI taxation.

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

b.

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

Furthermore, the Applicant states that "having been clear the legislator's intention to exclude, through no. 2 of Article 135-B of the IMI Code, the application of AIMI to properties used for economic activities, it should be understood necessarily that 'land for construction' used for such activities are equally included in that exclusion rule", and that, for the Applicant, "To understand that 'land for construction' intended, according to their respective property records, for purposes of 'commerce, industry, services' or 'other', are subject to AIMI – as has been understood by AT – is manifestly contrary to the spirit of the law and, moreover, is illegal" and that "the applicability of AIMI to this type of 'land for construction' would always demonstrate a manifest inconsistency of the legal regime in question".

The Applicant also points out that "only by mere absurdity would it be comprehensible and adequate to the purposes intended by AIMI the hypothesis that AT would tax 'land for construction' with a potential use of 'industry' and not tax a property (building) with the same use – even if that property is not actually being exploited in the course of an economic activity".

In this context, for the Applicant, "the subjection of these land for construction to AIMI causes a greater tax burden on this type of urban properties and, consequently, cannot fail to have an impact on the economic activities that will potentially be developed in these properties", therefore "the taxation methodology adopted by AT, in the sense of including in the taxable value for purposes of AIMI, the passive taxpayers holding 'land for construction' with the purposes identified by no. 2 of Article 135-B of the IMI Code, constitutes a discriminatory treatment that violates, plain and simple, 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)".

Thus, concludes the Applicant, "the tax act of AIMI, in the part that taxes the 'land for construction' intended for 'commercial, industrial or service' purposes or 'other' – here corresponding to the tax value of €27,260.15 –, is tainted with manifest illegality, due to error in the substantive and legal assumptions, and should be promptly annulled".

With respect to this subsidiary request, the Applicant seeks, in summary, the extension of the objective exclusions from subjection to AIMI, enshrined in no. 2 of Article 135-B of the CIMI, so as to include therein also the urban properties classified as "land for construction", provided that the construction envisaged therein refers to any of the types to which said no. 2 refers, that is, to urban properties intended for "commercial, industrial or service" purposes or "other".

With respect to this issue, now presented in the decision by the Applicant, the arbitral jurisprudence has been divided.

Thus, for example, the decision rendered in proceeding 686/2017-T concluded that it should exclude from AIMI taxation the "land for construction" without residential use, that is, with "commercial, industrial or service" purposes or "other".

This decision, based on the unity of the legal system, defends the possibility of extensive interpretation of the exclusion provided for in no. 2 of Article 135-B of the CIMI, in that case, regarding urban properties classified as "for services", "as expressing a legislative intention to also exclude from taxation the land intended for the construction of such properties".

For the said Arbitral Tribunal, "Given that the taxable fact chosen as an indicator of contributive capacity is the ownership of real estate assets of a 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 that is intended for their construction, especially since the value of the land is incorporated into the value of the buildings.

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

In the decisions rendered in proceedings no. 676/2017-T and 664/2017-T (the first of which concerns Real Estate Investment Funds and the second a credit institution), the claims of the applicants therein were decided unfavorably, in the sense of ruling out the taxation of "land for construction", even if the envisaged construction is for "commercial, industrial or service" purposes.

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

"Having the legislator defined an exclusion clause by express and precise reference to certain species of urban properties that are immediately identifiable in the context of the law, it is not possible to undertake an extensive interpretation in order to include other typologies that the legislator manifestly did not wish to consider. This interpretive result cannot even be reached on the basis of merely pragmatic considerations or of teleological identity".

While it is not contested that from the perspective of fiscal policy the solution could have been different, and with great respect for other opinions, it is believed that the exclusion of taxation of all or part of "land for construction" was not the solution adopted, since no. 2 of Article 135-B of the CIMI only provides for the exclusion of taxation with respect to AIMI of urban properties classified as "commercial, industrial or for services" and "other", precisely in accordance with paragraphs b) and d), of no. 1 of Article 6, which inevitably leads to the taxation of the properties provided for in the two remaining paragraphs of that same Article 6 of the CIMI, that is, urban properties classified as "residential" (paragraph a)) or as "land for construction" (paragraph 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 his clause excluding taxation, intended to exclude a part of the properties referred to in paragraphs a) and c), of no. 1 of Article 6 of the CIMI, he would have had all the possibilities to do so.

Likewise, the legislator could have altered the species of urban properties provided for in Article 6 of the CIMI, for example, by subdividing the land for construction according to the purposes for which they were intended, which did not happen.

With respect to the possibility of extensive interpretation of the exclusion enshrined in said no. 2 of Article 135-B of the CIMI, in order to cover land for construction not intended for residential purposes – a solution adopted in the decisions that accepted similar claims to that of the Applicant, now under examination – it is believed, always with great respect for other understandings, that it should not be accepted.

Thus, and first of all, it is believed that there is no identity of situations in light of the legally relevant criteria, necessary to carry out the said extension of the clause excluding objective subjection, that is, it does not appear that land for construction are in an identical situation to that of built properties, from the perspective of the teleology of that exclusion clause.

From a teleological perspective, such a clause will have underlying it, in the first place[3], the purpose of not burdening with AIMI the properties used or susceptible to immediate use in productive processes, land for construction not being characterized by such features, given that while a built property will be, or will be susceptible to being, immediately used in productive processes, land for construction are not in such a situation.

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

In the words of that high Court[4]:

"For tax purposes, properties (...) are clearly distinguished from land for construction, under Article 6 of the Municipal Property Tax Code (CIMI), the first of which is composed of buildings or existing constructions (...), while the second consists exclusively of land for which the right to build buildings intended for such or other purposes is consolidated by an administrative act of prior control of an urban operation.

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

That is, the taxation of properties (...) affects existing reality, over tangible things, unlike the taxation of land for construction, which affects construction rights, over future things, as indeed evidenced by Article 45 of the CIMI, which establishes that the patrimonial value of the latter is determined exclusively by the volume and quality of the building to be constructed on the land, and not by its current characteristics.

One might rightly say that both of these correspond to real estate assets (...). And that, by their real estate value, both are apt to translate a certain form of wealth. But the comparisons end there, because, precisely, the different nature of these goods does not allow for equating the contributive capacity of their respective owners, current or future, solely on the basis of their use and their taxable patrimonial value (TPV)."

Effectively, already constructed properties possess a material reality corresponding to the typology that belongs to them. That is, to a built and licensed property for, or which has as its normal destination, commerce, industry or services, there corresponds a material reality appropriate for such purposes and, for what matters, objectively distinct from a built and licensed property, or with normal destination, for residential use.

Land for construction, for its part, is distinguished from remaining land purely on a legal plane, that is, based on an action of a public entity (granting of license or authorization, admission of prior communication or issuance of favorable prior information of subdivision or construction operation - cf. Article 6/3 and 37/3 of the CIMI) or of owners (declaration of purpose in the acquisition title; cf. Article 6/3 of the CIMI), to which the Law attributes certain legal effects.

Thus, based on the aforementioned material differentiation, the alteration of the use of land for construction, from the point of view of the notes relevant to the issue in question, may be simple, requiring, for example, merely a declaration in the acquisition title, the submission and admission of a prior communication, or the submission and approval of a prior information request.

By contrast, the alteration of the purpose of a building, from residential to commerce/industry/services, or vice versa, will imply, from a normality perspective, the carrying out of more or less profound works (and necessary licensing).

Additionally, a built property has incorporated a significant value corresponding to the construction, which, even in cases where it is not concretely used for the intended use, will constitute a natural incentive to its economic exploitation since, always from a normality perspective, an unoccupied built property will not only generate no income, but will lose value (based on its degradation) due to non-use.

Land for construction, on the other hand, not only does it not incorporate, in itself, any natural incentive for its building and subsequent use in a productive activity, but, also from a normality perspective, the opposite may occur, that is, based on certain market conditions that create expectations of merely speculative gains, there may be incentives for their respective owners to maintain their condition as unbuilt land.

In this regard, the Applicant states that the subjection of the land for construction in question to AIMI "causes a greater tax burden on this type of urban properties and, consequently, cannot fail to have an impact on the economic activities that will potentially be developed in these properties".

Now, in light of the teleology ascertained for the interpreted rule, set forth above, the fact is that such impact could even be positive, insofar as the taxation of land for construction could constitute an incentive for its building, thus accelerating the effective use of the properties in productive activities.

All of the foregoing, it is believed, will justify a distinction in treatment, in line with the legally enshrined regime, and contrary to the extension of the clause of non-objective subjection through interpretive extension.

Nevertheless, it will always be added that a comprehensive understanding of AIMI within the framework of the IMI regime will point, precisely, in the direction of the legislator's real purpose of subjecting to AIMI all land for construction, and not merely those intended for residential use.

Let us see.

In the design of AIMI, and following what was the evolution of taxation under item 28.1 of the CIS, the legislator made it clear (due, first of all, to the nomenclature and systematic nature of the taxation created, as well as to the express referral to the relevant IMI norms) his intention that the categories relevant to the taxation in question be delineated in accordance with the criteria specific to the CIMI.

And, under this Code, land – which is the category that now concerns us – can fall into the categories of:

• rustic; or
• urban;
  • "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 classified as "rustic", by way of exclusive subjection of urban properties in no. 1 of Article 135-A, and land classified as "urban" intended for "other" purposes, by way of the exclusion clause of no. 2 of that aforementioned article, the non-exclusion of land "for construction" of buildings with certain purposes (namely commerce, services or industry) cannot fail to be considered sufficiently based on considerations of a material nature, as already seen.

Finally, it should not fail to be considered relevant in this matter that the Administrative Supreme Court has understood that for the determination of the TPV of land for construction, the intended use of the envisaged building is irrelevant.

Thus, in the Decision of the Administrative Supreme Court of 20-04-2016, rendered in proceeding 0824/15[5], it was held that:

"It follows from this norm that the formula transcribed above only applies to urban properties there discriminated, that is, those which, already built, are for residential, commercial, industrial and service purposes.

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

For the determination of the taxable patrimonial value of the same there is the aforementioned Article 45 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 concern buildings as such.

The use coefficient can only be relevant in light of the proven use of the built property and likewise the comfort and quality coefficient.

Such coefficients multiplying the taxable patrimonial value only concern what is built but do not have a real basis of support in the potential that the land for construction offers."

And, further on, in the same decision:

"But taking into account reality, the legislator enshrined for the determination of the taxable patrimonial value of this species of property a specific rule – that contained in Article 45 where it is reiterated that the value of the area of implantation of the building to be constructed and the value of the land adjacent to the implantation are taken into account, as well as the characteristics of accessibility, proximity, services and location described in no. 3 of Article 42. Taking into account the approved construction project and the provisions of no. 2 of Article 45 of the C.I.M.I.

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

And being so, the coefficients of use and of quality and comfort related to the property to be built also cannot and should not be taken into account in that evaluation.

Indeed, the use coefficient relates to the type of use of the already built property and the same applies to the quality and comfort coefficient.

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

The aforementioned understanding was sanctioned by a decision of the Full Panel of the Tax Contentious Division of the Administrative Supreme Court of 21-09-2016, rendered in proceeding 01083/13[6], in whose summary it is synthesized that:

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

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

V - The comfort and quality coefficient, a multiplying factor of the taxable patrimonial value contained in the mathematical expression of Article 38 of the CIMI with which the taxable patrimonial value of urban properties for residential, commercial, industrial and service purposes is determined, cannot be applied analogically as it is liable to alter the tax base, interfering with the incidence of the tax."

Thus, it is concluded that in determining the TPV within the CIMI framework, the intended purpose of the envisaged construction in "land for construction" is irrelevant, with land for construction of residential buildings and land for construction of buildings for commerce, industry or services not being distinguished, from the perspective of patrimonial taxation and, consequently, of the demonstration of contributive capacity.

By contrast, and based on the application of the use coefficient enshrined in Article 41 of the CIMI, in built buildings, the intended use of the buildings has an impact on patrimonial value, and consequently on contributive capacity, considered for purposes of taxation.

In the context of AIMI, in light of what has already been set forth regarding the nature of this taxation (as a supplementary tax to IMI), there will be no justifications to diverge from such criterion, that is, to consider that the ownership of "land for construction" with buildings projected for distinct purposes signals different contributive capacities.

Taking into account all that has been set forth, considering that the extension by way of extensive interpretation of the objective exclusions from subjection to AIMI, enshrined in no. 2 of Article 135-B of the CIMI, should not be carried out, so as to include therein also urban properties classified as "land for construction", provided that the construction envisaged therein refers to any of the types to which said no. 2 refers, that is, to urban properties intended for "commercial, industrial or service" purposes or "other", this arbitral request should also be dismissed.

c.

Also on a subsidiary basis, the Applicant believes that the regime of AIMI taxation is contrary to the principle of equality, enshrined in Article 13, and to the principle of tax equality and contributive capacity enshrined in Article 104, no. 3, both of the CRP, insofar as, in its understanding, the legal regime of AIMI, specifically its Articles 135-A and 135-B, both of the IMI Code, and the taxation resulting therefrom, promote differentiated treatment and unjustified inequality among taxpayers, and "the application of AIMI to the real estate assets held by entities dedicated to real estate exploitation (here understanding the purchase, sale, construction, promotion and rental), could only stem from the idea that such properties, productive factors of these companies and means for the exercise of their economic activity, constitute an indicator of increased contributive capacity – which cannot be accepted".

The Applicant also relies, in this matter, on Constitutional Court Decision no. 250/2017, of 24 May 2017, rendered in proceeding no. 156/20, already cited above.

In this matter, the Applicant repeats in large part arguments previously presented.

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

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

The answer to such question, as also already seen, goes in the direction of there being a substantial difference between land for construction and already-built buildings, the latter being susceptible to being, or being immediately used in the activities for which they are intended, contrary to the former.

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

The Applicant further alleges in this regard that "should it be accepted that AIMI taxation applies to the real properties held by these entities, the real estate sector would indeed be penalized, which, naturally, having no rational justification, cannot be accepted" and that "entities in this sector would thus assume an additional burden in relation to the generality of companies, based on a 'hypothetical indicator of contributive capacity' that has no correspondence with reality".

In this regard, as also already seen, the contributive capacity in question is the same as that of IMI, to which AIMI is added, and the legislator opted for enshrining lighter taxation rates for legal persons, in relation to natural persons.

As for the fiscal burden on the real estate sector, in relation to other sectors, note, first of all, that within the economic sector in question, companies are treated equally, and this falls within the scope of the legislator's freedom of action, being, moreover, a common and accepted practice, the interference in economic activities, fiscally incentivizing some, and fiscally burdening others.

Additionally, in the case in question, contrary to what the Applicant points out, we are not faced with a burden, but rather with a non-exemption.

For, properly viewed, the normative structure created for AIMI consists of a general scope thereof, overlaying the properties subject to IMI, followed by the withdrawal of the incidence regarding certain types of property, seeking, in the first place, that an exclusion from the subjective scope of subjection be recognized, and rising up, in the second place, against the scope of the said clause excluding objective incidence.

Thus, it is not the Applicant – or the properties held by it and on which tax was assessed – that are, in being taxed, faced with an exceptional situation of burden, but rather the sought non-burden – by way of subjective or objective exclusion – which, if recognized, would be characterized by an exceptional nature.

Furthermore, the Applicant's argumentation on constitutionality ends up reflecting certain argumentation in the constitutional jurisprudence relating to, subsequently repealed, taxation under item 28.1 of the Stamp Tax Code, namely that which was condensed in the already several times cited Constitutional Court Decision no. 250/2017, of 24 May 2017, rendered in proceeding no. 156/2016, also invoked by the Applicant.

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

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

• "if behind the tax imposed on the owner of a residential home with patrimonial value exceeding one million euros there could be a taxpayer with sufficient economic strength to bear the respective tax burden, behind the tax imposed on the owner of land for construction there will normally be an entrepreneur, as a rule in the form of a commercial company dedicated to real estate development, about whose economic strength we know nothing. In fact, we cannot presume that such a taxpayer has an economic strength proportional to the value of the land, which is merely instrumental in relation to his economic activity. We are unaware of what profit margin he will derive from its exercise, if he is in the legal and economic conditions to develop it, or if he may not even have a negative net situation.";

• "the different reality of the taxation of land for construction, which has more of an impact on the economic activity developed by its owner than on the value of the asset in itself. With the aggravating circumstance that the respective tax burden, if it does not definitively render that activity unviable, will end up being borne by the final consumer of the real estate products resulting therefrom, of whose contributive capacity we cannot presume anything 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 residential home in a tourist undertaking in the Algarve and to land for construction of a collective residential building under cooperative regime in the metropolitan suburbs of Lisbon or Porto."

Thus, from the said Constitutional Court decision, it seems possible to draw the understanding, sustained by the Applicant, that the non-consideration of the purpose of the real property ownership and/or the quality of the subject that owns it could generate the unconstitutionality of the tax.

However, this understanding is not subscribed to, in line with the dissenting vote issued in the aforementioned decision, by the Illustrious Counselor Manuel da Costa Andrade.

Thus, and the Constitutional Court itself evidences this, one thing is the taxation of income, another is that of assets, the latter, by nature, will essentially consider the patrimonial value of the goods owned, and not the personal situation of its holder, being, even based on reasons of practicability, reduced the factors of personalization.

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

Indeed, the said considerations will, first of all, and simply, be directly transposable to IMI, to Vehicle Transfer Tax, to Vehicle Circulation Tax, to Excise Duties, to Corporate Income Tax and even, in some way, to VAT. Also there the tax facts abstract, often precisely in the same manner, if not even more pronouncedly, from the personal situation of their respective passive taxpayers.

Thus, also in the context of such taxes, it is not distinguished, as a rule, manifestations of wealth (contributive capacity) from factors of production of that same wealth (that is, a taxable fact subject to IMI, Vehicle Transfer Tax, Vehicle Circulation Tax, Excise Duties, Corporate Income Tax, will abstract, as a rule, from the circumstance that the same occurred within the framework of "consumption" [broadly speaking] or "production of wealth"), and the differentiation will occur, as in the case of AIMI, by way of the consideration as a cost of the tax borne, in the context of income tax (cf. Article 23/2/f) of the Corporate Income Tax Code).

Additionally, there are other situations peacefully accepted - precisely in deference to the principle of practicability - of abstraction from the personal situation of passive taxpayers, significantly more evident than those pointed out by the Constitutional Court, which, if the understanding of that High Court were accepted, would be irremediably affected by unconstitutionality. Consider, for example, the situation of someone who acquires a real property by resorting to credit secured by the mortgage of the same property, being, from a perspective not only personal but also patrimonial, evident the disparity of contributive capacity ("wealth") between the said passive taxpayer and the holder of a property of equal value, but fully paid.

On the other hand, properly understood, it is believed that the concerns of the Constitutional Court relate more to the method of valuation of assets than to their subjection. That is, should the patrimonial value be justly fixed, and using the example used by the Constitutional Court, the owner of a luxury residential home in a tourist undertaking in the Algarve and of land for construction of a collective residential building under cooperative regime in the metropolitan suburbs of Lisbon or Porto, will evidence, from the perspective of patrimonial value, the same contributive capacity, that is, will be holders of a property with identical patrimonial value.

Thus, and in light of the foregoing, it is believed that consequences should not be drawn from the Constitutional Court jurisprudence in question, in the context of the constitutionality of the AIMI norms, applied in the case, namely with respect to the violation of the Constitutional norms pointed out by the Applicant, the arbitral request thus being dismissed in this part as well.

C. DECISION

Therefore, this Arbitral Tribunal decides to judge the arbitral request entirely lacking in merit and, as a consequence:

• Absolves the Respondent of the request;

• Maintains in the legal order the tax acts that are the subject of the present arbitral action; and

• Condemns the Applicant to the costs of the proceedings, in the amount fixed below.

D. Process Value

The process value is fixed at €116,874.15, under the terms of Article 97-A, no. 1, a), of the Code of Tax Procedure and Process, applicable by virtue of paragraphs a) and b) of no. 1 of Article 29 of RJAT and of no. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is fixed at €3,060.00, under the terms of Table I of the Regulation of Costs in Tax Arbitration Proceedings, payable by the Applicant, since the request was entirely lacking in merit, under the terms of Articles 12, no. 2, and 22, no. 4, both of RJAT, and Article 4, no. 4, of the aforementioned Regulation.

Let notification be made.

Lisbon, 06 September 2018

The President Arbitrator

(José Pedro Carvalho)

The Arbitrator Member

(Olívio Mota Amador)

The Arbitrator Member

(Paulo Ferreira Alves – dissenting, as per statement of dissent)

STATEMENT OF DISSENT

I voted in dissent from the award, while agreeing entirely with the decision of lack of merit regarding:

• illegality, due to errors in the substantive and legal assumptions, of the application of AIMI to investment funds for the ownership of real property within the scope of their activity; and

• 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 tax equality and contributive capacity enshrined in Article 104, no. 3 of that Fundamental Law.

I disagree with the decision of lack of merit regarding the request regarding the illegality of taxation of "land for construction" intended for "commercial, industrial or service" purposes or "other", insofar as they are not encompassed by the objective scope of the norms under analysis;

For the following reasons:

On this theme, CAAD has already ruled, in proceedings 668/2017-T, 675/2017-T, 681/2017-T and 688/2017-T, in which it decided in the sense that land for construction with commercial, industrial or service use are encompassed by the exclusion of taxation provided for in Article 135-B of the CIMI, and are subsequently not subject to AIMI.

Following the aforementioned jurisprudence, which I subscribe to, it can be stated that the creation of AIMI, as a complementary tax on real estate assets, which aimed to introduce in taxation "a progressive element of personal basis, taxing more highly the more substantial assets" (Report on the Budget for 2017, page 60) is compatible with the objective that the taxation of assets should contribute to equality among citizens, stated in no. 3 of Article 104 of the CRP, since progressivity has as a corollary, tendentially, the imposition of higher taxation on those with greater contributive capacity.

Furthermore, the exclusion of taxation of properties specifically intended for productive activity, namely "commercial, industrial or service" properties, finds constitutionally acceptable foundation in the obligation of the State to promote the increase in economic well-being, which presupposes the proper functioning of productive activities and constitutes one of its priority tasks within the economic sphere [Article 81, paragraph a), of the CRP].

In addition, in line with what was understood in the arbitral award in proceeding no. 507/2015-T, it should be understood that, while the ownership of high-value real estate assets intended for residential use is a tendency secure indicator of economic abundance, superior to that of the generality of citizens, one cannot consider that there exists a secure indicator of superior contributive capacity when it is a matter of the ownership of rights over properties intended for the exercise of economic activities (commercial, industrial, provision of services or similar), since they must be adequate to the functioning of the respective companies, their size and correlative value not being an indicator of abundance.

As has been 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 be treated equally and those in unequal situations be treated unequally, so as not to create arbitrary and unreasonable discriminations, because lacking sufficient material foundation. The principle of equality does not prohibit the establishment of distinctions, but rather distinctions devoid of objective and rational justification.

Thus, the restriction of the scope of AIMI to residential properties and land for construction of residential properties, which came to be enshrined in the wording approved for no. 2 of Article 135-B of the CIMI, in the interpretation adopted above, will have constitutionally acceptable foundation.

Given that the taxable fact chosen as an indicator of contributive capacity is the ownership of real estate assets of value considered substantial, it will not have coherence not to apply the tax to buildings intended for services and to apply it to land intended for their construction, whose value is incorporated in the value of the buildings.

Thus, in a perspective that bears in mind the unity of the legal system (Article 9, no. 1, of the Civil Code), which has decisive interpretive value, imposed by the principle of evaluative or axiological coherence of the legal order, there should be interpreted extensively the exclusion provided for in no. 2 of Article 135-B of the CIMI relating to urban properties classified as "for services" as expressing a legislative intention to also exclude from taxation land intended for the construction of such properties.

In any event, upon adopting a literal interpretation of this norm, with the meaning that all land for construction are encompassed by AIMI incidence, it will be materially unconstitutional, being incompatible with the principle of equality (Article 13 of the CRP), in considering as a taxable fact the ownership of land for construction of properties intended for services and not the ownership of the properties built therein, as it constitutes a underprivileged treatment of taxpayers in the first situation, without material justification, since the contributive capacity indicated by real estate assets in that situation must necessarily be less than in the second.

In situations of unjustified discriminatory treatment, reflected in the imposition of a duty or burden with violation of the principle of equality, what is illegitimate is, in principle, the act of imposing the duty only on some taxpayers, the inequality being resolved with the elimination of duties or burdens for those with whom they were discriminatorily burdened.

Based on the foregoing, in my opinion, the AIMI assessment impugned suffers from a defect of violation of law, due to error regarding the legal assumptions, embodied in the erroneous interpretation and application of the provisions of Article 135-B, no. 2, of the IMI Code, insofar as it includes in the taxable value the taxable patrimonial value of land for construction, and therefore its annulment is justified, in that part, in accordance with the provisions of Article 163, no. 1, of the Administrative Procedure Code, subsidiarily applicable under the terms of Article 2, paragraph c), of the General Tax Law.

Therefore, the request for arbitral ruling could not, with due respect, have been judged lacking in merit.

Paulo Ferreira Alves

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

[2] See Decision of 24-05-2017, rendered in proceeding 250/2017, available at: http://www.tribunalconstitucional.pt/tc/acordaos/.

[3] Without prejudice to some marginal situations concerning properties used for public services or non-business activities, encompassed by the species "other".

[4] See Decision rendered in proceeding 250/2017, already cited.

[5] Available at www.dgsi.pt.

[6] Ibid.

[7] With the exception, as from 2018, of municipal companies; cf. no. 4 of Article 135-A of the CIMI.

[8] Essentially in this direction, the following Constitutional Court decisions may be consulted, among others:

• no. 143/88, of 16-6-1988, rendered in proceeding no. 319/87, published in the Official Gazette of the Ministry of Justice no. 378, page 183;
• no. 149/88, of 29-6-1988, rendered in proceeding no. 282/86, published in the Official Gazette of the Ministry of Justice no. 378, page 192;
• no. 118/90, of 18-4-90, rendered in proceeding no. 613/88, published in the Official Gazette of the Ministry of Justice no. 396, page 123;
• no. 169/90, of 30-5-1990, rendered in proceeding no. 1/89, published in the Official Gazette of the Ministry of Justice no. 397, page 90;
• no. 186/90, of 6-6-1990, rendered in proceeding no. 533/88, published in the Official Gazette of the Ministry of Justice no. 398, page 81;
• no. 155/92, of 23-4-1992, rendered in proceeding no. 204/90, published in the Official Gazette of the Ministry of Justice no. 416, page 295;
• no. 335/94, of 20-4-1994, rendered in proceeding no. 61/93, published in the Official Gazette of the Ministry of Justice no. 436, page 129;
• no. 468/96, of 14-3-1996, rendered in proceeding no. 87/95, published in the Official Gazette of the Ministry of Justice no. 455, page 152;
• no. 1057/96, of 16-10-1996, rendered in proceeding no. 347/91, published in the Official Gazette of the Ministry of Justice no. 460, page 284;
• no. 128/99, of 3-3-1999, rendered in proceeding no. 140/97, published in the Official Gazette of the Ministry of Justice no. 485, page 26.

[9] In the case in question, the issue only arises with respect to land for construction of a building or buildings intended for services.

[10] BAPTISTA MACHADO, Introduction to Law and Legal Discourse Legitimation, page 191.

[11] Essentially in this direction, GOMES CANOTILHO and VITAL MOREIRA, Constitution of the Portuguese Republic Annotated, volume I, 4th edition, 2007, page 344.