Process: 691/2017-T

Date: August 6, 2018

Tax Type: IMI

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 691/2017-T) addresses the controversial application of AIMI (Adicional ao Imposto Municipal sobre Imóveis) to closed-end real estate investment funds in Portugal. A real estate investment management company, acting on behalf of a closed special real estate investment fund, challenged an AIMI assessment of €169,217.29 for 2017. The claimant argued that AIMI should not apply to fund properties because the tax excludes urban properties classified as commercial, industrial, or for services under Article 135-B(2) of the IMI Code. The fund contended that its properties, held for economic activities rather than personal wealth, should be exempt from AIMI taxation. Subsidiarily, the claimant argued that land for construction with commercial or industrial potential should be excluded, and that applying AIMI to investment funds violates constitutional principles of equality and tax fairness under Articles 13 and 104(3) of the Portuguese Constitution. The Tax Authority defended the assessment, emphasizing that AIMI's objective scope is determined solely by property classification (residential or land for construction), not by the property owner's nature or economic activity. The Authority argued that accepting the fund's interpretation would constitute an abrogating interpretation exceeding judicial powers and violating the separation of powers principle. This case highlights fundamental tensions between Portugal's wealth tax objectives and the treatment of institutional real estate investors, raising important constitutional questions about tax equality and the scope of AIMI exemptions for properties held within collective investment structures.

Full Decision

ARBITRAL DECISION

The arbitrators, Dr. Judge José Poças Falcão (presiding arbitrator), Dr. A. Sérgio de Matos and Dr. Mariana Vargas (member arbitrators), appointed by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 6 March 2018, agree as follows:

REPORT

On 29 December 2017, A... – Real Estate Investment Management Company, SA, with Tax Identification Number ... and registered at ..., no. ..., ..., ...-..., acting as a management company and on behalf of B... - Closed Special Real Estate Investment Fund, with Tax Identification Number ... (hereinafter referred to as the Claimant), came, pursuant to the provisions of Articles 2, No. 1, paragraph a) and 10, Nos. 1 and 2, of Decree-Law No. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters (RJAT) and Articles 1 and 2 of Order No. 112-A/2011, of 22 March (Binding Order), to request the constitution of an Arbitral Tribunal, in which the Tax and Customs Authority (hereinafter AT or Respondent) is the Respondent, informing that it does not intend to exercise the discretion to appoint an arbitrator.

The request for constitution of the arbitral tribunal was accepted by His Excellency the President of CAAD and automatically notified to AT, and, pursuant to the provisions of paragraph a) of No. 2 of Article 6 and paragraph b) of No. 1 of Article 11 of the RJAT, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated their acceptance of the assignment within the applicable time limit.

A. Subject Matter of the Request:

The Claimant seeks a declaration of illegality and the consequent annulment of the assessment of the Additional Municipal Property Tax ("AIMI") with No. 2017..., issued by the Tax and Customs Authority ("AT") in the name of B... - Closed Special Real Estate Investment Fund, with reference to the year 2017, in the total amount of €169,217.29.

B. From the Initial Petition:

Reference is made to the initial petition, attached to the request for constitution of the arbitral tribunal, to the AIMI assessment No. 2017..., issued by AT in the name of C... – Closed Real Estate Investment Fund, with Tax Identification Number..., for the sum of €116,874.15, as per the documents attached thereto.

Therein is formulated the claim for annulment of the tax act of the AIMI assessment identified, due to errors in the factual and legal premises, as well as condemnation of the Respondent to reimburse the amount of €116,874.15, plus compensatory interest at the legal rate, until the full restitution of that sum.

As grounds for the request, the Claimant invokes, in summary:

. The legal regime of the AIMI, established by Law No. 42/2016, of 28 December, excludes from the incidence of the tax urban properties classified as "commercial, industrial or for services" and "other", in accordance with paragraphs b) and d) of No. 1 of Article 6 of the Municipal Property Tax Code (CIMI), with only urban properties allocated to residential purposes and land for construction, as defined in that Article 6, being covered;

. It was the legislative intention to proceed with the creation of a tax on real estate wealth, in which urban properties allocated to economic activities would not be subject to AIMI taxation, recognizing that mere ownership of these properties does not constitute a factor demonstrating wealth, nor a sufficient indicator of the contributory capacity of their respective holders;

. The legal reasoning that underlay the rule of exclusion from objective incidence, enshrined in No. 2 of Article 135-B of the IMI Code, was based essentially on the intention not to excessively burden taxpayers who, by virtue of their economic activities, hold properties for the pursuit of their corporate purpose;

. In this way, AIMI cannot be levied on the properties of the Fund.

Subsidiarily, the Claimant requests that the assessment act identified be partially annulled in the amount of €27,260.15, on the grounds that the value of "land for construction" whose potential use coincides with "commercial, industrial or services" purposes cannot be considered in determining the tax property value subject to AIMI, in violation of the constitutional principle of equality.

Further subsidiarily, the Claimant maintains that the legal regime of the AIMI is contrary to the constitutional principle of equality and to the principles of fiscal equality and contributory capacity, enshrined in Articles 13 and 104, No. 3, of the CRP, requesting the non-application, to the concrete case, of Articles 135-A et seq. of the IMI Code, with the consequent annulment of the tax act challenged.

C. From the Respondent's Reply:

Following the notification order in accordance with the provisions of Article 17 of the RJAT, AT submitted its reply on 20 April 2018, notified to the Arbitral Tribunal and the Claimant on the same date, in which the Respondent raised, as a preliminary question, the failure to attach the four documents (of the assessment and proof of payment of the tax) to which the Claimant refers at the end of the initial petition, which are not in the file.

The Respondent further argued that both the initial petition and the documents attached thereto relate to another AIMI assessment and another taxpayer, which are not those identified in the request for constitution of the arbitral tribunal.

However, should the Claimant proceed to attach the relevant documentation, AT manifested its intention not to waive its right to exercise the right to be heard.

Defending the legality of the assessments, the Respondent makes observations on the legal and tax framework of the AIMI and its rules on personal and objective incidence, arguing, in summary:

. The real nature of AIMI taxation, with respect to legal entities and equivalent structures;

. The express choice of the legislator to tax properties classified as residential or as land for construction, even if they form part of the assets of companies, by not including them in the negative delimitation of incidence which only covers urban properties classified as "industrial, commercial or for services" and "other";

. The scope of objective incidence of AIMI is defined solely by the classification of properties and not by their link to a particular economic activity;

. The Claimant seeks an abrogating interpretation of the rule, introducing a meaning different from that established by the legislator in the letter of the law, albeit imperfectly expressed, thus broadening the scope of the exclusion from taxation to cover all properties held by the Funds;

. But, if such abrogating interpretation of the law were to be accepted, it would violate the constitutional principle of separation and interdependence of powers, enshrined 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 their function within the Rule of Law (cf. Articles 202 and 203 of the CRP);

. The AIMI aims to reach a portion of the patrimony of taxpayers, applying to immovable property constituting a patrimony, legally recognizable as capital of a given entity (individual or collective), regardless of whether it is allocated to any productive process or income-generating activity (No. 1 of Article 135-B of the IMI Code);

. The legislator opted in No. 2 of Article 135-B of the IMI Code for a negative delimitation of incidence, excluding from AIMI properties which, by their potential allocation, can be economically recognized as factors of production, as capital, or that is, as intermediate goods which, combined with other factors of production, produce new utilities;

. The criterion adopted is intended to be universally objective, inducing greater uniformity and equality in the treatment of properties subject to taxation, to the detriment of other criteria that would appeal to case-by-case verifications of the actual use of properties;

. The concern to ensure "the absence of impact on economic activity" did not lead to the exclusion from the incidence of the tax of commercial companies and other equivalent entities which, because their object is the pursuit of economic activities, would be affected to a greater or lesser degree by the burden of the tax;

. In fact, the negative delimitation of incidence was enshrined in objective incidence and not in subjective incidence;

. The assets in question, especially land for construction, are not merely instrumental to the exercise of the Fund's activity, but form part of the very core of the economic activity, are the subject of commerce or industry, as they are intended for resale or, in the case of land for construction, also for transformation in the event that constructions are erected thereon for subsequent sale;

. The immovable property excluded from AIMI liability, in accordance with No. 2 of Article 135-B of the CIMI, is that which performs an instrumental function to industrial, commercial or service economic activities, insofar as it constitutes buildings that serve to support the functioning of those activities, and are not in themselves generators of income;

. Funds such as that represented 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 of designing the taxation of Funds, as much as possible, in the same terms as the persons who invest directly in the immovable or movable assets that constitute their respective patrimonies would be taxed;

. Since the substrate of the activity of Real Estate Investment Funds is constituted by real rights over immovable property, if the legislator were to grant them a regime of exception, it would be privileging indirect investment in immovable assets through recourse to this financial product and opening the door to tax evasion behaviour;

. The legislator, by extending the scope of incidence to entities whose corporate purpose coincides with the exercise of economic activities, demonstrated that it was not its intention to leave outside the reach of AIMI all properties whose ownership belongs to such entities, under pain of creating a tax incentive for the transfer of properties by individuals, having as destination, in particular, Closed Real Estate Investment Funds;

. There is no unconstitutionality due to violation of the principles of equality and contributory capacity;

. Nor can the Tax and Customs Authority refrain from applying the law on the grounds of unconstitutionality, as it is subject to the principle of legality;

. Should it be concluded that the AIMI legal regime is unconstitutional, compensatory interest is not owed.

The AT further raises, in Articles 94 et seq. of its Reply, the question of the competence of the Arbitral Tribunal to address the issue of AIMI taxation of land for construction whose potential allocation is the construction of an urban property intended for commerce, industry or services.

The AT concludes by requesting that, should the Claimant proceed to attach the missing documents, a time limit be granted for the Respondent entity to exercise its right to be heard; that the present request for arbitral decision be judged entirely without merit and unproven, absolving the Respondent of all claims, with the due and legal consequences or, if deemed otherwise, that, by appeal to the provisions of Articles 280, No. 3 of the CRP and 72, No. 3 of the Constitutional Court Law, notification of the arbitral award be made to the Public Prosecutor's Office.

D. On the Competence of the Arbitral Tribunal

As for the alleged lack of material competence of the Arbitral Tribunal to decide on the question of unconstitutionality of the subjection to AIMI of land for construction whose potential use coincides with "commercial, industrial or services" purposes invoked by the Respondent, it may be said from the outset that the Respondent is mistaken, since arbitral tribunals in tax matters have the competence legally defined by Article 2 of the RJAT, in which falls, in accordance with paragraph a) of its No. 1, the declaration of illegality of acts assessing taxes, as is the case in the present proceedings, regardless of the defects imputed to them by taxpayers.

Since the question is raised in the context of assessing the legality of an assessment act, for which the Arbitral Tribunal is competent, we are faced with a concrete review of constitutionality, since courts are forbidden to apply "rules that infringe the provisions of the Constitution or the principles enshrined therein", as stated in Article 204 of the CRP.

E. On the Failure to Attach Documents Supporting the Request

The Respondent entity's Reply was received on 20 April 2018 and was notified to the Arbitral Tribunal and the Claimant on the same date.

On 6 June 2018, a request by the Claimant, sent by e-mail, was entered in the file and notified to the Respondent and the Arbitral Tribunal, the content of which is transcribed:

"Following the Reply presented by AT on 20.04.2018, we hereby inform you that we do not intend to produce arguments, oral or written, in the context of the aforementioned proceedings.

Additionally, we inform you that we have no objection to the dispensation with the holding of the meeting provided for in Article 18 of the RJAT.

Finally, and in the context of the principle of cooperation of the parties in the proceedings, I send, attached, the request for arbitral decision in word format".

The request for arbitral decision in word format was not received by the Arbitral Tribunal together with the notification of the aforementioned request.

On 8 June 2018, an Arbitral Order was issued, notified to the Parties on 11 June 2018, in which the holding of the meeting referred to in Article 18 of the RJAT was dispensed with, both Parties were invited to submit, within a simultaneous period of 20 (twenty) days – Articles 29 of the RJAT, 91, No. 5 and 91-A of the CPPT – written submissions of fact (essential facts which they consider proved and not proved) and of law, the date of 3 September 2018 was fixed for the delivery of the final decision, requesting the Parties, under the principle of cooperation, to send the pleadings and submissions in editable format (Word) in order to facilitate and shorten the preparation of the final decision.

In response to the Arbitral Order just referred to, the Claimant sent to the file a request, the content of which is reproduced:

"Following the arbitral order issued today, and as already mentioned in our email of 06.06.2018, we hereby inform you that we do not intend to produce arguments, oral or written, in the context of the aforementioned proceedings.

Additionally, we hereby resend, attached, the proof of payment of the remaining arbitration fee which was already sent to CAAD on 18.05.2018.

Finally, and as requested, we hereby send, attached, the request for arbitral decision in word format.".

The request for arbitral decision attached to the Claimant's request of 11 June 2018, in the name of B... - Closed Special Real Estate Investment Fund, corresponds to the request for constitution of the arbitral tribunal of 29 December 2017, without the supporting documents of the alleged facts being attached thereto.

The Respondent entity also sent to the file, on the same previous date and following the notification of the Claimant's request, a request in which it informed that it had nothing further to add to the reply presented, which it reiterates and states is reproduced, and thus had no objection either to the dispensation with the holding of the aforementioned meeting and the production of submissions.

II. PRELIMINARY EXAMINATION

The Arbitral Tribunal is competent and was regularly constituted on 6 March 2018, in accordance with the provisions of paragraph c) of No. 1 of Article 11 of Decree-Law No. 10/2011, of 20 January, as amended by Article 228 of Law No. 66-B/2012, of 31 December.

The parties have legal personality and capacity, are legitimate and are legally represented, in accordance with Articles 4 and 10 of the RJAT and Article 1 of Order No. 112-A/2011, of 22 March.

The proceedings do not suffer from defects that render them invalid.

No exceptions were raised that the Arbitral Tribunal must consider and decide.

III. REASONS

III.1 FACTUAL MATTER

In the decision, the judge shall distinguish proven from unproven facts, giving reasons for their decisions (Article 123, No. 2, of the Code of Procedure and Tax Proceedings [CPPT], subsidiarily applicable to tax arbitral proceedings, in accordance with Article 29, No. 1, paragraph a), of the RJAT), under penalty of nullity, provided for in No. 1 of Article 125 of the same CPPT.

A. Proven Facts:

  • The AIMI assessment No. 2017... was issued by AT in the name of B... - Closed Special Real Estate Investment Fund, with reference to the year 2017, for the total amount of €169,217.29 (Article 1 of AT's Reply);

  • The sum of the tax property value considered as taxable matter of the tax relates to properties classified as "residential" and "land for construction" (Article 2 of AT's Reply);

  • The subsidiary request for partial annulment of the AIMI assessment No. 2017... relates to the amount of €148,060.18 (Articles 1 and 95 of AT's Reply).

B. Unproven Facts:

a) The identification of the urban properties owned by B... - Closed Special Real Estate Investment Fund represented by the Claimant on which the AIMI assessment was levied was not proved;

b) It was not proved that, among the properties whose tax property value forms part of the taxable matter of the tax assessed in the AIMI assessment No. 2017..., those classified as "land for construction", whose potential use coincides with "commercial, industrial or services" purposes, appear, nor what their respective tax property values are;

c) It was not proved that the Claimant proceeded to pay the assessed tax.

C. Reasoning for Proven and Unproven Factual Matter:

Regarding the factual matter, the Tribunal need not pronounce on all that was alleged by the parties; rather, it is their duty to select the facts that matter for the decision and to distinguish proven from unproven facts.

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

Thus, having regard to the fact that the Claimant only attached to the file four documents relating to another AIMI assessment and another taxpayer, documents which AT contests (Article 8 of the Reply), the facts are considered as proven and unproven, respectively, as set out above.

III.2 ON THE LAW

Order of Consideration of the Defects

In accordance with the provisions of No. 1 of Article 124 of the CPPT, subsidiarily applicable to tax arbitral proceedings, in accordance with Article 29, No. 1, paragraph a) of the RJAT, in the absence of defects that lead to the declaration of non-existence or nullity of the challenged act, the tribunal should consider the defects invoked that determine its voidability, with No. 2, paragraph b) of the same article providing that, as to these latter, the order of their consideration shall be that indicated by the challenger, whenever a relationship of subsidiarity is established between them, without prejudice to the priority consideration of defects whose acceptance would assure the most stable or effective protection of the interests offended.

The Claimant formulates subsidiary requests, and their consideration shall follow the order indicated by it.

On the Scope of Incidence of the AIMI. Urban Residential Properties and Land for Construction Allocated to Economic Activities

Articles 135-A to 135-K of the IMI Code contain the regime of the Additional Municipal Property Tax (AIMI), created by Law No. 42/2016, of 28 December, which approved the State Budget for 2017, with Article 135-A addressing subjective incidence and Article 135-B addressing objective incidence.

In accordance with that first article, "Taxpayers of the additional municipal property tax are individuals or legal entities that are owners, usufructuaries or superficiaries of urban properties located in Portuguese territory", with "any structures or centers of collective interests without legal personality that appear in the matrices as taxpayers of the municipal property tax" being "treated as legal entities", on "the date of 1 January of the year to which the additional municipal property tax applies.".

The scope of objective incidence of the AIMI, as delimited by Article 135-B of the IMI Code, encompasses "the sum of the tax property values of urban properties situated in Portuguese territory of which the taxpayer is the owner" (No. 1), except those that are "classified as «commercial, industrial or for services» and «other» in accordance with paragraphs b) and d) of No. 1 of Article 6 of this Code." (No. 2).

The following is the wording of Article 6 of the IMI Code:

"Article 6 - Types of Urban Properties

1 - Urban properties are 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 structures licensed for such purposes or, in the absence of a license, that have as their normal purpose each of these uses.

3 - Land for construction is considered to be land situated inside or outside an urban agglomeration for which a license or authorization has been granted, prior notice admitted or favorable preliminary information issued for a subdivision or construction operation, and also those that have been declared as such in the acquisition title, with the exception of land on which the competent entities prohibit any of those operations, namely those located in green areas, protected areas or which, in accordance with municipal land use plans, are allocated to public spaces, infrastructures or facilities.

4 - Those set out in paragraph d) of No. 1 include land situated inside an urban agglomeration that are not land for construction nor fall within the scope of No. 2 of Article 3 and also buildings and structures licensed or, in the absence of a license, that have as their normal purpose other uses than those referred to in No. 2 and also those in the exception of No. 3.".

The Claimant argues that it was the legislative intention to proceed with the creation of a tax on real estate wealth, in which urban properties allocated to economic activities would not be subject to AIMI taxation, and that therefore, AIMI cannot be levied on the properties owned by the Fund it represents, with the impugned assessment being marred by error on the factual and legal premises.

It is true that in the Proposed Law of the State Budget for 2017 (Proposed Law No. 37/XIII-2nd), No. 2 of Article 135-B provided that "2 - Excluded from the additional municipal property tax are urban properties classified as "industrial", as well as urban properties licensed for tourist activity, the latter provided that their use is duly declared and evidenced.", while paragraph c) of No. 2 of Article 135-C provided for a basic deduction of "€600,000.00, when the taxpayer is a legal entity engaged in agricultural, industrial or commercial activity, for properties directly allocated to its functioning".

However, since in Law No. 42/2016, of 28 December, the planned deduction from the taxable value of properties directly allocated to agricultural, industrial or commercial activity of legal entities (and equivalent entities) was suppressed, as well as the envisaged reference to the allocation of properties to exclude from AIMI taxation, it should be concluded that "With respect to legal entities, the AIMI is a genuine general tax on immovable property, although some classes of properties are excluded from its application (…) a general tax, but partial, on real estate wealth (…)"[1].

In accordance with the general rules of legal interpretation, the letter of the law is not "only the starting point, it is also an immovable element of all interpretation", which means that "the text also functions as a limit to the search for the spirit"[2].

Since it is not possible to extract from the letter of No. 2 of Article 135-B of the IMI Code the meaning intended by the Claimant, that urban properties classified as "commercial, industrial or for services" and "other", even if they constitute the substrate of an economic activity carried out by a legal entity or equivalent entity, fall within the negative delimitation of the incidence of AIMI, it cannot be held that there is an alleged error on the factual and legal premises of the AIMI assessment in question.

Assessment of the Tax Property Value Subject to AIMI. "Land for Construction" Whose Potential Use Coincides with "Commercial, Industrial or Services" Purposes.

Subsidiarily, the Claimant requests that the assessment act identified be partially annulled on the grounds that the value of "land for construction" whose potential use coincides with "commercial, industrial or services" purposes cannot be considered in determining the tax property value subject to AIMI, in violation of the constitutional principle of equality.

However, as to this question, the request should be judged without merit as unproven, since, as noted above, the Claimant did not provide means of proof that would make it possible to ascertain whether the tax property value that served as the basis for the impugned assessment includes the tax property value of land for construction whose potential use is the construction of buildings intended for commercial, industrial or service purposes, since the documents it attached relate to another AIMI assessment and another taxpayer, which were expressly contested by AT in its Reply, with which the Claimant complied.

The tax arbitration instance is constituted with the presentation of the request for constitution of the arbitral tribunal, within the time limits and in the manner provided for in Article 10 of the RJAT; similarly to what occurs in the case of judicial challenge, in which, together with the petition, the challenger "shall offer the documents at its disposal, list witnesses and request such other evidence as does not depend on subsequent events" (Article 108, No. 3 of the CPPT), also among the elements that must be included in the request for constitution of an arbitral tribunal are "The evidence of the facts indicated and the indication of the means of proof to be produced" (Article 10, No. 2, paragraph d) of the RJAT).

The inquisitorial principle prevails in tax judicial proceedings, governed by legality (Articles 99 of the General Tax Law [LGT] and 13 of the CPPT), aimed at the discovery of material truth and the justice of the decision. Thus, it is the duty of the tribunal to "carry out or order on its own initiative all proceedings that seem useful to it to ascertain the truth regarding the facts alleged or of which it may officially have knowledge" (Article 99, No. 1 of the LGT), in particular "the necessary evidence proceedings" (Article 114 of the CPPT).

Proof is only necessary as to disputed facts and, where they are facts constitutive of rights, the burden thereof falls on whoever invokes them, a principle of allocation contained in No. 1 of Article 74 of the LGT, also applicable to tax proceedings[3], albeit subject to the principle of proportionality, in light of which the tribunal may request the performance of proof from the party not burdened with it, should the evidential effort of the party on whom the respective burden falls prove insufficient or should there be increased difficulty in accessing the probative means.

In the concrete case in question, it does not appear that the evidential effort to be made by the Claimant would be excessive or that it had increased difficulties in obtaining the supporting documents of the facts it alleges and to which it refers in the arbitral request, without having attached them.

On the other hand, before the Arbitral Tribunal had issued an order for improvement or any other order in the proceedings, it is the Claimant itself who, after being notified of AT's Reply, in which the lack of evidentiary elements of the alleged facts is expressly referred to and the documents offered, relating to another AIMI assessment and another taxpayer, are contested, in a request of 6 June 2018, the content of which was reiterated in the request of 11 June 2018, came to inform that it refrained from submissions, attaching a copy of the initial petition (previously unknown to the Arbitral Tribunal), but not the appropriate means of proof to substantiate the claims it makes.

Nor should it be said that the without merit judgment of the annulment request of the impugned assessment act, as unproven, conflicts with the Claimant's right to proof or constitutes a surprise decision for the purposes of Article 3, No. 3 of the Code of Civil Procedure, since, duly notified of the Reply by the Respondent entity, the Claimant complied with it, refraining from producing submissions.

Unconstitutionality of the AIMI, Due to Its Incidence on Properties That Constitute the Substrate of an Economic Activity

Subsidiarily, the Claimant holds that the legal regime of the AIMI is contrary to the constitutional principle of equality and to the principles of fiscal equality and contributory capacity, enshrined in Articles 13 and 104, No. 3 of the CRP, requesting the non-application, to the concrete case, of Articles 135-A et seq. of the IMI Code, with the consequent annulment of the impugned tax act, invoking, in summary:

. The legal regime of the AIMI, specifically its Articles 135-A and 135-B of the IMI Code, and the taxation resulting therefrom, promote differentiated treatment and unjustified inequality among taxpayers, in manifest violation of the principle of equality enshrined in Article 13 of the CRP;

. In instituting the AIMI, the legislator intended to tax properties with residential purposes, as effective manifestations of wealth, but it was clear that the intention was to exclude from the scope of application of the AIMI all properties allocated to economic activities;

. In the case of Real Estate Investment Funds, ownership of properties embodies the patrimonial substrate of the economic activity itself, being an essential (almost sole) means for its pursuit, and therefore the essential premise of taxation is not met, since ownership of those properties does not constitute an indicator of increased contributory capacity;

. In light of the activity that Real Estate Investment Funds are legally authorized to carry out, properties are productive factors and means for the exercise of their economic activity and not an indicator of increased wealth;

. The application of the AIMI to properties held by these entities penalizes this sector of activity in an unjustifiedly aggravated manner, to the detriment of the remainder;

. The imposition of this taxation has no relationship with the actual income of the activity carried out by these entities – at the limit, 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 AIMI entities that carry out an immovable activity – promotes differentiated treatment and unjustified inequality among taxpayers, in manifest violation of the principle of equality, enshrined in Article 13 of the CRP and the principle of fiscal equality and contributory capacity, enshrined in Article 104, No. 3 of the same instrument.

To this argument, the Tax and Customs Authority counters that:

. The choices underlying the delimitation of the objective incidence of the AIMI were made within the margin of "freedom of legislative design" and do not violate the principles of equality of taxation as a function of contributory capacity, in light of the doctrine and jurisprudence of the Constitutional Court;

. This is a "partial tax on certain manifestations of contributory capacity", and therefore it is not "normatively appropriate to proceed with a comparison between the overall value of the patrimony of other taxpayers", instead taking as the basis of comparison, to assess compliance with the principle of equality, the patrimonies of other Funds with the same corporate purpose;

. "the different valuation and taxation of a property with residential allocation as opposed to a property intended for commerce, industry or services results from the different capability of the properties in question, which supports the different treatment given by the legislator who, for economic and social reasons, decided, in the context of its power of design, to remove from the incidence of the tax properties intended for other purposes than residential";

. Real estate investment funds are holders of assets considered by the legislator as a manifestation of particular wealth;

. Properties are not merely instrumental to the exercise of the Funds' activity, but form part of the very core of the economic activity, are the object of commerce or industry, as they are intended for resale or, in the case of land for construction, transformation in the event that buildings are erected thereon for subsequent sale;

. By contrast, properties excluded from AIMI liability, in accordance with No. 2 of Article 135-B of the CIMI, perform an instrumental function to industrial, commercial or service economic activities, insofar as they constitute buildings that serve to support the functioning of those activities, and are not in themselves generators of income;

. The fact that a given asset serves as a "factor of production of wealth" is not sufficient to contradict the finding that its holder possesses an asset only accessible to one with particular wealth and thus capable of bearing an additional contribution to the desired fiscal consolidation;

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

. Like any tax on property, the AIMI is dissociated from any potential realization of profit with the sale of immovable assets, as well as the existence or otherwise of negative or positive net worth, being relevant to the economy of the tax only the property value of the properties.

The principle of tax equality embodies a specific expression of the general principle of equality inherent in Article 13 of the CRP, and should be understood not merely as equality before the law (formal sense) but as equality under the law (material sense), which evokes the principle of contributory capacity or ability to contribute to meeting public burdens in measure of the economic capacity revealed by income, expenditure, or property.

This principle of contributory capacity, as a measure and term of comparison of equality in the field of taxes, appeals to the ideas of "generality or universality, under which all citizens are bound to the duty to pay taxes, and uniformity, requiring that such duty be assessed by a single criterion – the criterion of contributory capacity. This thus implies equal tax for those with equal contributory capacity (horizontal equality) and different tax (in qualitative or quantitative terms) for those with different contributory capacity in proportion to this difference (vertical equality)."[4].

With respect to taxation of property, Article 104, No. 3 of the CRP provides that "taxation of property must contribute to equality among citizens", without a "general tax on property" having to date been created among us which, reinforcing general progressivity of the system, would be capable of promoting a more just distribution of wealth[5].

Moreover, in the delineation of tax figures, despite the broad margin of discretion of the legislator, it is forbidden to act arbitrarily, preventing it from enacting legislative measures that are manifestly disproportionate or inadequate.

For this reason, the Constitutional Court has come to understand that "Violation of the constitutional principle of equality presupposes a concrete and actual situation of unjustified or discriminatory differentiation, and it is certain that, to this effect, constitutional jurisprudence has repeatedly stressed that this principle does not prohibit the creation of distinctions, provided that they are not arbitrary or devoid of sufficient material foundation"[6].

Thus is justified the difference in the regime of taxation of property of individuals and legal entities under AIMI, as well as the negative delimitation of incidence established in No. 2 of Article 135-B of the IMI Code, with respect to urban properties intended for the exercise of productive activities, such as those classified as "commercial, industrial or for services".

With respect to the incidence of AIMI on property owned by Real Estate Investment Funds, predominantly intended for residential purposes, and having regard to the activities carried out by these collective investment structures, in accordance with Article 210 of the General Regime of Collective Investment Entities, approved by Law No. 16/2015, of 24 February (acquisition of properties for lease or intended for other forms of onerous exploitation; acquisition of properties for resale; acquisition of other rights over properties with a view to their economic exploitation; carrying out works of improvement, expansion and requalification of properties; development of construction and rehabilitation projects for properties), it does not appear that they should receive more advantageous treatment than that granted to the generality of owners of urban properties who, individually, are in an identical situation, since, as the Tax and Customs Authority emphasizes, "the paradigm underlying the tax regime applicable to them has been guided by the principle of neutrality, which consists of designing the taxation of Funds, as much as possible, in the same terms as persons who invest directly in the immovable or movable assets that constitute the patrimonies of the funds would be taxed".

It should therefore be concluded, in accordance with the Arbitral Award rendered in case No. 668/2017-T (available at www.caad.pt), that "the ownership of a high-value real estate patrimony by real estate investment funds evidences, as in relation to any owner of a property intended for residential purposes, a special economic capacity to be able to contribute additionally to the Financial Stabilization Fund of Social Security, to which the revenue from the AIMI is allocated, and which «corresponds to the objective of the government program to broaden the funding base of Social Security» (Report of the Budget for 2017, page 57).

For this reason, the non-incidence of the AIMI on the values of residential properties or land for construction of residential use belonging to real estate investment funds would constitute unjustified preferential tax treatment in relation to the generality of remaining owners of properties with those characteristics.

From the foregoing, the imposition on real estate investment funds of the AIMI regarding their patrimony constituted by residential properties and land for construction intended for residential use does not appear to be materially unconstitutional, in light of the principles of equality and contributory capacity.".

5. Questions Beyond the Court's Jurisdiction

In the decision, the judge must rule on all questions that it should consider, refraining from ruling on questions of which it should not have jurisdiction (final segment of No. 1 of Article 125 of the CPPT), with the questions that fall within the tribunal's powers of cognition being, in accordance with No. 2 of Article 608 of the CPC, subsidiarily applicable to tax arbitral proceedings, by referral of Article 29, No. 1, paragraph e) of the RJAT, "the questions that the parties have submitted to it for consideration, except those whose decision is prejudiced by the solution given to others (…)".

For the same reasons stated in point 3 above, to which reference is made, knowledge of the question relating to the unconstitutionality of the AIMI when it applies to "land for construction" whose potential use coincides with "commercial, industrial or services" purposes becomes prejudiced.

In fact, since the Arbitral Tribunal will not have jurisdiction over the concrete question relating to the inclusion of the tax property value of that type of land for construction in the value of the taxable matter for purposes of AIMI, for the reasons described there, the consideration of the constitutionality raised by the Claimant would not cease to be an abstract consideration of constitutionality, which falls exclusively within the jurisdiction of the Constitutional Court, in accordance with Article 281 of the CRP.

Thus, since the impugned assessment must be entirely maintained in the legal order, for the reasons indicated in points 2 and 4 above, to which reference is made, knowledge of the question relating to the request for compensatory interest is also prejudiced.

The without merit judgment of the question related to the invoked unconstitutionality of the legal regime of the AIMI, when applicable to properties that constitute the substrate of an economic activity, and the non-jurisdiction over the question relating to the unconstitutionality of the same Additional, due to its incidence on "land for construction" whose potential use coincides with "commercial, industrial or services" purposes, renders unnecessary the notification of the present arbitral decision to the Public Prosecutor's Office.

DECISION

On the basis of the factual and legal grounds set out above and, in accordance with Article 2 of the RJAT, it is decided, judging the present request for arbitral decision entirely without merit, and absolving the Tax and Customs Authority of all claims.

VALUE OF THE CASE: In accordance with the provisions of Article 306, Nos. 1 and 2 of the CPC, 97-A, No. 1, paragraph a) of the CPPT and 3, No. 2 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at €169,217.29 (one hundred sixty-nine thousand, two hundred seventeen euros and twenty-nine cents).

COSTS: Calculated in accordance with Article 4 of the Regulation of Costs in Tax Arbitration Proceedings and Table I attached thereto, in the amount of €3,672.00 (three thousand, six hundred seventy-two euros), chargeable to the Claimant.

Notify.

Lisbon, 6 August 2018.

The Arbitrators,

José Poças Falcão

(President)

Sérgio de Matos

(Member)

Mariana Vargas

(Member)

Text prepared by computer, in accordance with No. 5 of Article 131 of the CPC, applicable by referral of paragraph e) of No. 1 of Article 29 of Decree-Law 10/2011, of 20 January.

The wording of this decision is governed by the Orthographic Agreement of 1990.

[1] José Maria Fernandes Pires, "The Additional to the IMI and Personal Taxation of Property", Almedina, Coimbra, 2017, p. 42.

[2] José de Oliveira Ascensão, "The Law – Introduction and General Theory", 13th Revised Edition, Almedina, Coimbra, p. 396.

[3] Cf. Jorge Lopes de Sousa, "Code of Procedure and Tax Proceedings Annotated and Commented", Vol. II, 6th Edition, 2011, p. 131: "Although this rule is provided for in tax proceedings, its content should be transposed to the judicial proceedings that follow, so that whoever had the burden of proof of certain facts in tax proceedings has the respective burden in tax judicial proceedings".

[4] José Casalta Nabais, "Tax Law", Almedina, Coimbra, 2014, 7th Edition, p. 155.

[5] In accordance with José Maria Fernandes Pires, cited work, p. 31, "The most commonly used argument in defence of the existence of general and personal taxes on property, and also the one that our Constitution enshrines, is that of promoting a more just distribution of wealth. (…) The increase in progressivity produced by this tax, as well as the tax revenues it would be capable of generating, could serve to reduce the rates applicable to medium and lower incomes, lowering the tax burden on those citizens and increasing social justice".

[6] Cf. The Decision of the Constitutional Court No. 211/03, of 28/04, case No. 308/02.

Frequently Asked Questions

Automatically Created

What is the Adicional ao Imposto Municipal sobre Imóveis (AIMI) and which properties does it apply to in Portugal?
The Adicional ao Imposto Municipal sobre Imóveis (AIMI) is an additional tax on municipal property introduced in Portugal to tax real estate wealth. AIMI applies to urban properties classified as residential (habitação) and land for construction (terrenos para construção) as defined in Article 6 of the IMI Code. The tax explicitly excludes urban properties classified as commercial, industrial, or for services and 'other' properties under Article 135-B(2) of the IMI Code. For individual taxpayers, AIMI applies when the total taxable value of residential properties exceeds €600,000, while for legal entities and collective structures, it applies without any minimum threshold. The tax aims to reach a portion of taxpayers' patrimony, targeting immovable property constituting recognizable capital, regardless of allocation to productive processes or income-generating activities.
Can real estate investment funds (Fundos de Investimento Imobiliário) challenge AIMI tax assessments on constitutional grounds?
Yes, real estate investment funds (Fundos de Investimento Imobiliário) can challenge AIMI tax assessments on constitutional grounds through the CAAD arbitral system. In this case, the fund raised constitutional challenges based on violations of the equality principle (Article 13 of the Portuguese Constitution) and principles of fiscal equality and contributory capacity (Article 104(3)). The fund argued that applying AIMI to properties held for economic activities, rather than personal wealth, creates unconstitutional discrimination. Investment funds can request that arbitral tribunals refuse to apply AIMI provisions to specific cases if deemed unconstitutional. However, the Tax Authority countered that such challenges risk violating the constitutional separation of powers by seeking judicial modification of clear legislative choices. Constitutional challenges in tax arbitration require demonstrating that the tax treatment lacks rational justification and violates fundamental equality or proportionality principles.
Which types of urban properties are excluded from AIMI under Article 135-B of the IMI Code?
Under Article 135-B(2) of the IMI Code, AIMI excludes urban properties classified as 'commercial, industrial or for services' and 'other' properties according to Article 6(1)(b) and (d) of the IMI Code. This negative delimitation means only residential properties (habitação) and land for construction (terrenos para construção) fall within AIMI's scope. The Tax Authority interprets this exclusion based strictly on property classification in the cadastral system, not on actual use or the owner's nature. Properties recognized as factors of production or intermediate goods combined with other production factors are excluded. However, residential properties and construction land remain taxable even when held by companies or investment funds for economic purposes. The legislator's criterion aims for objective universality, creating uniform treatment regardless of the taxpayer's legal form. Controversy arises when institutional investors hold residential properties or construction land as part of commercial real estate portfolios, yet face AIMI taxation unlike holders of explicitly commercial or industrial properties.
How does the CAAD arbitral tribunal process work for contesting AIMI tax liquidations in Portugal?
The CAAD (Centro de Arbitragem Administrativa) arbitral tribunal process for contesting AIMI liquidations follows the Legal Framework for Arbitration in Tax Matters (RJAT - Decree-Law 10/2011). Taxpayers file a request for constitution of an arbitral tribunal within the statutory deadline, identifying the contested tax assessment. The CAAD President accepts the request and notifies the Tax Authority. The Deontological Council appoints arbitrators (either a sole arbitrator or a three-member collective tribunal). In this case, a collective tribunal was appointed with one presiding and two member arbitrators. The claimant submits an initial petition detailing grounds for annulment, which must include the assessment notice and proof of payment. The Tax Authority files a reply within the prescribed timeframe. The tribunal examines procedural requirements, factual and legal issues, and may address constitutional questions. Proceedings are generally faster than judicial courts, with decisions binding on both parties. The process allows for principal claims (full annulment) and subsidiary claims (partial annulment or constitutional non-application), providing flexible remedies for taxpayers challenging AIMI assessments.
Is the AIMI discriminatory or unconstitutional when applied to closed-end real estate investment funds holding residential properties?
The constitutionality of applying AIMI to closed-end real estate investment funds holding residential properties remains contested. Funds argue the tax violates equality principles because it treats them differently from holders of commercial or industrial properties, despite both holding real estate for economic rather than personal wealth purposes. The contributory capacity argument emphasizes that mere ownership of properties for fund investment purposes doesn't demonstrate personal wealth warranting taxation. However, the Tax Authority defends AIMI's constitutionality based on the legislator's express choice to tax all residential properties and construction land regardless of owner type. The objective classification criterion ensures uniform treatment, avoiding subjective determinations about property use. The Authority argues that differential treatment between residential and commercial properties has rational justification: residential properties represent wealth accumulation, while commercial/industrial properties constitute production factors. Whether this distinction survives constitutional scrutiny when applied to institutional investors operating funds depends on whether courts accept that property classification alone provides sufficient justification for different tax treatment, or whether the economic reality of professional real estate investment requires exemption to avoid violating equality and proportionality principles under Articles 13 and 104(3) of the Portuguese Constitution.