Summary
Full Decision
ARBITRAL DECISION
The arbitrators Counsellor Jorge Lopes de Sousa (arbitrator-president), Dr. Marcolino Pisão Pedreiro and Dr. José Coutinho Pires (arbitrators-members), designated by the Ethics Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 07-03-2018, agree as follows:
1. Report
A..., S.A., with registered office at Avenue …, with unique registration number and collective person number ..., covered by the Tax Authority of …, notified of assessment no. 2017 ..., dated 30-06-2017, which determined tax payable in the amount of € 47,059.80 (Document no. 1, attached to the request for arbitral pronouncement, the contents of which are reproduced herein),
B..., S.A., with registered office at …, with unique registration number and collective person number ..., notified of assessment no. 2017 ..., dated 30-06-2017, which determined tax payable in the amount of € 4,025,291.53 (Document no. 2, attached to the request for arbitral pronouncement, the contents of which are reproduced herein),
C..., S.A. - IN LIQUIDATION, with registered office at Avenue …, with unique registration number and collective person number ..., notified of assessment no. 2017 ..., dated 30-06-2017, which determined tax payable in the amount of € 132,916.90 (Document no. 3, attached to the request for arbitral pronouncement, the contents of which are reproduced herein),
D..., S.A., with registered office at Avenue …, with unique registration number and collective person number ..., notified of assessment no. 2017 ..., dated 30-06-2017, which determined tax payable in the amount of € 575,768.07 (Document no. 4, attached to the request for arbitral pronouncement, the contents of which are reproduced herein), and
E..., S.A., with registered office at Avenue …, with unique registration number and collective person number ..., notified of assessment no. 2017 ..., dated 30-06-2017, which determined tax payable in the amount of € 7,208.56 (Document no. 5, attached to the request for arbitral pronouncement, the contents of which are reproduced herein),
(hereinafter jointly referred to as "Requesters") came, pursuant to paragraph a) of article 2, paragraph 1, and articles 10 and following of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters or "RJAT"), to present a request for arbitral pronouncement seeking the declaration of illegality of the aforementioned assessment acts of the Additional Municipal Property Tax ("AIMI").
The Requesters further request reimbursement of the amounts paid, with compensatory interest.
The respondent is the TAX AND CUSTOMS AUTHORITY.
The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 29-12-2017.
Pursuant to paragraph a) of article 6, paragraph 2, and paragraph b) of article 11, paragraph 1, of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council designated as arbitrators of the collective arbitral tribunal the undersigned, who communicated acceptance of the assignment within the applicable time period.
On 14-02-2018 the parties were duly notified of this designation and expressed no intention to refuse the designation of the arbitrators, in accordance with the combined provisions of article 11, paragraph 1, subparagraphs a) and b) of the RJAT and articles 6 and 7 of the Code of Ethics.
Thus, in accordance with the provisions of paragraph c) of article 11, paragraph 1, of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 07-03-2018.
On 04-05-2018, the Tax and Customs Authority submitted a response in which it argued that the request should be judged inadmissible and that the Public Prosecutor's Office should be notified of the final decision.
On 08-06-2018, a hearing was held in which witness testimony was produced and it was decided that the proceedings would continue with written pleadings.
The parties submitted pleadings.
The arbitral tribunal was regularly constituted, in accordance with the provisions of articles 2, paragraph 1, subparagraph a), and 10, paragraph 1, of Decree-Law no. 10/2011, of 20 January.
The parties are duly represented, enjoy legal personality and capacity, and have standing (articles 4 and 10, paragraph 2, of the same act and article 1 of Order no. 112-A/2011, of 22 March).
The proceedings contain no procedural defects.
2. Question of the Competence of the Arbitral Tribunal
The Tax and Customs Authority, in articles 200 to 205, alleges the incompetence of the Arbitral Tribunal to examine the question of discrimination against the Requesters as against companies that commercialize real estate for non-residential purposes, by also commercializing them.
The Arbitral Tribunal has competence to examine the legality of assessment acts as results from article 2, paragraph 1, subparagraph a), of the RJAT.
In the case at hand, assessment acts are being challenged and the Taxpayers have the right to impute to them the illegalities they consider appropriate, and the Arbitral Tribunal is competent to examine whether or not such illegalities affect the assessments.
In these terms, there is no incompetence of the Arbitral Tribunal to examine any question raised.
3. Powers of Cognition of the Arbitral Tribunal
The Tax and Customs Authority invokes the principle of separation and interdependence of powers as an obstacle to the powers of cognition of this Arbitral Tribunal.
There is surely some misunderstanding, since, in a State governed by the rule of law, it is for the Courts and not any other bodies, particularly those with legislative and executive competences, that the administration of justice falls, "ensuring the defense of the rights and legally protected interests of citizens, repressing violation of democratic legality and settling conflicts between public and private interests" (articles 202, paragraphs 1 and 2, of the CRP), for which they must interpret and apply the laws to settle disputes between citizens and the Administration.
It is also to the Courts that the CRP attributes the power to control the constitutionality of laws issued by bodies with legislative power (article 204 of the CRP).
This decision is rendered by a Court, such that it has a jurisdictional character, and in the exercise of its jurisdictional power it is incumbent upon it to apply the law according to its own interpretation, being subject only to the law as it interprets it, and not being obliged to adopt the interpretation adopted by the Tax and Customs Authority or that which would hypothetically be adopted by bodies with legislative power if they were assigned the competence to apply the law to disputes pending in the Courts.
On the other hand, in the exercise of its interpretative activity, the Arbitral Tribunal is not limited by the letter of the law, but must adopt all criteria for interpretation provided for in the law, particularly those indicated in article 9 of the Civil Code and article 11 of the LGT: "interpretation should not be confined to the letter of the law, but should reconstruct from the texts the legislative intent, taking especially into account the unity of the legal system, the circumstances in which the law was elaborated and the specific conditions of the time in which it is applied," only being unable to consider "the legislative intent that does not have in the letter of the law a minimum of verbal correspondence," which may even be "imperfectly expressed."
It is the exercise of this jurisdictional power that is concretized in this arbitral decision, in light of the legal criteria for interpretation.
4. Factual Matters
4.1. Facts Proven
On 01-01-2017, Requester A..., S.A., NIF ..., was the owner of the real estate indicated in the list contained in the document called "…_Listagempredios.pdf" attached by the Tax and Customs Authority with its Response, the contents of which are reproduced herein;
On 01-01-2017, Requester B..., S.A., NIF ..., was the owner of the real estate indicated in the list contained in the document called "…_Listagempredios.pdf" attached by the Tax and Customs Authority with its Response, the contents of which are reproduced herein;
On 01-01-2017, Requester C..., S.A. - IN LIQUIDATION, NIF ..., was the owner of the real estate indicated in the list contained in the document called "…_Listagempredios.pdf" attached by the Tax and Customs Authority with its Response, the contents of which are reproduced herein;
On 01-01-2017, Requester D..., S.A., NIF ..., was the owner of the real estate indicated in the list contained in the document called "…_Listagempredios.pdf" attached by the Tax and Customs Authority with its Response, the contents of which are reproduced herein;
On 01-01-2017, Requester E..., S.A., NIF ..., was the owner of the real estate indicated in the list contained in the document called "…_Listagempredios.pdf" attached by the Tax and Customs Authority with its Response, the contents of which are reproduced herein;
The 1st, 3rd and 5th Requesters are real estate companies whose purpose is real estate development, namely the purchase and sale of real estate;
The 2nd and 4th Requesters are credit institutions and banking institutions that are dedicated to banking activity and financial leasing of real estate;
The 2nd and 4th Requesters acquired in the exercise of their credit granting activity the properties that are not affected to financial leasing operations, in the vast majority, through credit recovery processes (testimony of witnesses G... and H...);
The 1st and 5th Requesters hold real estate that integrated the F... GROUP by transfer, in a process in which the bank, instead of receiving other assets, received these companies (testimony of witnesses G... and H...);
In June 2017, the CLAIMANTS were notified of the following assessment acts of Additional IMI with reference to the year 2017, indicating as the payment deadline the end of September 2017 (documents nos. 1 to 5, attached to the request for arbitral pronouncement, the contents of which are reproduced herein):
– A..., S.A., was notified of assessment no. 2017 ..., dated 30-06-2017, which determined tax payable in the amount of € 47,059.80;
– B..., S.A., was notified of assessment no. 2017 ..., dated 30-06-2017, which determined tax payable in the amount of € 4,025,291.53;
– C..., S.A. - IN LIQUIDATION was notified of assessment no. 2017 ..., dated 30-06-2017, which determined tax payable in the amount of € 132,916.90;
– D..., S.A., was notified of assessment no. 2017 ..., dated 30-06-2017, which determined tax payable in the amount of € 575,768.07;
– E..., S.A., was notified of assessment no. 2017 ..., dated 30-06-2017, which determined tax payable in the amount of € 7,208.56;
Requesters A..., S.A., B..., S.A., C..., S.A. - IN LIQUIDATION and D..., S.A. paid the assessed amounts on 26-09-2017 (document no. 6 attached to the request for arbitral pronouncement, the contents of which are reproduced herein);
Requester E..., S.A. paid the assessed amount on 27-09-2017 (document no. 6 attached to the request for arbitral pronouncement, the contents of which are reproduced herein);
In 2017, none of the real estate underlying the challenged acts was affected to personal use by the holders of the share capital of the CLAIMANTS, members of the corporate bodies or any governing, management, administration or supervisory bodies or their respective spouses, ascendants and descendants (testimony of witnesses G... and H... and documents nos. 1 to 5, attached to the request for arbitral pronouncement from which results that the assessments were issued under paragraph 1 of article 135-F of the IMI Code, with no values assessed under paragraph 3 of the same article);
None of the real estate subject to taxation is affected directly or indirectly to the current activity of the taxpayers, being accounted for as "non-current assets held for sale," in the case of financial institutions, or as "inventories" or "tangible fixed assets," in the case of the others (testimony of witnesses G... and H... and documents nos. 1 to 5 attached to the 1st Request submitted by the Requesters on 23-03-2018, the contents of which are reproduced herein);
The financial leasing contracts entered into by Requesters B..., S.A. and D..., S.A. are registered as "loans granted to third parties," are not registered in the assets under "tangible fixed assets" of these institutions because it is financial leasing (Testimony of witness H...);
The financial leasing contracts entered into with individuals concern, as a rule, real estate with tax asset value below € 600,000, averaging values of € 100,000 to € 110,000 (testimony of witness G...);
The accounting record of the real estate taxed, with the exception of those affected to financial leasing operations, of the Requesters that are financial institutions, complies with International Financial Reporting Standard 5 "Non-Current Assets Held for Sale and Discontinued Operating Units," approved by Commission Regulation (EC) no. 1126/2008, of 3 November 2008 (testimony of witness H...);
The real estate in question that are not affected to financial leasing operations are intended for sale (testimony of witnesses G... and H...);
On 29-12-2017, the Requester submitted the request for arbitral pronouncement that gave rise to the present proceedings.
4.2. Facts Not Proven and Grounds for Determination of Factual Matters
It was not proven that any of the real estate was in a situation of exemption or not subject to IMI taxation in the year 2016. In particular, for purposes of article 9, paragraph 1, subparagraph e), of the CIMI, it was not proven that any of the properties appeared in the inventories of the Requesters for a time period shorter than that indicated therein as determining the beginning of IMI taxation.
The facts proven are based on documents attached by the Requester and the Tax and Customs Authority and on the testimony of witnesses G... and H....
The witnesses appeared to testify with integrity and with knowledge of the facts upon which they pronounced themselves.
There is no controversy regarding the factual matters.
5. Legal Matters
Law no. 42/2016, of 28 December (State Budget for 2017) added to the CIMI chapter XV, containing articles 135-A to 135-K, which includes the regime for the Additional Municipal Property Tax (AIMI).
In the Report of that Budget it is stated:
The revenue-raising measures, in addition to updating the IECs and ISV by 3%, focus on the introduction of two new taxes: a progressive additional IMI surcharge and an expansion of the IABA base to soft drinks. Together, the two measures represent only about 0.5% of total tax revenue. In both cases the revenue is earmarked.
The earmarking of the progressive taxation of real estate property to the Financial Stabilization Fund of the Social Security System corresponds to the objective of the government program to expand the financing base of Social Security, while introducing a tax that falls on holders of larger real estate portfolios, reinforcing the overall progressivity of the system.
(...)
Progressive Taxation of Real Estate Property
The additional municipal property tax introduces into the taxation of real estate a progressive element of personal basis, taxing higher portfolios more heavily, with a marginal rate of 0.3% applied to portfolios exceeding €600,000 per taxpayer.
To avoid the impact of this tax on economic activity, excluded from the scope are rustic, mixed, industrial properties and those dedicated to tourism activity, while also permitting companies an exemption for properties dedicated to their productive activity up to €600,000. The possibility of deducting the amount of tax paid at the collection level relating to rental income constitutes an additional incentive for leasing and productive use of property.
This tax replaces the former 1% stamp duty on the value of property above 1 million euros. With a much lower rate (0.3%) it is also fairer by taking into account the global value of real estate property and not, in isolation, the value of each individual property.
Article 135-A defines the subjective scope of this tax, establishing that "the taxpayers of the additional municipal property tax are natural or legal persons who are owners, usufructuaries or surface rights holders of urban properties located in Portuguese territory," with "legal persons equated to any structures or centers of collective interests without legal personality that appear in the matrices as taxpayers of municipal property tax."
Article 135-B defines the objective scope of this additional tax, establishing the following:
Article 135-B
Objective Scope
1 - The additional municipal property tax applies to the sum of the tax asset values of urban properties located in Portuguese territory of which the taxpayer is the owner.
2 - Excluded from the additional municipal property tax are urban properties classified as "commercial, industrial or service" and "other" in accordance with subparagraphs b) and d) of paragraph 1 of article 6 of this Code.
In the wording that appeared in the Budget proposal this paragraph 2 had the following wording:
2 - Excluded from the additional municipal property tax are urban properties classified as "industrial," as well as urban properties licensed for tourism activity, the latter provided that their destination is properly declared and proven.
Article 6 of the CIMI establishes the following:
1 - Urban properties are divided into:
a) Residential;
b) Commercial, industrial or service;
c) Land for construction;
d) Other.
2 - Residential, commercial, industrial or service are buildings or constructions licensed for such purposes or, in the absence of a license, that have as their normal purpose each of these purposes.
3 - Land for construction is considered to be land situated within or outside an urban agglomeration for which a license or authorization has been granted, prior communication admitted or favorable prior information issued for a subdivision or construction operation, and also those so declared in the acquisition title, except for land on which the competent entities prohibit any of those operations, in particular land located in green areas, protected areas or that, in accordance with municipal territorial planning plans, are affected to public spaces, infrastructure or equipment.
4 - The provision of subparagraph d) of paragraph 1 includes land situated within an urban agglomeration that are neither land for construction nor covered by the provisions of paragraph 2 of article 3, and also buildings and constructions licensed for or, in the absence of a license, that have as their normal purpose purposes other than those referred to in paragraph 2, and also those in the exception of paragraph 3.
The Requesters summarize their claims in conclusion 2 of their pleadings by saying that "they request the annulment of the Additional IMI assessment acts contested, with reference to the year 2017, on the grounds of material unconstitutionality of the norms of articles 135-A and following of the IMI Code, especially of the norms of paragraphs 1 and 2 of article 135-B, in the interpretation adopted in the contested acts by violation of the principles of equality, proportionality, contributory capacity, and housing enshrined in articles 13, 18, 65 and 104, paragraph 3 of the Constitution."
5.1. Non-exclusion from the Scope of AIMI of Real Estate Dedicated to Housing and Land for Construction Used by Legal Persons in the Context of Their Economic Activity
The Requesters argue that "by not expressly excluding from the scope of the Additional the real estate dedicated to housing and land for construction used by legal persons in the context of their economic activity, a situation was created penalizing real estate held for these purposes by companies in the exercise of their activity, without any justification that would allow it to pass the test of constitutionality."
In the view of the Requesters, "the holding of this real estate does not reveal the special contributory capacity that justifies taxation in this tax by natural persons; on the other hand, its application affects the economic activity of companies when this is exercised through real estate intended for housing or land for construction, which was precisely the effect that the legislator sought to prevent."
The legislative concern to "avoid the impact of this tax on economic activity" was announced in the Budget Bill for 2017 and was concretized, to some extent, through the exclusion from the scope of "urban properties classified as 'industrial,' as well as urban properties licensed for tourism activity, the latter provided that their destination is properly declared and proven" and the deduction from the taxable value of the amount of "€600,000, when the taxpayer is a legal person with agricultural, industrial or commercial activity, for properties directly affected to its operation."
However, the exclusion from scope was not based on the activity to which the properties are dedicated, since in the wording that was approved, the non-scope was defined only on the basis of the types of properties indicated in article 6 of the CIMI, without any reference to the dedication to the operation of legal persons.
The dedication of a property, which presupposes a use, and the purpose to which it is intended, the "normal destination," underlying the classifications of properties referred to in paragraph 2 of article 6 of the CIMI, are distinct concepts.
If it had been maintained, in the final wording of the Budget, the legislative intent to preclude scope on properties directly dedicated to the operation of legal persons, the reference to this dedication that appeared in the proposal and that clearly expressed this legislative option would surely have been maintained.
Thus, since this reference to the dedication of the properties was deleted, there is no legal basis to conclude that residential properties and land for construction dedicated to the activity of legal persons are not relevant to the scope of AIMI.
"In the absence of other elements that lead to the selection of the less immediate sense of the text, the interpreter should in principle opt for that sense that best and most immediately corresponds to the natural meaning of the verbal expressions used, and in particular to their legal-technical meaning, in the assumption (not always accurate) that the legislator knew how to correctly express its intent. ( [1] )
In the case at hand, given the departure from the proposed wording in which the dedication of the properties was given relevance, there is no reason to conclude that the legislator did not know how to express its intent in adequate terms, as must be presumed, by force of the provisions of article 9, paragraph 3, of the Civil Code.
For this reason, it must be concluded that the dedication of the properties to the economic activities of legal persons does not preclude taxation in AIMI (except in cases where these are properties that previously were exempt or not subject to IMI taxation, which are not counted for purposes of AIMI, in accordance with paragraph 3 of article 135-B of the CIMI). [2]
The holding of high-value real estate property, regardless of dedication or not to economic activity, is tendentially indicative of high contributory capacity, superior to that which is presumed to exist when property of reduced value is held or when it does not exist, such that, in principle, the limitation of taxation to the former situations is justified.
However, the reasons that would underlie the distinction, for purposes of AIMI taxation, between the tax asset values of properties classified as residential or land for construction (regardless of their actual dedication to those purposes) and those of urban properties that have other classifications, in light of article 6 of the CIMI, do not explicitly result from the Report of the Budget for 2017 nor from its parliamentary discussion.
Regarding properties that have the classification of "other" in light of article 6, paragraphs 2, subparagraph d), and 4, of the CIMI, a reason for distinction may be seen in the fact that these are essentially properties that are not intended for income-generating activities, in particular land situated in urban agglomerations that do not meet the requirements for their classification as land for construction nor are being used for agricultural or forestry purposes, and buildings intended for public spaces, infrastructure or equipment. ( [3] )
As for the exclusion from taxation regarding properties intended for commerce, industry or services, an explanation may be glimpsed in the purpose invoked for the creation of this new tax, which is to finance Social Security, ensured through the earmarking of AIMI revenues to the Financial Stabilization Fund of Social Security, provided for in paragraph 2 of article 1 of the CIMI, as amended by Law no. 42/2016, of 28 December.
The subsidization of the social security system is one of the constitutional obligations of the State, provided for in article 63, paragraph 2, of the CRP, and its sustainability and stability is a permanent concern, as is well-known fact, which has justified many initiatives, well evidenced in the Major Plan Options for 2017 (Law no. 41/2016, of 28 December,) and for 2018 (Law no. 113/2017, of 29 December) ( [4] ) among which is the diversification of funding sources, which is a principle long adopted in the Basic Laws of Social Security (article 78 of Law no. 17/2000, of 8 August, article 107 of Law no. 32/2002, of 20 December, and article 88 of Law no. 4/2007, of 16 January). The essence of the principle of diversification of Social Security financing sources consists in the expansion of the bases for obtaining financial resources, with a view in particular to the reduction of non-wage labor costs (article 79 of Law no. 17/2000, article 108 of Law no. 32/2002, and article 88 of Law no. 4/2007, of 16 January), which can explain why the new AIMI taxation is not applied to legal persons holding properties intended for commercial, industrial and service activities, because the holding of such types of properties by legal persons is normally associated with the exercise of these activities, with the corresponding payment of contributions to Social Security, as employers [article 92, subparagraph b), of Law no. 4/2007, and articles 3, subparagraph a), and 14, subparagraph a), of Decree-Law no. 367/2007, of 2 November].
From this perspective, a reason may be discerned for distinguishing between the ownership of real estate property by persons who, presumably, will develop activities connected with Social Security financing and the holding of property not intended for these activities, whose owners, tendentially, will not be associated in the same way with such financing, at least not with the same intensity.
Article 13 of the Constitution of the Portuguese Republic proclaims the principle of equality of citizens before the law. As has been uniformly understood by the Constitutional Court, the principle of equality, as a limit on 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 justification. The principle of equality does not prohibit distinctions from being established, but rather arbitrary distinctions, devoid of objective and rational justification. ( [5] )
In light of what has been said, the creation of a special taxation of high-value property intended to ensure Social Security financing limited to real estate property generating income that will not already tendentially be connected with that financing will not be completely devoid of objective and rational explanation.
On the other hand, the creation of AIMI, as a complementary tax on real estate property, which aimed to introduce into taxation "a progressive element of personal basis, taxing higher portfolios more heavily" (Report of the Budget for 2017, page 60), is compatible with the objective that taxation of property should contribute to equality among citizens, affirmed in paragraph 3 of article 104 of the CRP, since progressivity has as a corollary, tendentially, imposing higher taxation on those with greater contributory capacity.
The contributory capacity of business legal persons, relevant to assessing the application of the principle of tax equality, is not evidenced only by income, particularly by the results of the activity to which the properties are intended. In truth, "property provides its owner with special contributory capacity, advantages that by their nature escape personal income tax: thus, ownership of property facilitates the raising of credit, strengthens the negotiating position of its owner in the conclusion of various contracts, makes it easier to multiply wealth allowing him to take risks where in principle he would not. From this perspective, property tax is seen as something more than an extension of personal income tax - it is not a matter of overloading here income already subject to it but of reaching manifestations of contributory capacity that in fact escape it" (...) Property taxes will be justified by allowing the transfer of resources for the benefit of the working class, instituting a "qualitative progressivity" complementary to the progressivity in quantity of personal income taxes." ( [6] )
On the other hand, if it is true that the different intended uses of real estate do not necessarily imply a distinction in the level of contributory capacity, the exclusion from taxation of properties especially suited for productive activity, in particular "commercial, industrial or service," will find another justification (in addition to the presumed greater contribution of these activities to Social Security through contributions), since it comes down, ultimately, to favoring these activities, which is in harmony (and therefore will have a constitutionally acceptable basis) with the obligation of the State to promote the increase of economic well-being, which presupposes the proper functioning of wealth-creating activities and is one of its priority obligations in the economic field [article 81, subparagraph a), of the CRP]. Being this an obligation constitutionally considered as a priority, the first listed in this norm, it certainly will not be incompatible with the CRP to give it preferential protection when confronted with the constitutional duties of the State in housing matters indicated in article 65 of the CRP, which, obviously, are also protected through the proper functioning of wealth-creating activities.
The referred increased contributory capacity in relation to that resulting from income, which is inherent to the very ownership of property, does not cease to exist when the holders of rights over real estate enter into financial leasing contracts, such that no special issue arises at the level of constitutionality in cases where such contracts are entered into.
As regards the alleged unconstitutionality alleged by the Requesters translated as "the deduction at collection, under IRC, is only admitted in the fraction corresponding to income generated by real estate, subject to Additional IMI, within rental or hospitality activity, creating a distinction in taxation between taxpayers without justification therefor (conclusion lxxii of the Requesters' pleadings), this is a hypothetical defect that cannot constitute illegality of the AIMI assessments challenged, and may be relevant in hypothetical IRC assessments, which are not the subject of these proceedings.
By the foregoing, AIMI taxation is not incompatible with the principles of equality, proportionality, and contributory capacity, invoked by the Requesters, based on articles 13, 18, and 104, paragraph 3, of the CRP, nor with the duty of protection of the right to housing that emanates from its article 65.
6. Request for Reimbursement of Amount Paid and Compensatory Interest
The Requester formulates a request for reimbursement of the amounts collected by the Tax and Customs Authority, as well as for payment of compensatory interest.
Since the request for arbitral pronouncement is not to be judged admissible, it cannot be concluded that there are unduly paid amounts and, consequently, the annulment of the assessments or the payment of compensatory interest is not justified, in accordance with article 43, paragraph 1, of the LGT.
7. Decision
In these terms, this Arbitral Tribunal agrees to:
Declare the request for arbitral pronouncement inadmissible;
Absolve the Tax and Customs Authority of all claims.
8. Value of the Case
In accordance with the provisions of article 305, paragraph 2, of the CPC and article 97-A, paragraph 1, subparagraph a), of the CPPT and paragraph 2 of article 3, of €4,788,244.86.
9. Costs
Pursuant to article 22, paragraph 4, of the RJAT, the amount of costs is set at €60,282.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Requesters.
Lisbon, 23-07-2018
The Arbitrators
(Jorge Lopes de Sousa)
(Marcolino Pisão Pedreiro)
With attached dissenting opinion
(José Coutinho Pires)
DISSENTING OPINION
of Arbitrator Marcolino Pisão Pedreiro
I dissent from the present arbitral decision for the reasons I shall now set forth.
- It results from the proven facts that, regarding the 1st, 3rd and 5th Requesters, the real estate in question are accounted for as "inventories" or "tangible fixed assets."
"Inventories" are assets:
"a) Held for sale in the ordinary course of business activity;
b) In the process of production for such sale; or
c) In the form of materials or consumables to be applied in the production process or in the provision of services"[7]
"Tangible fixed assets" are also assets by nature dedicated to business economic activity[8].
With regard to the 2nd and 4th Requesters, of the real estate in question, some are dedicated to financial leasing contracts and the remainder result, in the vast majority, from credit recovery processes and are intended for sale.
The real estate dedicated to financial leasing activities and those resulting from credit recovery processes are also assets intrinsically linked to the normal economic activity of these taxpayers, since, as can be seen, to conduct financial leasing activities of real estate, credit institutions must necessarily be owners of the property right over real estate, and on the other hand, credit granting inevitably implies the occurrence of defaults, with the corresponding need for their recovery, which, even through the real guarantees normally associated with mortgage contracts for the acquisition of real estate, is typically concretized through the acquisition of real estate belonging to defaulting borrowers. To this extent, these real estate are also intrinsically linked to the normal economic activity of the companies.
These real estate, just like those belonging to the 1st, 3rd and 5th Requesters are thus dedicated to business activity comprehended in the corporate object of the companies.
Thus, I disagree with the following assertion of item N) of the proven facts:
"None of the real estate subject to taxation is affected directly or indirectly to the current activity of the taxpayers."
On the one hand, it appears to me to be conclusive matter and not fact, and on the other, because the conclusion does not find support in the proven facts and, instead, is in contradiction with them, in that inventories held for sale, those that form part of tangible fixed assets, those resulting from credit recovery processes, and those acquired as a function of the conclusion of real estate financial leasing contracts are intrinsically related to the normal activity of the Requesters and even to their operational activity.
- The AIMI legislator, within its powers of free legislative discretion, excluded from taxation[9] urban properties classified as "commercial, industrial or service" and "other." Thus, companies that are owners of such types of properties are not subject to taxation in AIMI.
The question that can be raised in the case before us is whether, in light of that exclusion and the principle of tax equality, it is legitimate to tax real estate belonging to companies whose corporate object is real estate development, namely the purchase and sale of real estate, not excluded from taxation by that provision, intended to be sold, or else part of its tangible fixed assets, and on the other hand, real estate belonging to credit institutions dedicated to real estate financial leasing operations or acquired by these entities in the credit recovery process and which are intended to be sold.
- The tax exclusion in question was granted to real estate that are typically dedicated to business economic activities.
What is the legislative intent of the norm?
In the decision of case 664/2017-T[10] it is stated, regarding real estate subject to exclusion, "an instrumental function in relation to a certain productive activity that the legislator, within its margin of free discretion, may intend to safeguard in the context of its obligations to promote economic and social development, which have constitutional standing (article 81 of the Fundamental Law)."
In the present decision it is advanced that:
"The essence of the principle of diversification of Social Security financing sources consists in the expansion of the bases for obtaining financial resources, with a view in particular to the reduction of non-wage labor costs (article 79 of Law no. 17/2000, article 108 of Law no. 32/2002, and article 88 of Law no. 4/2007, of 16 January), which can explain why the new AIMI taxation is not applied to legal persons holding properties intended for commercial, industrial and service activities, because the holding of such types of properties by legal persons is normally associated with the exercise of these activities, with the corresponding payment of contributions to Social Security, as employers [article 92, subparagraph b), of Law no. 4/2007, and articles 3, subparagraph a), and 14, subparagraph a), of Decree-Law no. 367/2007, of 2 November]."
It seems clear that the legislator intended to relieve properties normally dedicated to productive activities in line with what essentially occurred with the extinct item 28 of the General Table of Stamp Duty, especially in its original wording, and it appears to me correct and complementary the reasons for the legislative option indicated in this decision and in the decision of case 664/2017-T.
But these reasons are also fully applicable to the companies Requesters, since they are goods indispensable to the pursuit of their economic activities, on the one hand, and on the other, companies that commercialize real estate and credit institutions are companies that, like others, are typically associated with the exercise of activities that imply the corresponding payment of contributions to Social Security as employers.
- Real estate belonging to companies whose corporate object is their commercialization and which form part of their inventories/assets are not only dedicated to the productive activity of the same, but are so to a degree of indispensability superior to that of the generality of real estate intended for the exercise of commercial, industrial and service activities, insofar as their existence in the legal sphere of these companies constitutes a sine qua non condition of the exercise of their respective activities, while other companies could opt not to be owners of real estate by using such goods through other legal instruments (such as rental or financial leasing).
The same occurs with real estate belonging to Credit Institutions as a function of the conclusion, as lessors, of real estate financial leasing contracts and of real estate that it acquired in credit recovery processes and holds for sale.
The ownership of such real estate constitutes an inevitable consequence of the exercise of the economic activity of these companies.
In this measure, it is incumbent to determine whether these companies are not negatively discriminated, in terms that injure the constitutional principle of equality, because the real estate in question, although indispensable to the pursuit of their activity or inevitable consequence thereof, are not excluded from the scope by article 135-B, paragraph 2, of the CIMI.
- As the Constitutional Court considered in ruling no. 232/2003 of 13 May 2003, handed down in Case no. 306/03[11]:
"The principle of equality, enshrined in article 13 of the Constitution of the Republic (...), prohibits differential treatment, except when these, being objectively justified by constitutionally relevant values, are revealed to be rationally and reasonably founded. Such prohibition (...) should be considered to include also the so-called 'indirect discriminations,' in which, and always without such being justifiable from an objective point of view, a given measure, apparently not discriminatory, affects negatively in greater measure, in practice, an individualizable and distinct part of the universe of recipients to whom it is directed."[12] [13]
It appears to me that this is what occurs in the case before us.
Given that in 135-B, paragraph 2, of the CIMI, it is the objective element of scope that is relevant for non-taxation, apparently there is no discrimination, but in practice, given the legislative intent of the norm, individualizable and distinct parts of the universe of recipients to whom it is directed are affected negatively, and among these are the groups to which the 1st, 3rd and 5th, on the one hand, and the 2nd and 4th on the other, belong.
The nature of these companies could justify, as against others, a positive discrimination, similar to what occurs in the Municipal Property Tax and in the Municipal Tax on Onerous Transfers of Real Estate, never a negative discrimination[16] that, manifestly, lacks sufficient material justification, being consequently arbitrary.
In truth, real estate belonging to this type of company, when they form part of the company's assets as a consequence or necessary condition of the exercise of an economic activity, will not necessarily constitute an indication of contributory capacity, at least not in the same terms as occurs when it is in the ownership of other types of companies.
This reason will explain the favorable regimes enjoyed, as against others, established in articles 9, paragraph 1, subparagraph e), of the CIMI and 7 and 8, of the CIMT.
Emerging from article 135-B, paragraph 2, in practical terms a regime of opposite sense, regarding real estate not foreseen therein, it appears to me that there is also a deviation from the principle of system coherence which, according to José Casalta Nabais, "does not cause the invalidity of tax laws, since it only constitutes an indication of affectation of constitutional principles, especially the principle of equality, it being the factual inequality of treatment that decides in the concrete case whether or not it exists. (...).
Notwithstanding this lack of autonomy (to lead to unconstitutionality of laws) and the other limitations within which it moves, the principle of system coherence always presents itself as an important auxiliary in triggering the practical operability of constitutional principles, of which we have been speaking, especially the principle of tax equality which, faced with a lack of systematicity, more easily can the conclusion be drawn that it is violated"[17].
This is what occurs in the case before us, in my view. The violation of the principle of equality results from the unequal treatment, set out above, without material justification therefor. But such violation is even more intense and clear by the simultaneous violation of the principle of system coherence.
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On the other hand, in line with the decision I subscribed to in the decision handed down in case 603/2017-T, (concerning only a real estate commercializing company), also appears to me to lack rational foundation the discrimination between these companies that commercialize plots of land and residential properties and those that commercialize other types of real estate not subject to the tax (which also does not accord with the principle of management freedom), and even as regards the generality of companies that engage in the purchase and sale of other types of goods (whose merchandise can also have very significant asset value), taxing the former and not the latter.
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In terms in which, for the reasons set out above, I consider article 135-B of the CIMI to be materially unconstitutional, insofar as it subjects to AIMI taxation the real estate with the economic allocations mentioned and not excluded from taxation by paragraph 2 of that article, belonging to companies whose object is real estate development, namely the purchase and sale of real estate, and credit institutions that engage in banking activity and financial leasing of real estate, I therefore consider that the annulment claims of the Requesters should be allowed.
Lisbon, 23-07-2018
The Arbitrator
(Marcolino Pisão Pedreiro)
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