IMT and Stamp Tax Exemption for Real Estate Investment Funds: Unconstitutionality of Retroactive Fiscal Law (CAAD 732/2015-T)

ARBITRAL DECISION

Claimant: A…– INVESTMENT FUND MANAGEMENT COMPANY, S.A. (hereinafter "Claimant")

Respondent: PORTUGUESE TAX AND CUSTOMS AUTHORITY (hereinafter "AT" and "Respondent")

1. Report

A…– INVESTMENT FUND MANAGEMENT COMPANY, S.A., with taxpayer number…, with registered office at…, n.º…, …, …-… …, in its capacity as manager of the real estate investment fund "B… – Closed Real Estate Investment Fund for Residential Leasing", with tax identification number…, submitted to the Administrative Arbitration Centre (CAAD) a request for arbitral decision with a view to the annulment of the assessments of Municipal Tax on Transfers of Immovable Property (IMT) and Stamp Duty (IS), with n.º … and …, in the amounts of € 839.00 and € 671.20, respectively.

The Claimant bases the illegality of the tax assessments of IMT and IS and consequent annulment of the aforementioned assessments on the following defects, which are summarized below:

A) Illegality of the assessments: insofar as the fact subject to taxation is, both in relation to IMT and IS, the acquisition of ownership of the relevant properties by the Fund, and the exemptions from IMT and IS were not, at the date on which they entered the Fund's assets, conditional upon the subsequent verification of any facts or circumstances, nor, moreover, subject to any regime of lapse or expiration, given that at the moment the properties entered the Fund's assets, the IMT and IS exemptions were definitively crystallized in the tax-legal order as provided for in the Tax Regime of FIIAH; therefore, as there are no facts or circumstances legally provided for at the moment of recognition of the exemption upon which the expiration of the recognized exemption depended, it is evident that the subsequent imposition of such facts or circumstances on exemptions crystallized in the tax-legal order of the Claimant is afflicted with unconstitutionality, by violation of the principle of non-retroactivity of tax law, enshrined in article 103, number 3 of the Constitution of the Portuguese Republic, considering that there is an example of authentic retroactivity, since the tax fact had already produced all its effects at the date when the new law entered into force.

B) On the nullity of the assessments: In the Claimant's view, the violation of the principle of non-retroactivity of tax law is in this case generative of nullity of the tax assessments, since the violation concerns a fundamental right, which is why the tax assessments should be declared null;

It further petitions, finally, not only the reversal of the amounts of tax paid, but also the payment of compensatory interest.

The Portuguese Tax and Customs Authority, for its part, argued that there is no illegality owing to alleged violation of a constitutional provision, thus contending for the legal conformity of the tax assessments and consequent dismissal of the claims formulated by the Claimant.

The sole arbitrator was appointed on 02.02.2016.

In accordance with the provisions of article 11, number 1, letter c) of the RJAT, the single arbitral tribunal was constituted on 17.02.2016.

Given that the issue subject to the present proceedings is exclusively one of law and no exceptions were raised, the Tribunal dispensed with the holding of an arbitral hearing, with the Claimant and Respondent being notified to, if they so wished, submit written arguments, which the Claimant did present, reiterating the sense of what was petitioned in its request for arbitral decision, and on that occasion attached a legal opinion relating to the alleged unconstitutionality.

The Respondent AT dispensed with submitting arguments.

2. Sanation

The single arbitral tribunal is materially competent, in accordance with the provisions of articles 2, number 1, letter a) of the Legal Framework for Arbitration in Tax Matters (RJAT).

The parties have legal personality and legal capacity and have standing in accordance with art. 4 and number 2 of art. 10 of the RJAT, and art. 1 of Ordinance n.º 112-A/2011, of 22 March.

The cumulation of claims made in the present request for arbitral decision, in which assessments of IMT and IS are at issue, are based on the same factual foundation and call for the same legal framework, being fully justified, as stated, the aforementioned cumulation in light of the principle of procedural economy enshrined in article 3 of the RJAT.

The proceedings do not suffer from any nullity, there are no exceptions that prevent the consideration of the merits of the case, the claim is timely, therefore the conditions are met for the issuance of the arbitral decision.

3. Factual Matter

3.1. Proved Facts:

Having examined the documentary evidence produced and the positioning of the parties, the following facts are considered proved and of interest for deciding the case:

1. The Claimant is the manager of the real estate investment fund "B… – Closed Real Estate Investment Fund for Residential Leasing", registered with the Portuguese Securities Market Commission (CMVM), with tax identification number….

2. The Claimant proceeded on 30 December 2013 to the acquisition of the autonomous fraction "…" recorded in the urban property matrix of the parish of … under article…, and in such acquisition benefited from exemption from IMT and IS under letter a) of number 7 and number 8, respectively, of article 8 of the legal regime of FIIAH;

3. The Claimant alienated, in such capacity, on 13 October 2015, the autonomous fraction "…" recorded in the urban property matrix of the parish of … under article…, having requested from the Respondent AT, prior to the execution of the public deed of alienation, the following assessments:

1. The IMT and IS assessments identified in the previous point were issued on 13 October 2015.

2. The Claimant made payment of the aforementioned tax assessments on 14 October 2015.

3. On 04.12.2015, the request for decision and constitution of arbitral tribunal was submitted, via electronic platform, by the Claimant.

4. The Claimant proceeded to payment of the initial court fee;

No other facts with relevance for deciding the merits of the case were proved.

3.2. Reasoning of the Proved Factual Matter:

With respect to the proved facts, the conviction of the arbitrator was based on the documentary evidence attached to the proceedings, as well as on the positioning manifested by the parties.

3.3. Unproved Facts

The matter given as proved is sufficient for examining the issues raised in these proceedings, which are reduced to questions of law, there being no unproved facts relevant to the solution of the present dispute.

4. Legal Matter and Reasoning:

The request for arbitral decision has as its object the assessment of the illegality of the tax assessments of IMT and IS.

The central issue now raised by the Claimant and now under examination is based on assessing the non-conformity with a norm of the Constitution of the Portuguese Republic – article 103, number 3 – by alleged occurrence of authentic retroactivity of a legal norm subsequent to the occurrence of the tax fact.

Thus, it is necessary, first and foremost, to carry out an overview of the infra-constitutional legal framework in which the issue to be resolved lies, taking into account, from the outset, the tax regime that confers differentiated treatment to the general rule in matters of IMT and IS and which is subsumed, for the reasons set out below, to a tax benefit, and thus subject to the discipline contained in the Tax Benefits Statute (EBF).

In accordance with article 2 of the EBF, "tax benefits are considered to be measures of an exceptional character instituted for the protection of relevant extra-fiscal public interests that are superior to those of taxation itself that prevent", and are considered as tax benefits, in particular, "(…) exemptions (…)".

The tax benefit thus functions as an imperative fact preventing the constitution of the tax relationship, such that the norms that govern its creation, and that legitimize its granting, are, in terms of law, special, aimed at covering factual realities of an exceptional nature, and are anchored in interests that are eminently extra-fiscal, recognized as of public interest and with constitutional protection.

The legislator thus admits the derogation from the general rule of taxation and the principle of contributory capacity in the name of certain public interests, of an extra-fiscal nature, which it considers to be prevailing with a view to creating a deviation from the principle of taxation according to the contributory capacity of the taxpayer.

In accordance with article 12 of the EBF, "the right to tax benefits shall be calculated as of the date of occurrence of the respective prerequisites, even if dependent on recognition (…)", from which it is possible to extract with sufficient certainty that, as a general rule, the right to tax benefits is deemed to be constituted with the occurrence of the prerequisites laid down by law for a taxpayer to be able to benefit from them.

Article 5 of the EBF establishes that tax benefits may be "automatic and dependent on recognition", and that "the former result directly and immediately from the law, the latter presuppose one or more subsequent acts of recognition".

In that the provision in article 7 of the EBF provides that "all natural or legal persons, of public or private law, to whom tax benefits are granted, whether automatic or dependent on recognition, are subject to supervision by the Portuguese Tax and Customs Authority (…) for the purpose of controlling the occurrence of the prerequisites of the respective tax benefits and compliance with the obligations imposed on the holders of the right to benefits".

As for the extinction of such benefits, in accordance with the provision in article 14 of the EBF, such extinction may occur through lapse, through alienation of assets for purposes different from those for which the benefit was granted, or through revocation of the administrative act of granting and by simple waiver of the benefits by its holder.

Inasmuch as in any of the situations outlined above, the extinction of tax benefits has as its consequence the automatic restoration of the general taxation regime, which binds the holders of the right to tax benefits to declare, within 30 days of the occurrence of the cessation of the factual or legal situation on which the benefit was based, unless that cessation is known ex officio, as can be gathered from article 9 of the EBF.

Given the framework of the tax benefits regime, it is important to pay attention to the legal framework of the benefits in question pertaining to the exemption of IMT and IS now under judicial consideration.

Law n.º 64-A/2008, of 31 December, approved the special regime applicable to real estate investment funds for residential leasing and real estate investment companies for residential leasing.

In its article 104, the State Budget Law for 2009 established the legal regime applicable to real estate investment funds, which is cited below:

Article 104

Legal Regime

1 - The constitution and functioning of FIIAH, as well as the marketing of the respective units of participation, are governed by the provisions of the Legal Regime of Real Estate Investment Funds, approved by Decree-Law n.º 60/2002, of 20 March, amended by Decrees-Law n.os 252/2003, of 17 October, 13/2005, of 7 January, and 357-A/2007, of 31 October, and, subsidiarily, by the provisions of the Securities Code, approved by Decree-Law n.º 486/99, of 13 November, amended by Decrees-Law n.os 61/2002, of 20 March, 38/2003, of 8 March, 107/2003, of 4 June, 183/2003, of 19 August, 66/2004, of 24 March, 52/2006, of 15 March, 219/2006, of 2 November, and 357-A/2007, of 31 October, with the specificities contained in the following articles:

"Article 1

Denomination and Characteristics

1 - Real estate investment funds for residential leasing shall include in their denomination the expression 'real estate investment funds for residential leasing' or the abbreviation FIIAH.

2 - Only FIIAH may include in their denomination the expressions referred to in the previous number.

3 - FIIAH are funds that are constituted with the characteristics mentioned in articles 2 to 6 of the present legal regime and that adopt such denomination.

Article 2

Types and Form of Subscription

FIIAH are constituted in the form of closed funds with public or private subscription.

Article 3

Asset Value and Dispersion

1 - After the first year of activity, the value of total assets of FIIAH must reach the minimum amount of (euro) 10 million and, when constituted with recourse to public subscription, have at least 100 participants, whose individual participation may not exceed 20% of the value of total assets of the fund.

2 - Non-compliance with the individual participation limit provided for in the previous number determines the immediate and automatic suspension of the right to distribution of income of FIIAH in the amount of the participation that exceeds that limit.

3 - Without prejudice to the provision of the previous number, in the event of non-compliance with the provision of n.º 1, the Portuguese Securities Market Commission (CMVM) may revoke the authorization of the FIIAH.

Article 4

Composition of Assets

1 - The composition of the assets of FIIAH shall be governed by the provision of article 46 of the Legal Regime of Real Estate Investment Funds, such that at least 75% of its total assets consists of real estate, situated in Portugal, intended for leasing for permanent residential purposes.

2 - The percentage limit defined in the previous number is assessed in relation to the average of the values verified at the end of each of the last six months, being complied with within a two-year period from the date of constitution of the FIIAH, and one year from the date of increase of capital, regarding the amount of the increase.

Article 5

Purchase Option

1 - Borrowers of residential credit contracts who proceed to alienate the real estate subject to the contract to a FIIAH may enter into a leasing contract with the fund management entity.

2 - Prior to the execution of the contract for transfer of ownership of the real estate to the FIIAH, the respective management entity shall provide to the alienator, on paper or on another durable medium, information on the essential elements of the transaction, such as the price of the transaction, including, if applicable, the amount of the rent, the respective conditions of updating and the criteria for fixing the price and the general terms of exercise of the purchase option.

3 - The leasing under the terms provided for in n.º 1 constitutes the lessee in a right of purchase option of the real estate, to the fund, susceptible of being exercised until 31 December 2020.

4 - The right of purchase option of the real estate provided for in the previous number is only transferable by death of the holder.

5 - The right of purchase option provided for in n.º 3 ceases if the lessee defaults on the obligation to pay rent to the FIIAH for a period exceeding three months.

6 - The terms and conditions of exercise of the option provided for in the previous numbers shall be regulated by ordinance of the member of the Government responsible for the area of finance, and must ensure the right of the alienator to repurchase the real estate from the FIIAH by reference to the updated value of the alienation, as well as, in the case of non-exercise of the right of option, the right to receive the difference between the value of future alienation of the real estate and the updated value of acquisition of that same real estate by the FIIAH.

7 - The ordinance provided for in the previous number shall equally determine the criteria for fixing and updating the values referred to therein.

Article 6

Distribution of Results

The results relating to units of participation of the FIIAH are distributed with a minimum annual periodicity and in an amount not less than 85% of the net results of the fund.

Article 7

Monitoring Committee

1 - A monitoring committee shall be responsible for verifying compliance with the legal and regulatory regime applicable to the activity of FIIAH and monitoring compliance with principles of good governance.

2 - The monitoring committee is composed of three independent persons designated by the member of the Government responsible for the area of finance, in accordance with criteria of competence, suitability and professional experience.

3 - The functions of the monitoring committee are, in particular, the following:

a) Verify compliance with the legal regime and the principles of good governance that should govern the management of the FIIAH, in particular in matters of implementation of investment and financing policy and responsibilities, as well as respect, by the management entity, of the rights of participants and of lessees, in particular as to compliance with the duties of information established in their favour;

b) Verify, in particular, compliance by the FIIAH with the regime for exercise of the purchase option by the lessee;

c) Exercise any other functions assigned to it in the fund management regulations.

4 - The resolutions of the monitoring committee are recorded in minutes, and these must be sent to the CMVM.

5 - The functioning of the monitoring committee is regulated, insofar as it is not defined in the present law or in regulations of the CMVM, by the fund management regulations.

6 - The members of the monitoring committee, in that capacity, exercise their mandate with independence, and their status is determined by ordinance of the member of the Government responsible for the area of finance.

Article 8

Tax Regime

1 - Income of any nature obtained by FIIAH constituted between 1 January 2009 and 31 December 2015, which operate in accordance with national legislation and in compliance with the conditions provided for in the previous articles, are exempt from corporate income tax (IRC).

2 - Income relating to units of participation in the investment funds referred to in the previous number, paid or placed at the disposal of their respective holders, whether by distribution or reimbursement, are exempt from personal income tax (IRS) and IRC, excluding the positive balance between capital gains and capital losses resulting from alienation of units of participation.

3 - Capital gains resulting from the transfer of real estate intended for permanent residential use in favour of the investment funds referred to in n.º 1, which occurs by virtue of the conversion of the right of ownership of such real estate into a right of leasing, are exempt from IRS.

4 - The capital gains referred to in the previous number are subject to taxation, under the general rules, if the taxpayer terminates the leasing contract or does not exercise the right of option provided for in n.º 3 of article 5, with the periods of lapse and prescription for the purposes of assessment and collection of IRS being suspended until the end of the contractual relationship.

5 - The amounts borne by lessees of the real estate of the investment funds referred to in n.º 1 as a result of the conversion of a right of ownership of real estate into a right of leasing are deductible from the tax, in the terms and limits contained in letter c) of n.º 1 of article 85 of the IRS Code.

6 - Urban real estate intended for leasing for permanent residential purposes that form part of the assets of the investment funds referred to in n.º 1 are exempt from real estate tax (IMI), while they remain in the portfolio of the FIIAH.

7 - Are exempt from IMT:

a) Acquisitions of urban real estate or of autonomous fractions of urban real estate intended exclusively for leasing for permanent residential purposes, by the investment funds referred to in n.º 1;

b) Acquisitions of urban real estate or of autonomous fractions of urban real estate intended for permanent residential use, as a result of the exercise of the purchase option referred to in n.º 3 of article 5 by lessees of the real estate that form part of the assets of the investment funds referred to in n.º 1.

8 - All acts are exempt from stamp duty, provided that they are connected with the transfer of urban real estate intended for permanent residential use that occurs by virtue of the conversion of the right of ownership of such real estate into a right of leasing on the same, as well as with the exercise of the purchase option provided for in n.º 3 of article 5.

9 - The management entities of FIIAH are exempt from supervision fees with respect solely to the management of funds of this nature.

10 - The exemptions contained in the present article are excluded for entities that are resident in a country, territory or region subject to a clearly more favourable tax regime, contained in a list approved by ordinance of the Minister of Finance.

11 - The obligations provided for in article 119 and in n.º 1 of article 125 of the IRS Code shall be complied with by the management or registration entities.

12 - If the requirements referred to in n.º 1 cease to be met, the application of the regime provided for in the present article ceases, and the regime provided for in article 22 of the Tax Benefits Statute, approved by Decree-Law n.º 215/89, of 1 July, shall apply, and the income of the investment funds referred to in n.º 1 which, at that date, have not yet been paid or placed at the disposal of their respective holders shall be taxed at the rates provided for in article 22-A of the aforementioned decree-law, with the addition of compensatory interest.

13 - The management entities of the investment funds referred to in n.º 1 are jointly and severally liable for the tax debts of the funds whose management is their responsibility. (underlined)

Article 9

Transitional Regime

1 - Within six months following the date of authorization of the FIIAH and, at the limit, until 31 December 2009, the management entities may carry out transactions between real estate investment funds under their management with the sole purpose of including in the portfolio of the FIIAH real estate intended for permanent residential use, provided that all legal safeguards are observed, in particular as regards the protection of the interests of investors.

2 - The transactions carried out under the provision of the previous number are communicated to the CMVM within that period, with the identification of the essential elements thereof."

2 - The regime contained in the present section is in force until 31 December 2020, with the conversion of FIIAH into real estate investment funds subject in full to the Legal Regime of Real Estate Investment Funds taking place on that date."

Given the legislative dynamics that the legal regime of the investment vehicles now under analysis has undergone, by means of Law n.º 83-C/2013, of 31 December, the legislator came to add to article 8 numbers 14 to 16, which received the following wording:

"14 — For the purposes of the provision in numbers 6 to 8, it is considered that urban real estate is intended for leasing for permanent residential purposes whenever it is subject to a leasing contract for permanent residential purposes within a three-year period counted from the moment when they came to form part of the assets of the fund, and the taxpayer must communicate and provide proof to the AT of the respective effective leasing, within 30 days following the end of that period.

15 — When the real estate has not been subject to a leasing contract within the three-year period provided for in the previous number, the exemptions provided for in numbers 6 to 8 become ineffective, and in such case the taxpayer must request from the AT, within 30 days following the end of that period, the assessment of the respective tax.

16 — If the real estate is alienated, with the exception of the cases provided for in article 5, or if the FIIAH is subject to liquidation, before the expiration of the period provided for in n.º 14, the taxpayer must also request from the AT, prior to the alienation of the real estate or the liquidation of the FIIAH, the assessment of the tax due in accordance with the previous number."

The identified legal instrument also established in its article 236, the following transitional regime:

"1 — The provision in numbers 14 to 16 of article 8 of the special regime applicable to FIIAH and SIIAH, approved by articles 102 to 104 of Law n.º 64-A/2008, of 31 December, is applicable to real estate that has been acquired by FIIAH as from 1 January 2014.

2 — Without prejudice to the provision in the previous number, the provision in numbers 14 to 16 of article 8 of the special regime applicable to FIIAH and SIIAH, approved by articles 102 to 104 of Law n.º 64-A/2008, of 31 December, is equally applicable to real estate that was acquired by FIIAH before 1 January 2014, counting, in such cases, the three-year period provided for in n.º 14 from 1 January 2014."

In turn, article 11 of the General Tax Law establishes the essential rules for interpretation of tax laws in the following terms:

Article 11

Interpretation

1. In determining the meaning of tax norms and in qualifying the facts to which they apply, the general rules and principles of interpretation and application of laws are observed.

2. Whenever tax norms employ terms specific to other branches of law, these must be interpreted in the same sense that they have there, unless the law provides otherwise.

3. If doubt persists as to the meaning of the applicable rules of incidence, account must be taken of the economic substance of the tax facts.

4. Gaps resulting from tax norms covered by the constitutional reservation of law to Parliament are not susceptible to analogical filling.

The general principles of interpretation of laws, to which number 1 of article 11 of the LGT refers, are established in article 9 of the Civil Code, which provides as follows:

Article 9

Interpretation of Law

1. Interpretation shall not be confined to the letter of the law, but shall reconstruct from the texts the legislative intent, having particular regard to the unity of the legal system, the circumstances in which the law was enacted and the specific conditions of the time in which it is applied.

2. The interpreter may not, however, take into account the legislative intent that does not have in the letter of the law a minimum of verbal correspondence, even if imperfectly expressed.

3. In determining the meaning and scope of the law, the interpreter shall presume that the legislator adopted the most appropriate solutions and knew how to express his intent in adequate terms."

Taking as a reference point the principles arising from the above-cited norms, it is necessary to examine their application to the present case.

From the reading of the legal regime of FIIAH and anchored in the principles and general rules for interpretation of legal norms, it is necessary, first and foremost, to carry out a brief framework of the legislative rationale for the creation of this legal (and tax) regime.

The legislator, perhaps in the face of the scenario of economic and financial crisis that struck the Portuguese economy from the second half of 2008, sought to find legislative solutions that would allow mitigating the situations of individuals and families with difficulties in fulfilling the payment of their commitments relating to residential credit to which they had resorted, the real estate acquired for that purpose being most often given to the lending entity as collateral security for the good payment of that same residential credit and, on the other hand, it would wish to avoid imbalances in the banking system, which could occur by virtue of the massive sale placement by banks of real estate acquired as a result of prior default by borrowers, a situation that would imbalance the supply and demand and lead to greater depreciation of the market value of such real estate and thus to an erosion of the value of the real estate assets guaranteeing the payment of such loans.

To that end, the legislator forged a mechanism that would enable borrowers (or third parties) to remain in the residential unit given as security for that same loan in the event of inability to meet the financial obligations associated with it, by leasing them from these FIIAH, which would be achieved by the acquisition by FIIAH of the real estate in question and subsequent leasing to the borrowers of those same residential units, thus avoiding a dramatic increase in the number of real estate available for sale in the real estate market, much higher than demand, with the implied negative reflexes that such a situation would have on prices from the seller's perspective.

A legal regime which established, from the outset, the right of lessees to acquire the real estate taken on lease from FIIAH, through a purchase option right – n.º 3 of article 5 of the legal regime of FIIAH.

In order for such a regime to be a successful solution and with acceptance, it would be necessary that such operations associated with the real estate were not tax-penalizing for the individuals and entities involved in them.

Accordingly, the legislator enshrined various norms aimed at making, as a general rule, neutral and even advantageous, from the tax point of view, the recourse to this same legal regime.

Such that, in matters of IMT (and equally IS), the following exemptions were provided for, in accordance with n.º 7 of article 8 of the LOE2009:

• The acquisition by FIIAH of real estate or autonomous fractions of urban real estate intended exclusively for leasing for permanent residential use;

• The acquisition of real estate or autonomous fractions of urban real estate intended for permanent residential use, as a result of the exercise of the purchase option referred to in n.º 3 of article 5 by lessees of the real estate that form part of the assets of FIIAH;

Now, we are thus in the presence of exemptions applicable to absolutely distinct tax facts: the first of the exemption situations applicable at the time of acquisition by FIIAH of residential real estate for the sole purpose of leasing it.

And the second taxable fact susceptible to exemption occurs when, at a second moment, the lessees of the real estate held by FIIAH exercise the right of purchase option on the real estate taken on lease.

Therefore, without room for any hesitation, it is necessary to establish that the circumstance of alienation by the Claimant for a purpose different from that contained in letter b) of n.º 7 of article 8 of article 104 of LOE2009 would in no way collide with the right to exemption by the FIIAH (managed by the Claimant) with respect to the exemption to which letter a) of the aforementioned provision refers.

This is because, in the case of the present arbitral proceedings, the FIIAH managed by the Claimant had benefited from the exemption in the first of the situations stated, which meant respecting the exclusive purpose of the aforementioned letter a) contained, that is, that the Claimant's FIIAH should destine the real estate exclusively to leasing for permanent residential purposes, independently of the circumstance that subsequently it alienates it under or not letter b) of n.º 7 of article 8.

Now, the amendments brought about through Law n.º 83-C/2013, of 31 December, in no way modified the essence of the tax regime that derived from LOE2009, this is because, in fact, the legislator continued to make the recognition of the exemption dependent on the destination for permanent residential leasing.

There was not even any amendment to the normative framework already in existence, but rather additions of various numbers to articles already in force and equally proceeding with the approval of a transitional regime for articulation between the two different laws that are at the basis of the current legal regime of FIIAH (approved in 2008 and 2013).

This means that the introduction of additions to existing provisions maintained, in their essence, the facts subject to exemption from IMT (and IS), only (in what is relevant for the examination of these proceedings) proceeding with the regulation of what should be understood by destination for permanent residential leasing, making it concrete in terms of effective leasing and its respective temporal delimitation to which it should be subject.

Now, in this respect and bearing in mind what has been stated above regarding the legislative rationale that underlies this legal regime, it would be poorly understood that the legal-tax framework of FIIAH, in the segment pertaining to letter a) of n.º 7 and n.º 8 of article 8 - article 104 of LOE2009 - could be interpreted as not binding FIIAH to the effectuation of permanent residential leasing with respect to real estate acquired for that purpose by FIIAH.

The extra-fiscal legislative purpose that underlies the granting of this exception to the general rule of taxation of transfers of real estate does not appear to have been merely to allow FIIAH to passively park real estate with a view to its subsequent resale, especially because for such purpose there already exists an exemption enshrined in the IMT Code, enshrined in article 7 of the IMT Code.

That is, considering the legislative intent and the general rules of interpretation of norms – see n.º 1 of article 9 of the Civil Code, it is not possible to conceive the tax regime of FIIAH as it pertains to the exemption from IMT under the aforementioned letter a) of n.º 7 (and as to n.º 8 as regards IS) without the effectuation of actual leasing being a constitutive element of that same right to the tax benefit in question.

In this regard, it should also be noted that reading the initial request for arbitral decision submitted by the Claimant does not even result in any mention of the fact that the Claimant had, since the date of acquisition of the autonomous fraction – or at any later time - effectuated any permanent residential leasing on the real estate benefiting from the exemption.

That is, there is no evidence that between acquisition and alienation the Claimant proceeded to lease the real estate for permanent residential purposes.

Therefore, since such matter was not even expressly invoked, much less was it proved, and since such burden of proof was incumbent upon the Claimant in accordance with n.º 1 of article 74 of the General Tax Law, not forgetting also that we are not dealing with IMT and IS assessments generated by the AT's initiative (ex officio), but rather tax assessments issued following declarations made by the Claimant itself with a view to that same purpose – issuance of the competent IMT and IS assessments.

Which is equivalent to stating that the Claimant failed to prove a constitutive element of its right to the tax benefit materialized in the exemption from IMT under letter a) of n.º 7 of article 8 of the legal regime of FIIAH (and IS, in accordance with n.º 8), independently of the legal wording in light of which the Claimant's right to the tax benefit being examined is to be assessed.

For which reason, in the absence of such constitutive element of the right to tax benefit, even in light of the wording in force until 2013, the alleged violation of the right to protection of confidence, security and legal expectation on which the Claimant bases itself in the domain of the alleged violation of n.º 3 of article 103 of the Constitution of the Portuguese Republic, proves to be spurious and undermined, given the non-proof of the constitutive element of the right to such tax benefit, which would always have to be verified upstream of the assessment of any possible unconstitutionality.

Nevertheless, we cannot fail to make reference here, in agreement with its meaning and reasoning, to what was decided by the Constitutional Court in the scope of decision 85/2010, of 3 March, according to which:

"In Decision n.º 287/90, of 30 October, the Court established the limits of the principle of protection of confidence in weighing the possible unconstitutionality of norms endowed with 'inauthentic retroactivity, retrospective effect.' In this case, similarly to what occurs now, it was a question of the application of a new law to new facts, yet there was a prior context to the occurrence of the fact that created, possibly, legal expectations. It was in this decision that the Court proceeded to distinguish between the treatment that should be given to cases of 'authentic retroactivity' and the treatment to be conferred on cases of 'inauthentic retroactivity' which would be, it was said, protected only in light of the principle of confidence as a consequence of the principle of rule of law enshrined in article 2 of the Constitution.

In accordance with this jurisprudence on the principle of legal security in the material aspect of confidence, for the latter to be protected it is necessary that two essential prerequisites be met:

a) the affectation of expectations, in an unfavourable sense, will be inadmissible when it constitutes a mutation of the legal order with which, reasonably, the recipients of the norms contained in it cannot reckon; and furthermore

b) when not dictated by the necessity of safeguarding rights or interests constitutionally protected that should be considered to be prevailing (one should resort here to the principle of proportionality, explicitly enshrined, as regards rights, liberties and guarantees, in n.º 2 of article 18 of the Constitution).

The two criteria stated (and which are equally expressed in other jurisprudence of the Court) are, in essence, reducible to four different requirements or 'tests'. In order for there to be legal-constitutional protection of 'confidence,' it is necessary, in the first place, that the State (in particular the legislator) has undertaken conduct capable of generating in private parties 'expectations' of continuity; then such expectations must be legitimate, justified and founded on good reasons; thirdly, private parties must have made life plans taking into account the prospect of continuity of 'State conduct'; and finally, it is still necessary that no reasons of public interest occur that justify, in balance, the non-continuity of the conduct that generated the situation of expectation.

This principle thus postulates an idea of protection of the confidence of citizens and the community in the stability of the legal order and in the constancy of State action. However, the confidence here is not just any confidence: if it does not meet the four requirements that were formulated above, the Constitution does not grant it protection.

For this reason, it was still said in Decision n.º 287/90 – and it is important to bear this in mind in this case – that, in principle, and having regard to the self-revision capability of laws, 'there is no (…) a right to non-frustration of legal expectations or to maintenance of the legal regime in lasting legal relationships or as to complex facts already partially realized.'"

It thus results that for one to be able to speak with propriety of legal-constitutional protection of 'confidence' it is necessary that the legislator has undertaken conduct capable of generating in private parties 'expectations' of continuity, which does not occur at all in this case, since perplexity could not but be generated by such a poorly densified formulation as the normative version approved in 2008.

Secondly, the expectations of the 'affected' taxpayers must be legitimate, justified and founded on good reasons, which likewise does not appear to subsume to the case of the present proceedings, given that the tenuously concrete 2008 wording was potentially generative of situations in which the legislative rationale was object to total distortion of the purposes that presided over the granting of the exceptional tax benefit in question, chief among them: ensuring the effectuation of the leasing to which the real estate was intended.

Without even need to take into consideration the two remaining 'tests,' given the cumulative nature of the four, the claim of unconstitutionality cannot deserve acceptance also from this perspective.

In this context, no censure whatsoever, as regards non-conformity with the legal order, whether infra-constitutional or constitutional, merit the assessments of IMT and IS subject to these proceedings, which result, as was appropriately noted, from declarations made by the Claimant itself.

In light of all that has been set out and concluded above, as no judgment of illegality is issued with respect to the tax assessments subject to the present arbitral decision, the consideration of compensatory indemnification at the level of interest to be borne by the Respondent in favour of the Claimant is prejudiced and, equally and naturally, the restitution of those same taxes paid.

Finally, the Claimant also invokes the nullity of the tax assessments of assessment by virtue of the violation of n.º 3 of article 103 of the Constitution of the Portuguese Republic (CRP).

Now, given the reasoning set out above regarding the non-occurrence of any application of a legal-tax provision non-conforming with the CRP, the acceptance of the recognition and declaration of nullity of such tax assessments is equally prejudiced, and, even if such non-application for reasons of non-constitutionality were to occur, such circumstance would not of itself dictate the nullity of the tax assessment.

This Court is inclined to follow the understanding repeatedly expressed by the Supreme Administrative Court, to the effect that the nullity that may underlie a tax assessment does not by itself generate the nullity of that same assessment (unless it offended the essential content of a fundamental right, which does not occur for the reasons already stated), but rather its abstract illegality, reason for which the application of a norm on the basis of its erroneous validity or existence should lead to the voidability of the tax assessment, based on error regarding the legal prerequisites on which the assessment was based.

5. DECISION:

On these grounds and with the reasoning set out above, this arbitral tribunal decides:

1. To declare completely without merit the claim for declaration of nullity and illegality of the tax assessments of IMT and IS, by non-occurrence of any of the defects attributed to them by the Claimant.

2. To condemn the Claimant to payment of costs in accordance with Table I of the RCPTA, calculated according to the value of the case - arts. 4-1 of the RCPTA and 6, n.º 2, letter a) and 22, n.º 4, of the RJAT.

Value of the case: € 1,510.20 – arts. 97-A of the CPPT, 12 of the RJAT (DL 10/2011), 3-2 of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).

Let notice of this arbitral decision be given to the parties and, in due course, let the proceedings be filed.

Lisbon, 1 August 2016.

The sole arbitrator

(Luís Ricardo Farinha Sequeira)

Text prepared by computer, in accordance with article 138, n.º 5 of the Code of Civil Procedure (CPC), applicable by reference of article 29, n.º 1, letter e) of the Tax Arbitration Framework, with blank lines and reviewed by me.