Process: 91/2015-T

Date: November 11, 2015

Tax Type: IMI

Source: Original CAAD Decision

Summary

This arbitration case (91/2015-T) addresses whether the IMI safeguard clause applies when a property converts from full ownership to horizontal property regime. The taxpayer company owned an urban property in Lisbon that was registered under horizontal property on July 4, 2013, creating 22 autonomous fractions. The Tax Authority issued a third installment IMI assessment for 2013 totaling €3,675.31 without applying the safeguard clause from article 15-O of Decree-Law 287/2003. The taxpayer challenged this through CAAD arbitration, arguing the safeguard clause should continue to apply despite the property conversion, and that the assessment violated principles of good faith, contributive capacity, justice, proportionality, equality, and property rights. The Tax Authority defended its position by asserting that constituting horizontal property created entirely new properties with distinct legal individuality under article 2(4) of the IMI Code. According to the Authority, even though ownership remained with the same entity, the owner no longer held a single right over the entire building but instead held separate rights over each autonomous fraction. This legal transformation allegedly constituted creation of new properties ex novo that were not entitled to the transitional regime protections. The third installment represented a reconciliation of total 2013 IMI (€5,935.83) after deducting two paid installments (€2,260.52). The central legal question is whether the safeguard clause protecting properties under the general urban valuation transition regime continues when property is divided into horizontal fractions mid-year, or whether such division creates new taxable properties excluded from transitional protections. The case highlights the tension between legal form and economic substance in property tax treatment.

Full Decision

Arbitral Decision

CAAD: Tax Arbitration

Case No. 91/2015 – T

Subject: Municipal Property Tax

Claimant/Applicant: A… – …, LDA

Respondent: Tax and Customs Authority (hereinafter A.T.A.)

  1. Report

On 12-02-2015, the private limited company A… – …, LDA, tax identification number …, with registered office at Rua …, no. …, …, … Lisbon, hereinafter referred to as the Applicant, submitted to the Administrative Arbitration Center (CAAD) a request for constitution of an arbitral tribunal for the purpose of annulling the tax act regarding the assessment of Municipal Property Tax (IMI) no. 2013 …, for the year 2013, relating to the third instalment, and concerning the property located at Rua …, no. …, …, …, … and Avenida …, no. … and …, … Lisbon, registered in the property register under no. … of the parish of ....

The Applicant requests the annulment of the IMI assessment relating to the third instalment of the year 2013, alleging that the safeguard clause was not taken into consideration.

The Applicant further alleges that the assessments violate the principle of good faith and the principle of contributive capacity, as they require tax amounts that are not legally due.

The Applicant further states that there is a violation of the principle of justice, the prevalence of substance over form, the right to property, equality, and proportionality.

The Applicant requests, finally, a declaration of illegality of the assessment in question, and its replacement with another respecting the safeguard clause, and that the A.T.A. be ordered to refund to it the amount resulting from the difference between the assessment of the first instalment and the assessment of the third instalment, which it estimated at €2,545.05, plus compensatory interest.

A sole arbitrator was appointed on 13-04-2015: Suzana Fernandes da Costa.

In accordance with the provisions of article 11, paragraph 1, subparagraph c) of the Tax Arbitration Regime (RJAT), the sole arbitral tribunal was constituted on 21-05-2015.

The Tax and Customs Authority filed a response on 24-06-2015.

The A.T.A. states that the property in question, upon being constituted as horizontal property in July 2013, ceased to exist on 31-12-2013, and in its place, 22 autonomous fractions legally capable of individualization came into existence, which, pursuant to paragraph 4 of article 2 of the IMI Code, are individually considered as properties for IMI purposes. For the A.T.A., these are new properties, therefore it is not the same property that benefited from the transitional regime of general valuation of urban properties added to Decree-Law no. 287/2003 of 12-11, by Law no. 60-A/2011.

And it alleges that the assessment corresponding to the third instalment of IMI for 2013 in the amount of €3,675.31 constitutes a reconciliation of accounts in the IMI assessment for that year, in the total amount of €5,935.83, taking into account the two instalments already paid totalling €2,260.52.

The A.T.A. further requested in its response the waiver of the meeting provided for in article 18 of the Tax Arbitration Regime, as well as the waiver of oral arguments.

On 08-07-2015, an order was issued scheduling the meeting provided for in article 18 of the RJAT for 21-10-2015, at 14:00 hours, given that the A.T.A. presented a defense by exception.

On the day prior to the scheduled date for the meeting, the A.T.A. sent a request to the case file, stating that the legal representatives designated in this case would not be present at the meeting, due to the volume of work assigned.

At the meeting, the Honourable Dr. B and the Honourable Dr. C appeared as representatives of the Applicant.

The representative of the Applicant pronounced on the matter of exception contained in the A.T.A.'s response, concluding that the exception was unfounded and defending the declaration of illegality of the assessment in question in this case.

It was decided at the meeting to forgo final oral arguments.

The arbitral tribunal further decided to set 11-11-2015 as the date for rendering the arbitral decision. Finally, the Applicant was warned to, by that date, proceed with payment of the subsequent arbitration fee.

The parties possess legal personality and capacity and are legitimate (articles 4 and 10, paragraphs 1 and 2 of the RJAT and article 1 of Order no. 112-A/2011 of 22 March).

This request for arbitral decision was presented in a timely manner, pursuant to article 10, paragraph 1, subparagraph a) of Decree-Law no. 10/2011 of 20 January.

The case does not suffer from nullities and no preliminary questions were raised.

  1. Matter of Fact

2.1. Proven Facts:

Upon analysis of the documentary evidence produced, the following facts are considered proven and relevant for the resolution of the case:

  1. In 2013, the Applicant was the owner of the urban property located at Rua …, no. …, …, …, … and Avenida …, no. … and …, … Lisbon, registered in the urban property register under article … of the parish of ..., municipality of Lisbon, described in the Real Property Registry of Lisbon under no. …, as shown in the property certificate attached to the arbitration request as document 2.

  2. The aforementioned property is registered with the Real Property Registry of Lisbon, in horizontal property regime since 04-07-2013, as shown in the property certificate attached to the arbitration request as document 2.

  3. The A.T.A. processed the assessment of the first instalment of IMI on 05-03-2014.

  4. The A.T.A. issued, in relation to the aforementioned property, on 01-05-2014, an assessment note for the third instalment of IMI for 2013, with no. 2013 …, in the amount of €3,675.31, as document 1 attached to the arbitration request.

  5. And issued on the same date a "statement demonstrating the assessment" corresponding to the totality of IMI 2013, in the total amount of €5,935.83.

  6. The Applicant proceeded to pay the third instalment of Stamp Tax in the amount of €3,675.31.

No other facts relevant to the resolution of the case were proven.

2.2. Justification of Proven Facts:

Regarding the proven facts, the arbitrator's conviction was based on the documentary evidence attached to the case file and on facts admitted by agreement.

  1. Matter of Law:

3.1. Object and Scope of This Proceeding

The decisive question in this case is whether the safeguard clause provided for in article 15-O of Decree-Law no. 287/2003 of 12-11, which benefited a property in the regime of full ownership, is applicable or not, given that the property changed from vertical property to horizontal property.

On 04-07-2013, the property at issue in this case (located at Rua …, no. …, …, …, … and Avenida …, no. … and …, … Lisbon, registered in the property register under no. … of the parish of ...) was constituted as horizontal property, giving rise to 22 autonomous fractions identified by the letters A to X, as shown in the property certificate attached with the arbitration request.

The A.T.A. understands that the safeguard clause does not apply due to a change in the type of property, which ceased to be type A – full ownership or with divisions – and became type F – horizontal property.

For the A.T.A., "with the constitution of horizontal property, the property became legally divided into several autonomous fractions, each with its own legal individuality. And even though the owner remains the same, the latter no longer has a single right over the entire building, but instead has as many rights as there are autonomous fractions."

The A.T.A. further alleges that "the modification of the legal regime from full ownership to horizontal property of the property in question has as a consequence the constitution ex novo of rights of horizontal property over each of the new fractions or properties."

In its response, the A.T.A. also states that "the new legal situation must be reflected in the property register inscription of the property in horizontal property regime, pursuant to article 92 of the IMI Code, according to which, each building in horizontal property corresponds to only one entry in the property register (no. 1), generically describing the building and mentioning the fact that it is in a horizontal property regime (no. 2), the autonomy being specified in the property register by the attribution to each of the autonomous fractions, described in detail and individualized, of a capital letter, according to alphabetical order (no. 3)".

And it concludes that "in that measure, facing the new properties corresponding to the autonomous fractions resulting from the constitution of horizontal property, and because it is not the same property that benefited from the transitional regime of General Valuation of Urban Properties (…), there was no objective prerequisite for the application of the safeguard clause provided for in article 15-O (…)".

For the Applicant, however, the safeguard clause only ceases to have application if the taxpayer changes, and "it is neither can it be considered that a mere change in the type of property can constitute a change in the taxpayer."

Let us examine what is provided by the safeguard clause set forth in article 15-O of Decree-Law no. 287/2003 of 12-11, added by Law no. 60-A/2011 of 30-11:

"1 – The collection of IMI concerning the years 2012 and 2013 and assessed in the years 2013 and 2014, respectively, for property or part of urban property subject to general valuation, cannot exceed the collection of IMI due in the immediately preceding year, plus, in each of those years, the greater of the following values:

a) €75; or

b) One third of the difference between the IMI resulting from the patrimonial value determined in the general valuation and the IMI due in the year 2011 or that should be due, in the case of exempt properties.

2 – The collection of IMI of property or part of urban property subject to general valuation, intended for the permanent personal residence of the taxpayer or of its household, whose taxable income for purposes of personal income tax in the previous year does not exceed €4,898, cannot exceed the collection of IMI due in the immediately preceding year plus, in each year, an amount equal to €75.

3 – In the event that the taxpayer ceases to benefit from the regime provided for in the previous paragraph, the provisions of paragraph 1 shall apply, with the necessary adaptations, concerning the difference between the IMI resulting from the patrimonial value determined in the general valuation and the collection of IMI due in the immediately preceding year.

4 – The provisions of the previous paragraphs do not apply:

a) To vacant properties and properties in ruins referred to in paragraph 3 of article 112 of the IMI Code;

b) To properties owned by the entities referred to in paragraph 4 of article 112 of the IMI Code;

c) To properties in which there is a change in the IMI taxpayer after 31 December 2011, except in transfers by death of which the spouse, descendants and ascendants are beneficiaries when the latter do not express a contrary will."

Article 2, paragraph 4 of the IMI Code states that for purposes of this tax, each autonomous fraction, under the horizontal property regime, is considered as constituting a property.

Article 12, paragraph 3 of the same code requires that each floor or part of property capable of independent use is considered separately in the property register inscription, which also discriminates the respective patrimonial value.

Analyzing comparatively the IMI regime applicable to autonomous fractions of property in horizontal property and to units capable of independent use of property in vertical property ownership, we must conclude that the regimes are identical. Note that, despite the legal-formal nature being different, the tax regime of these figures is exactly the same. As stated in the CAAD decision in case 174/2015, where it states that:

"a) properties in horizontal property and properties in full ownership are subject to the same rules of entry in the property register, as provided in paragraph 3 of article 12 of the IMI Code aforementioned;

b) properties in horizontal property and properties in full ownership are subject to the same rules and procedures for valuation, with the provision being expressly made in subparagraph b) of paragraph 2 of article 7 of the IMI Code that, should the parts composing the property in full ownership be economically independent, each part is valued by application of the corresponding rules".

Moreover, article 119, paragraph 1 of the IMI Code mentions that the assessment of IMI discriminates the properties, their parts capable of independent use, and respective patrimonial value. Thus, and as stated in the CAAD decision of case no. 174/2015-T, it is the "legislator determining that the assessment of tax must be done individually, considering each economic reality and not each legal reality".

Let us further note that the tax base of IMI is determined in exactly the same manner, that is, it corresponds to the individual patrimonial value of each autonomous fraction or independent part, contained in the property register. Thus, and as stated in the CAAD decision of case no. 174/2015-T, "the assessment is made in an individualized and autonomous manner based on each of the independent parts of the property, whether or not they are autonomous fractions".

Verifying that for purposes of IMI the legislator chose to equate the properties before and after the constitution of horizontal property, there is no justification for disregarding the safeguard clause by the mere change in the nature of the property in question in the terms already explained.

On the other hand, there is extensive CAAD jurisprudence to the effect of equating properties in vertical property and properties in horizontal property with independent use, in the context of stamp tax, in compliance with the principle of tax equality.

Also, the principle of tax legality (article 103, paragraph 2 of the Constitution) requires that the meaning of the law cannot be restricted or analogy applied (article 11, paragraph 4 of the General Tax Law) in matters of taxpayer guarantees. As the law does not expressly state as a ground for the exclusion of the safeguard clause the change in the property regime, it is not legitimate to base the exclusion of the clause without express legal basis.

The A.T.A.'s decision, as justified, suffers from a defect in reasoning, pursuant to article 77 of the General Tax Law.

The assessment in question, in requiring tax without application of the safeguard clause, further violates the principle of good faith and the principle of contributive capacity.

Of the remaining principles invoked by the Applicant, in our view, the principle of justice and equality will also be violated, insofar as two materially identical situations could have substantially different taxation, by the mere modification of the property regime, without there being legal expression for this.

As to the principle of proportionality, it will be violated insofar as by virtue of the alteration in the property regime, the A.T.A. excludes the application of the safeguard clause that had the objective of a gradual application of the new legal regime, leading to exaggerated taxation in the Applicant's sphere.

As for the principle of the prevalence of substance over form, the same, in our view, will not be violated.

It should also be noted that since the Applicant only raises in the case file the partial illegality of the IMI assessment for 2013, corresponding to the third instalment, and not the illegality of the total assessment corresponding to that year, and notified on the same date, we shall limit the decision to the assessment of the third instalment of IMI, in the terms identified by the Applicant.

Furthermore, the conclusion regarding the illegality of the non-application of the safeguard clause makes moot the examination of the remaining questions raised in the case file.

  1. Compensatory Interest

The Applicant requested that the A.T.A. be ordered to refund the unduly paid tax, plus compensatory interest.

Article 43, paragraph 1 of the General Tax Law establishes that "compensatory interest is due when it is determined, in a gracious claim or judicial challenge, that there was an error attributable to the tax authorities as a result of which the tax debt was paid in an amount exceeding that legally due".

In the case at hand, the error affecting the assessment is attributable to the Tax and Customs Authority, which carried out the assessment acts on its own initiative, and therefore the Applicant is entitled to compensatory interest from the date of payment of each sum until reimbursement, at the legal supplementary rate, pursuant to articles 43, paragraphs 1 and 4, and 35, paragraph 10, of the General Tax Law, article 559 of the Civil Code, and Order no. 291/2003, of 8 April.

As results from the aforementioned article 43, paragraph 1 of the General Tax Law, the right to compensatory interest depends on the payment of a tax debt in an undue amount.

The IMI assessment no. 2013 …, corresponding to the third instalment of IMI for the year 2013, being affected by illegality, compensatory interest is due from the date of excess payment until complete reimbursement by the A.T.A., pursuant to articles 43 of the General Tax Law and 61, paragraph 2 of the Code of Tax Procedure and Process.

  1. Decision

In view of the foregoing, it is determined:

a) to uphold the claim filed by the Applicant in this tax arbitration proceeding, regarding the illegality of the IMI assessment no. 2013 …, in the amount of €3,675.31;

b) to order the A.T.A. to refund the amount paid in excess by the Applicant;

c) to order the A.T.A. to pay to the Applicant compensatory interest, calculated from the date of payment of the excess IMI of 2013 until the date of its refund to the Applicant.

  1. Value of the Proceeding:

In accordance with the provisions of article 315, paragraph 2, of the Code of Civil Procedure and article 97-A, paragraph 1, subparagraph a) of the Code of Tax Procedure and Process and article 3, paragraph 2 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the action is fixed at €3,675.31.

  1. Costs:

Pursuant to article 22, paragraph 4, of the RJAT, and Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is fixed at €612.00, to be borne by the Tax and Customs Authority.

Notify.

Braga, 11 November 2015.

Text prepared by computer, pursuant to article 138, paragraph 5 of the Code of Civil Procedure (CPC), applicable by reference of article 29, paragraph 1, subparagraph e) of the Tax Arbitration Regime, by me revised.

The sole arbitrator

Suzana Fernandes da Costa

Frequently Asked Questions

Automatically Created

What is the IMI safeguard clause and how does it apply to property tax liquidation in Portugal?
The IMI safeguard clause, established in article 15-O of Decree-Law 287/2003, is a transitional protection mechanism that limits property tax increases during implementation of the general urban property valuation system introduced by Law 60-A/2011. This clause ensures taxpayers do not face excessive tax burdens when properties are revalued under the new system. It applies to properties subject to the transitional regime of general valuation, limiting annual increases in IMI liability to protect taxpayers from sudden dramatic increases in property tax obligations resulting from updated valuations. The clause operates as a ceiling mechanism, ensuring gradual rather than abrupt tax increases during the transition period.
Does the constitution of horizontal property create new properties that lose the IMI transitional valuation regime?
According to the Tax Authority's position in this case, the constitution of horizontal property does create legally new properties that lose the IMI transitional valuation regime benefits. The Authority argues that when a property in full ownership is divided into horizontal property fractions, each autonomous fraction gains its own distinct legal individuality under article 2(4) of the IMI Code. Even though ownership remains with the same entity, the owner no longer holds a single right over the entire building but instead holds separate rights over each autonomous fraction. This legal transformation allegedly constitutes creation of new properties ex novo that are not entitled to safeguard clause protections that applied to the original undivided property. However, this interpretation was contested by the taxpayer, who argued that substance should prevail over form.
Can a taxpayer challenge IMI liquidation through CAAD tax arbitration when the safeguard clause is not applied?
Yes, taxpayers can challenge IMI liquidation through CAAD (Administrative Arbitration Center) tax arbitration when the safeguard clause is not applied. This case demonstrates that CAAD has jurisdiction to review disputes regarding application or non-application of the IMI safeguard clause. The taxpayer company successfully initiated arbitration proceedings by filing a request on February 12, 2015, seeking annulment of the third installment IMI assessment for 2013. The arbitral tribunal was constituted according to the Tax Arbitration Regime (RJAT), confirming that disputes over safeguard clause application fall within CAAD's competence. Taxpayers must file such requests in a timely manner as prescribed by article 10(1)(a) of Decree-Law 10/2011 of January 20.
How does the IMI third installment adjustment work when a property is split into autonomous fractions mid-year?
The IMI third installment adjustment works as a reconciliation mechanism when property is split mid-year into autonomous fractions. In this case, the Tax Authority processed the first installment assessment on March 5, 2014, based on the property's original status. When the property was constituted as horizontal property on July 4, 2013, creating 22 autonomous fractions, the Authority recalculated the total IMI liability for 2013 as €5,935.83. The third installment of €3,675.31 represented the balance due after deducting two already-paid installments totaling €2,260.52. This reconciliation approach ensures that the total annual IMI reflects the property's changed legal status and division into multiple taxable units during the fiscal year, effectively adjusting for the mid-year transformation.
What legal principles, such as good faith and proportionality, can be invoked to contest IMI tax assessments in Portugal?
Taxpayers can invoke several legal principles to contest IMI assessments in Portugal, including good faith, proportionality, contributive capacity, justice, equality, substance over form, and property rights. The principle of good faith requires the Tax Authority to act consistently and honor legitimate taxpayer expectations. The principle of contributive capacity, constitutionally protected in article 104(1) of the Portuguese Constitution, mandates that taxes reflect actual economic ability to pay. Proportionality requires that tax burdens be reasonable and not excessive relative to the tax's objectives. The principle of justice ensures fair treatment, while equality demands similar situations be taxed similarly. The principle of substance over form prevents purely formal legal changes from creating unjust tax consequences. These constitutional and administrative law principles can be invoked when assessments impose legally undue amounts or violate fundamental taxpayer protections.