27 June 2018
The Tax Authority is now expected to eliminate the IMI surcharge tax charged on investment funds who own land that is slated for the construction of buildings to be used in commerce. The Constitutional Court will have the final word.
The arbitration courts have ruled against the tax authorities’ interpretation of the permissible application of the IMI surcharge (AIMI) on land destined for the construction of buildings for trade and services. However, the court’s decision – in favour of investment funds and a bank – is not yet final, pending an appeal to the Constitutional Court.
In 2017, there were already close to three dozen lawsuits regarding the payment of the AIMI filed at the Administrative Arbitration Centre (CAAD), where tax-related disputes are litigated. In the cases where a decision has already been made, in April, May and June, judges ruled against the application of the AIMI on land destined for the construction of buildings for trade and services, vacating any previously paid taxes.
Although these decisions were favourable to taxpayers, not everything the claimants requested of the courts were viewed favourably. The requests for the AIMI to be declared unconstitutional, as well for differential treatment for funds and financial institutions, were denied. In one of the decisions, the arbitrators stated that the perceived “illegality” in relation to the AIMI being charged on land for the construction of services “does not result from unconstitutionality but an interpretation” of tax code’s standards on the application of the tax.
The controversial surcharge, which was first levied last year, replaced the previously existing Stamp Tax on luxury real estate valued above one million euros. The new tax is now applicable to the sum of the net asset value of residential buildings and land with building permits. In the case of individual taxpayers, assets exceeding 600,000 euros (or 1.2 million for couples who are married or in civil unions and file their taxes jointly). In relation to real estate and land held by companies, a tax of 0,4% is applied on all related holdings.
The manner in which exemptions, for buildings used for commerce, services and industry, were included in the IMI code lead to misinterpretations. Dozens of investment funds and at least one bank contested the application of the AIMI on land destined for the construction of buildings for trade and services.
The tax authorities’ understanding had been the exact opposite. In a recent binding note, the tax authority stated that only “commercial”, “industrial”, “service” and “other” urban buildings and commercial buildings are excluded from taxation. As for “land for building urban buildings,” the tax authorities understand that the law makes no distinction in relation to what can be constructed, whether housing or commercial buildings and services.
Property register
Of a number of decisions by the CAAD (in which the name of the taxpayers is unknown) analysed by Público, the case of an investment fund stands out. The fund, after having paid the AIMI for a plot of land valued at 8.7 million euros (in terms of tax assets) in September, decided to contest the charge, since the land’s location coefficient was described in the property register as “services”.
That taxpayer sought to challenge the tax by arguing that the tax rule in question (Article 135b (2) of the IMI Code) should be interpreted “in the sense” that “buildings that are not intended for housing, in line with the legislative decision to exclude buildings classified as ‘commercial, industrial or for services’ from the tax,” should be exempted from the surcharge.
The arbitration court agreed with this interpretation, considering that the rule, apart from exempting urban buildings classified as intended for “services” from the tax, was also designed with the legislative intent of excluding land for the construction of such buildings. The arbitrators ruled that the tax payment must be annulled, stating that the tax authorities must return the amount paid (34,900 euros) to the investment fund together with interest counted from the date of payment.
The court stated its belief that if a literal interpretation of the law were to be adopted, i.e. if the assumption was made that all land for construction would be liable for the AIMI, that rule would be “materially unconstitutional” and would be “incompatible with the principle of equality” laid down in Article 13. ff the Constitution, “when considering taxable ownership of land for the construction of buildings for services and not ownership of the buildings built on them.”
While the courts’ rulings have been favourable in the case of land for construction that is destined for commerce and services, the opposite has occurred for land for the construction of homes. The same investment fund was the owner of land worth 9.2 million euros that was intended for the construction of housing. It also filed a lawsuit against the IMI surcharge, but this time the court ruled against the fund, stating that AIMI may be levied on residential buildings and land for the construction of residential buildings.
At the same time, the arbitration court took the view that “the specific situation of real estate investment funds, as collective investment entities holding housing assets, does not appear to deserve special treatment in relation to the majority of citizens who are individually in the same situation [as owners of housing].”
In another case, a bank challenged an AIMI payment of 117,900 euros (on assets worth 29.5 million euros) for land for the construction of industrial, commercial and service buildings. The CAAD’s decision was not what the bank was hoping. The tax authorities will only have to pay back 7,586 euros, because, like the other decision, some of these lands are intended for the construction of real estate for services and commerce. However, in relation to a number of buildings that the bank alleged were intended “for the installation and operation of the bank and the pursuit of its corporate purpose, in particular, its real estate credit business,” the arbitration court ruled against the bank.
Constitutional Court called to intervene
The tax authorities expressly requested that the Public Prosecution Service be notified of the arbitration decisions in three of the five cases in which the CAAD issued rulings, which will lead to a reassessment by the Constitutional Court. Usually, decisions by the arbitration courts are not open to challenge, but there are some exceptions. These can occur when questions are raised regarding the constitutionality of norms.
In the cases that have already been ruled upon, the requests for contestation involved amounts exceeding one million euros. The decision of the Constitutional Court in relation to the decisions already appealed is not yet known. In the other two cases already tried by the CAAD, one gave 100% reason to the claimant and another to the tax authority, but the situations evaluated evolved specific issues.
The number of arbitration awards will grow, taking into account the number of challenges that have been brought before the CAAD. The arbitration court is close to issuing rulings on another 23 cases against the AIMI. Another challenge is still at the preliminary stage. In this case, the proceedings are still being constituted, which, in cases involving sums above 60,000 euros, require the appointment of three arbitrators by the arbitration council. In a very small number of cases, one arbitrator is appointed by the arbitration council, and the two parties each nominate another.
Created in 2009, the CAAD has adjudicated 3,865 cases and issued rulings on 3,470, of which 95.8% were by arbitration. The remaining 4.2% we annulled or withdrawn. The tax value (claimed from the tax authorities) of the total number of cases filed amounts to close to 970 million euros, with cases worth 130 million euros filed in 2018, 13% of the total.
Of the decisions already issued this year, worth 97.7 million euros, 57% were favourable to taxpayers, while 43% were in favour of the tax authorities.
Original Story: Público – Pedro Crisóstomo / Rosa Soares
Photo: Nuno Ferreira Santos
Translation: Richard Turner