Portugal has used its municipal property tax (IMI) not merely as a neutral real estate levy but as a tool for advancing housing policy. Through exemptions, reductions, and increased taxation on ‘vacant’ properties, IMI has become central to the country’s response to urban housing pressures.
The most controversial feature is the regime applicable to vacant urban properties, ruins, and certain plots in designated urban stressed areas. These assets do not face a mere marginal increase: the standard IMI rate is multiplied by 10 in the first year, and then rises each year by 20%, capped at 20 times the original rate. That cap can be raised by as much as 50% for housing properties deliberately kept off the market, and by up to 100% when the taxpayer is a company. In the most extreme cases, the resulting tax burden is significantly higher.
In theory, the system operates as a two-step process. First, municipalities identify and classify properties as vacant through an administrative procedure that should include prior notification, an opportunity for the property owner to be heard, and a well-founded decision. Once classified, the information is passed on to the tax authorities, which then apply the increased IMI rate.
In practice, however, this procedural framework often falls short. Many taxpayers only become aware that their property has been classified as vacant when they receive an IMI assessment notice applying the increased rate. Prior notification is frequently lacking, as is any opportunity to clarify relevant facts such as partial use, ongoing renovations, or delays caused by administrative processes like licensing that are beyond the taxpayer’s control.
This raises important concerns under administrative law: was a formal decision made, was the taxpayer given a chance to be heard, and who is responsible for proving that the procedure was properly followed?
These issues are especially pronounced for investors. In asset transactions, prior vacant classifications may go unnoticed during due diligence yet persist after acquisition, only to resurface as unexpected tax liabilities later. This creates legal and financial uncertainty that is hard to factor into investments.
How case law has dealt with the issues
An emerging body of arbitral case law has begun to address the above issues. In earlier cases concerning IMI surcharges on dilapidated or long-term vacant properties, arbitral tribunals have held that the tax authorities must prove both that a valid municipal decision exists and that the taxpayer was properly notified. If the authorities cannot provide such proof, the surcharge portion of the assessment is set aside.
In addition to procedural shortcomings, arbitral case law has also examined the constitutionality of the regime through applying a proportionality test rooted in constitutional principles, to determine whether it is suitable, necessary, and proportionate.
Regarding suitability, tribunals generally agree that increasing the tax burden on unused properties may incentivise their productive or residential use. However, they note that lawmakers opted for extreme rate multipliers without adjusting the property’s taxable value or considering the taxpayer’s actual financial capacity. At the higher end, IMI increasingly resembles a punitive measure rather than a conventional property tax.
Regarding necessity, tribunals emphasise that less restrictive alternatives were available. These could include more gradual surcharges, safe harbours for delays caused by public authorities, and incentives to promote development or long-term rentals. The lack of transitional or protective mechanisms for taxpayers acting in good faith counts against the regime being the least intrusive way to achieve housing policy goals.
As for proportionality in the strict sense, tribunals balance the public interest in promoting housing against the impact on property rights and taxation according to actual financial capacity. In cases at the upper end of the scale, the conclusion has been that the regime fails to strike a fair balance. The additional tax burden may bear little relation to income or wealth and may be passed on to buyers or tenants. At the same time, the system relies on rigid classifications that often fail to capture the asset’s true economic value or its potential for housing.
This lack of alignment is particularly evident with ‘service-type’ properties. While the cadastral system distinguishes between residential and service uses, that distinction often does not reflect market realities. Some properties that could be converted for residential use remain classified as service-type properties and avoid the harshest surcharges, while other properties that are not suitable for housing may still fall within the regime imposing higher IMI, even though they add little to housing supply.
When procedures lack transparency, classifications are rigid, and tax rates are extreme, increased IMI on vacant property begins to look less like a housing policy tool and more like a revenue-raising measure. This creates uncertainty for investors and reminds policymakers of the limits of tax policy as a solution for housing – an issue that may soon be addressed by the Constitutional Court.
Final assessment
It is entirely reasonable to use property taxation to pursue housing objectives. However, if the increased IMI regime is to withstand constitutional scrutiny and remain a credible policy tool, it needs to be rebalanced. This adjustment should ensure procedural protections, reflect actual financial capacity, and take into account the true impact that different property types can have on alleviating housing pressures, while avoiding adverse effects on investment.
