The Portuguese aggravated Municipal Property Tax (“MPT”) and Property Transfer Tax (“PTT”) has gained renewed attention following the recent publication of the first arbitration award addressing the matter, representing a significant development in the interpretation and application of the aggravated MPT and PTT regimes – the aggravated property taxes.
This landmark decision establishes important principles for the application of Portuguese aggravated property taxes by characterising the relevant provisions as anti-abuse rules that require actual proof of abuse, rather than allowing their automatic application based solely on the corporate structure. Through this interpretation, the arbitration court has aligned Portuguese tax law with established European jurisprudence on anti-abuse provisions.
Background: the aggravated property taxes
The Budget Law for 2021 introduced, in Article 112(4)(b) of the MPT Code and Article 17(4)(b) of the PTT Code, the aggravated MPT and PTT rates – i.e., an aggravated MPT rate of 7.5% on the ownership and an aggravated PTT rate of 10% on the acquisition of Portuguese real estate assets by entities directly or indirectly controlled or dominated by entities resident in blacklisted jurisdictions, as listed in the official list published by the Portuguese government.
Under these provisions, an entity is deemed to be directly or indirectly controlled or dominated by an entity resident in a blacklisted jurisdiction if, between both, there is a so-called "domain relationship" as defined by Article 486 of the Portuguese Companies Code (“PCC”).
Since the introduction of the aggravated property taxes, the Portuguese Tax Authorities (“PTA”) has issued some public tax rulings (upon request of a taxpayer and only binding for such taxpayer) addressing the scope of these provisions. Such rulings suggest a broader interpretation of the concept of domain/control set out in the PCC, particularly in relation to the application of the aggravated MPT rate to fund structures. This expansive approach by the PTA set the stage for inevitable conflict with taxpayers whose structures, whilst technically involving entities in blacklisted jurisdictions, served legitimate commercial purposes rather than tax avoidance.
The arbitration award: an anti-abuse rule
The decision – issued under arbitration (CAAD) proceeding no 1168/2024-T – set a favourable outcome for the taxpayer, a Portuguese bank owning real estate in Portugal through a corporate structure that included entities domiciled in Bermuda and the Bahamas. Although the award specifically concerned the aggravated PTT rate, its reasoning would equally apply to the aggravated MPT rate.
In analysing the case, the arbitration court concluded that the aggravated PTT rate should be deemed a specific anti-abuse provision, aimed at preventing the use of artificial structures, with entities domiciled in blacklisted jurisdictions, designed to avoid taxation on Portuguese real estate. Such avoidance typically arises, for instance, through the concealment of rental income from Portuguese properties, the use of share transfers to disguise property transfers and avoid PTT, and the obstruction of cadastral updates necessary for accurate MPT assessments.
Moreover, the court emphasised that the aggravated property taxes cannot be invoked automatically simply because a blacklisted entity is present within the ownership or control structure of a Portuguese taxpayer. Instead, the application of the aggravated property taxes must be supported by specific, evidence-based findings concerning the transaction’s substance and underlying purpose.
This understanding was also reflected in the PTA’s line of defence, marking a crucial shift from its previous approach, which appeared to treat the presence of blacklisted entities as creating an automatic or irrebuttable presumption of abuse, contrary to both constitutional safeguards and the limits imposed by EU law.
This decision is consistent with established principles of international tax law and with European Court of Justice (“ECJ”) settled case law, according to which anti-abuse provisions, as potentially restrictive measures, must be narrowly construed and applied on a case-by-case basis. Taken together, both Portuguese jurisprudence and the ECJ's case law refuse to endorse automatic applications of anti-abuse provisions detached from an actual economic analysis of substance or genuine abusive behaviour.
Based on the above, one could argue that the Portuguese aggravated property taxes should only apply where there is a substantive finding that the structures were designed to avoid taxation on Portuguese real estate.
A cautious step forward: open questions and unresolved issues
Whilst the decision constitutes a considerable step in framing the aggravated property taxes as anti-abuse provisions, it remains a cautious and restrained ruling, leaving several fundamental issues unresolved and postponing their clarification to future case law.
Unconstitutionality and incompatibility with EU law: the arbitration court did not analyse the taxpayer's arguments on unconstitutionality or incompatibility with EU law; rather basing its ruling on the absence of any demonstrated abuse, which should be a prerequisite for applying the aggravated property taxes. Future cases may need to address these fundamental questions.
Application to non-banking entities: whilst the decision provides clear guidance for financial institutions, its application to other types of entities – particularly special purpose vehicles and holding companies – remains to be fully tested.
Evidential standards: the decision does not provide detailed guidance on what evidence the PTA must produce to demonstrate abuse, leaving this to be developed through future case law.
Nevertheless, this decision will serve as an important precedent, ensuring that the abovementioned provisions are treated as anti-abuse provisions, which are applied in a manner consistent with fundamental principles of proportionality, legal certainty, and respect for legitimate corporate arrangements.
Nicolle Barbetti, Tax lawyer at Pérez-Llorca
