Dams, Property, and Tax: Portugal’s Ongoing IMI Controversy

Introduction

The classification of hydroelectric infrastructures within the Portuguese Municipal Property Tax (IMI) regime has long been a contested issue. Central to this debate is the question of whether dams (“barragens”) may qualify as property (“prédios”) under the IMI Code and, if so, whether their integration into the public domain prevents their taxation.

The matter has evolved through a succession of administrative opinions, court decisions, and governmental instructions, reflecting the inherent tension between fiscal imperatives, the legal regime of the public domain, and the principle of legitimate expectations. This paper seeks to provide an academic overview of the main turning points in the tax authorities’ position, while critically examining the legal reasoning underpinning these developments.

The Concept of “Prédio” for IMI Purposes

IMI, introduced by the 2003 Property Reform, is levied annually on the owner, usufructuary, or surface-right holder of a property registered as of 31 December. The rationale is grounded in the principle of benefit: those who enjoy municipal services contribute proportionally to local public expenditure.

The definition of “prédio” under Article 2(1) of the IMI Code is deliberately broad. It encompasses any fraction of territory, including waters, plantations, buildings, and permanent constructions, provided it belongs to a legal or natural person and possesses economic value. This definition requires three cumulative elements:
• Physical element – a tangible, permanent incorporation into land.
• Legal element – belonging to the patrimony of an individual or a collective entity.
• Economic element – capacity to generate economic value on its own.

The scope of “prédio” in IMI law is thus wider than in civil law, tailored to capture patrimonial realities of fiscal relevance. The crucial issue regarding dams is whether such infrastructures may satisfy the legal and economic requirements for IMI taxation.

Evolution of the Tax Authority’s Understanding

Initial Approach: Dams as Taxable (2015)
In 2015, the Tax Authorities issued an opinion recognizing dams and associated constructions as private assets of concessionaires, capable of economic valuation and therefore subject to IMI. This interpretation resulted in additional IMI assessments, triggering extensive litigation.

The Public Domain Objection (2016)
Subsequently, the Portuguese Environment Agency (APA) issued an opinion that dams of public utility belonged to the State’s public domain. The Tax Authorities eventually accepted this interpretation, suspending ongoing tax procedures and annulling prior IMI assessments. The Administrative Arbitration Court (CAAD) endorsed this view, holding that public domain assets, by definition, lack independent economic value and thus cannot be subsumed within the IMI concept of “prédio”.

Consolidation of the Public Utility Criterion (2017)
The Tax Authorities formalised this understanding through Service Instruction No. 40048, which established a dichotomy:
• Dams outside the public domain are taxable;
• Dams of declared public utility, integrated into the public domain, are not.

This position provided temporary clarity, albeit at the cost of relying on the contested distinction between public and private dominial regimes.

Renewed Debate and the 2023 Ministerial Orders

Order No. 46/2023
In February 2023, the Secretary of State for Fiscal Affairs revisited the issue, grounding his position in a 2005 opinion. This opinion distinguished between:
• Assets incorporated by the State – no transfer of ownership, only exploitation rights.
• Assets acquired or built by concessionaires – these are considered property of the concessionaire, either as full ownership or temporary/resoluble ownership (to be transferred at the end of the concession).

The decisive factor is therefore not whether the dam is classified as of public utility, but whether it was constructed or acquired by the concessionaire. In such cases, the assets are deemed to form part of the concessionaire’s patrimony and are taxable under IMI.

Order No. 222/2023
Later in 2023, a second ministerial instruction clarified that this approach did not innovate but merely directed the AT to apply the 2005 PGR opinion. Reference was made to Supreme Administrative Court jurisprudence, which consistently excludes land within the public domain from IMI, while allowing for the taxation of constructions built thereon under concessionary agreements.

Current Understanding and Practical Implications

At present, the Tax Authorities’ prevailing view is that hydroelectric dams constructed or acquired by concessionaires are taxable under IMI, since they are considered part of the concessionaire’s assets, even if only temporarily. The decisive factor is no longer the label of “public utility”.

This interpretation carries substantial financial implications for energy producers, many of whom had previously relied on the Tax Authorities’ guidance exempting public utility dams. Litigation in this area is likely to persist as concessionaires challenge the compatibility of these interpretations with constitutional and administrative principles, particularly legitimate expectations.

In practice, and leaving aside the technical debate on dominial classification, a cautious and balanced approach to IMI on dams should give priority to consistency with the public-domain regime and to safeguarding legitimate expectations. Since there is no explicit fiscal rule that subjects public-domain infrastructures to IMI, it is more coherent to adopt a restrictive interpretation of “prédio” that excludes assets legally removed from private commerce. Even in cases where concessionaire-built structures are treated as part of the concessionaire’s patrimony, any extension of IMI should only apply going forward, accompanied by clear transitional rules. This would prevent unexpected retroactive liabilities, respect the reliance created by past administrative practice, and ensure compliance with fundamental principles of legal certainty, good faith, and the protection of trust.

Conclusion

The current prevailing understanding of the tax authorities is that hydroelectric dams constructed or acquired by concessionaires are subject to IMI, regardless of their classification as public utility assets. The decisive element is the patrimonial integration of such infrastructures into the concessionaire’s estate, even if only temporarily.

This marks a departure from earlier reliance on the public domain criterion. Yet the matter remains contentious, both doctrinally and judicially. The interaction between concession law, property law, and fiscal law will continue to generate disputes, particularly as courts are called upon to arbitrate this dispute.

It is fair to say…to be continued…