One more nail in the coffin of Portugal's 7.5% IMI rule…
The aggravated 7.5% IMI rate (Portugal's annual property tax) applicable by reference to indirect ownership through listed low-tax jurisdictions is, in my view, an example of bad tax policy, poorly drafted and inevitably prone to litigation, both domestically and at European level.
The quality of a tax system should also be measured by how quickly it identifies and corrects badly designed rules. On that metric, Portugal does not score particularly well here.
The provision, introduced back in 2021, essentially provides that the 7.5% IMI rate may apply where a Portuguese property-owning entity is directly or indirectly dominated or controlled by an entity resident in a blacklisted low-tax jurisdiction.
When the rule was introduced, I told several real estate clients with existing investments in Portugal that I did not believe this approach would survive serious judicial scrutiny. What I did not expect was that it would take almost six years for the issue to reach both the Portuguese tax arbitration courts and the Court of Justice of the European Union.
And now we have an important first domestic decision.
In CAAD case 950/2025-T, the Tax Arbitration Court held in favour of the taxpayer that the existence of Cayman funds within an investment structure does not, by itself, trigger the aggravated 7.5% IMI rate.
An ordinary IMI liability of approximately €23,000 was potentially being transformed into more than €573,000 for a single year: almost 25 times the ordinary tax burden.
The Portuguese Tax Authorities had focused principally on a Cayman General Partner, arguing that the significant authority it exercised over the operations and decision-making of the Cayman funds amounted to indirect “dominant influence”.
The taxpayer's argument was different and, in my view, much closer to what the legislation actually says. You cannot simply identify a Cayman entity somewhere in the economic ownership chain. The legislation expressly refers to a relationship of dominance within the meaning of the Portuguese Companies Code. The question is therefore not merely where entities in the structure are located, but who legally exercises the relevant dominant influence.
The structure was, in simplified terms: US Ultimate GP → Cayman GP → Cayman investment funds → Luxembourg company 1 → Luxembourg company 2 → Portuguese PropCo
The Arbitration Court considered, among other things, that:
the Cayman investment funds were partnerships without separate legal personality and could not simply be treated as dominant or dependent companies for purposes of the Portuguese Companies Code;
the mere presence somewhere in the ownership chain of an entity resident in a blacklisted jurisdiction is not enough;
the statutory test is fundamentally functional (i.e. who exercises dominant influence) rather than merely geographical; and
the relevant ultimate dominant commercial company was the US Ultimate GP, an LLC, resident in Delaware, United States, rather than the Cayman vehicles.
That distinction was decisive. The United States is not on Portugal's blacklist of privileged tax jurisdictions. Therefore, the basic statutory condition for application of the 7.5% rate was absent.
The Arbitration Court also made an important broader point. It characterised the aggravated IMI provision as a specific anti-abuse rule. Such a rule must be interpreted according to the abusive behaviour that Parliament intended to prevent. It cannot simply be stretched to cover any investment structure in which a vehicle from a listed jurisdiction happens to appear.
The result? The IMI assessment was annulled, with the Tax Authorities ordered to repay with indemnity interest.
Interestingly, the taxpayer had also asked the Arbitration Court to suspend the case pending the outcome of C-661/25, Meritpanorama and Others, currently before the CJEU. The Arbitration Court refused because it could decide this particular case solely through the interpretation of Portuguese law. It therefore did not decide whether the aggravated regime itself infringes the EU free movement of capital. And Meritpanorama is potentially even more important because it concerns not only the 7.5% IMI rate, but also the parallel 10% aggravated IMT rate on property acquisitions, and expressly asks the CJEU whether these rules constitute an unjustified restriction on the free movement of capital.
So, is the rule dead? Not yet.
This is an important judgment, but it still remains narrow on its facts. There are many variations of cross-border investment structures still to be tested.
What happens, for example, where:
the investment is ultimately held through a trust?
the intermediate blacklisted entities are corporations rather than partnerships?
the blacklisted company is ultimately controlled by a person/individual resident in the EU? or a third country resident with exchange of information mechanim in place?
economic ownership and governance rights point in different directions?
Those cases will test just how far this reasoning can travel. But one principle emerging from this decision is already important:
A blacklisted jurisdiction entity appearing somewhere in the corporate diagram does not lead, by itself, to a punitive taxable event.
And that is perhaps the broader lesson here. Using punitive property taxation to discourage particular international investment structures may be politically tempting. But if the legislation is badly designed, disproportionate or disconnected from the legal reality of modern investment structures, the result is usually not better tax policy. It is years of uncertainty, litigation and, eventually, refunded assessments.
Taxpayers have won this round. The European challenge is still to come, and I would be surprised if a rule this broad, punitive and structurally disconnected from actual abuse ultimately survives EU law scrutiny.
© Kore Partners, 2026
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