Stamp Tax Verba 28.1: Vertical Property Units Under €1M Exempt from IS Taxation (CAAD 123/2017-T)

ARBITRAL DECISION

I. REPORT

1. A…, Tax Identification Number…, resident at Av. …, no. …-…, …, …, …-… Carcavelos; B…, Tax Identification Number…, resident at Av. …, …, …, …, …, …-… Amadora; C…, Tax Identification Number…, resident at Av. …, no…, …, …, …, …-… Barreiro; D…, Tax Identification Number…, resident at Rua … … …, …, …-… Queluz; E…, Tax Identification Number …, resident at Av. …, no … -…, …, …-… Lisbon; F…, Tax Identification Number…, Resident at … n … …, …, …-… Lisbon; G…, Tax Identification Number…, resident at Rua…, no … …, …, …, …-… Azeitão; H…, Tax Identification Number…, resident at Rua …, no.…, …, …-… …; I…, Tax Identification Number…, resident at Rua … no…, …, …, …, …-… Barreiro; J…, Tax Identification Number…, resident at Rua …- …, …, …-… Tinalhas; K…, Tax Identification Number…, resident at Rua…, … …, …, …-… Cacém and ESTATE OF L…, Tax Identification Number…, with address at …, no.…, … …, …-… Algés, successor of M…, have requested the constitution of an arbitral tribunal in tax matters with a view to declaring the illegality of stamp duty tax assessments, in the total amount of €13,577.07, relating to an urban property, not held under a condominium ownership regime, registered in the respective property register of the parish of …, municipality of Lisbon, under article … . The aforementioned assessments, made on the basis of the norm contained in Article 1 of the Stamp Duty Tax Code (CIS), in conjunction with Entry no. 28.1 of the respective General Table, relate to the year 2015.

In addition to the declaration of illegality of the contested acts, with the consequent reimbursement of amounts unduly paid, the Claimants further request recognition of the right to compensatory interest, calculated in accordance with legal terms.

1. As grounds for their claim, the Claimants allege, in summary, that the taxation provided for in the aforementioned norms applies to urban properties with residential designation, whose taxable property value used for purposes of Municipal Property Tax is equal to or greater than €1,000,000. In the case of properties not held under a condominium ownership regime but comprising parts or units capable of independent use, the taxable property value used for purposes of Municipal Property Tax, and consequently relevant for purposes of stamp duty incidence, is, in accordance with the aforementioned norm, the value determined by reference to each of those parts or units. Such prerequisites, according to the Claimants, do not apply in the present case – specifically by reason of the fact that the taxable property value corresponding to each co-owner's share does not equal or exceed €1,000,000 – and therefore the assessments in question suffer from a defect arising from the erroneous attribution of residential designation to the property identified above. Notwithstanding that it is not held under a condominium ownership regime, it comprises autonomous units capable of independent use, predominantly intended for commerce and services, in addition to residential use, without, however, any of them having a value equal to or exceeding 1 million euros. The Claimants further allege that the contested assessments are based on an interpretation of Entry 28.1 of the General Table of Stamp Duty that is unconstitutional by virtue of violation of Article 104(3) of the Constitution of the Portuguese Republic.

2. For its part, the Respondent – the Tax and Customs Administration (AT) – in response to the foregoing, submits that the claim is unfounded and, consequently, that the questioned tax assessments should be upheld, on the basis that there is a single urban property with a total taxable property value of €1,357,706.87. Since the Claimants hold merely an ideal share of the said property and not any part of a property capable of independent use, in accordance with Article 7, paragraph 1, subparagraph b), of the Municipal Property Tax Code (CIMI), the taxable value to be considered, for purposes of determining the incidence of stamp duty, is "the total value of the property that corresponds to each of the co-owners...are only [responsible for payment of stamp duty in proportion to their share."

3. The request for constitution of the arbitral tribunal, submitted on 16-02-2017, was accepted by the President of CAAD and automatically notified to the Respondent (AT) on the 24th of the same month.

4. In accordance with the provisions of subparagraph a) of paragraph 2 of Article 6 and subparagraph b) of paragraph 1 of Article 11 of Legislative Decree no. 10/2011, of 20/01, as amended by Article 228 of Law no. 66-B/2012, of 31/12, the Ethics Council appointed the undersigned as arbitrator of the single arbitral tribunal, who confirmed acceptance of the appointment within the applicable period, and notified the parties of this appointment on 10-04-2017.

5. Duly notified of this appointment, the parties did not express any will to challenge the arbitrator's appointment in accordance with the combined provisions of Article 11, paragraph 1, subparagraphs a) and b) of the Arbitral Tax Procedures Regulations and Articles 6 and 7 of the Ethics Code.

6. Accordingly, in conformity with the provisions of subparagraph c) of paragraph 1 of Article 11 of the Arbitral Tax Procedures Regulations, as amended by Article 228 of Law no. 66-B/2012, of 31/12, the single arbitral tribunal was constituted on 22-05-2017.

7. Regularly constituted, the arbitral tribunal has material jurisdiction in accordance with the provisions of Articles 2, paragraph 1, subparagraph a), of the Arbitral Tax Procedures Regulations.

8. The parties have legal personality and capacity and have standing (Articles 4 and 10, paragraph 2, of the Arbitral Tax Procedures Regulations, and Article 1 of Ministerial Order no. 112-A/2011, of 22/03).

9. In view of the knowledge derived from the procedural documents submitted by the parties, which is deemed sufficient for the decision, the tribunal decided to dispense with the hearing referred to in Article 18 of the Arbitral Tax Procedures Regulations.

10. The proceedings do not suffer from any nullities and no other issues have been raised that would prevent examination of the merits of the case, and the conditions are met for a final decision to be rendered.

II. FACTS

1. The following factual elements are highlighted as relevant to the examination of the matter raised:

12.1. The Claimants are co-owners, in varying proportions, of the urban property registered in the urban property register of the parish of …, municipality of Lisbon, under article … .

12.2. In accordance with the respective property record, the property, registered as total ownership without floors or units capable of independent use, in the names of the various co-owners with indication of their respective shares, consists of a ground floor, 1st, 2nd, 3rd, 4th and 5th floors, used for commerce and residential purposes. From the 1st to 5th floor, the building is divided into floors – left side and right side – each having autonomous entrances. The respective total taxable property value is €1,357,706.87.

12.3. Each of the floors of the property in question comprises apartments that are completely autonomous from the remaining apartments and floors, and are mostly intended for commerce and services.

12.4. On the basis of copies of lease agreements attached to the proceedings (Docs. 13 to 26), it is possible to verify that the use of the units comprising the property in question is as set out in the following table:

12.5. For the year 2015, stamp duty tax assessments were made, pursuant to Entry 28.1 of the respective General Table. Having been duly notified to the Claimants, payment was made (Docs. 1 to 12).

12.6. Attached to the present proceedings, by the Claimants, are copies of arbitral decisions dated 27.3.2015 – Proc. 573/2014-T – and 30.9.2016 – Proc. 110/2016-T -, already final and conclusive, whose bases were entirely identical to that which gave rise to the present proceedings, relating to the same tax and the same property and to the tax periods of 2013 and 2014.

1. There are no facts relevant to the decision that have not been proven.

III. JOINDER OF CLAIMS AND JOINDER OF PARTIES

1. The present request for arbitral decision, in joinder of parties, relates to various stamp duty assessments. However, given the identity of the tax facts, of the tribunal competent to decide, and of the grounds of fact and law invoked, the tribunal considers that nothing prevents, in accordance with the provisions of Articles 3 of the Arbitral Tax Procedures Regulations and 104 of the Code of Tax Procedure, the said joinder and cumulation of claims.

IV. LEGAL ISSUES

1. As already mentioned above, the Claimant in its request for arbitral decision sustains, in essence, that the norm of Entry 28.1 of the General Table of Stamp Duty is not applicable to properties in total ownership comprising parts or units capable of independent use, provided that they have uses other than residential.

2. To the foregoing allegation, the Tax and Customs Administration replied, in summary, that Entry 28 of the General Table of Stamp Duty applies to urban properties with residential designation and that the taxable property value on which the application of that legal norm depends is, as expressly results from the law, the taxable property value of each property and not the value corresponding to the share of each co-owner. Concluding, therefore, that the tax acts in question, having violated no legal norm, should be upheld.

3. From the positions expressed by the Claimant and the Respondent, summarized above, it follows that the matter involves a purely legal question, and proof is unnecessary beyond the documentary elements attached to the proceedings.

4. Indeed, the question to be decided centers solely on whether the incidence of stamp duty referred to in Entry 28 of the General Table of Stamp Duty (GTSD) encompasses, or does not encompass, urban properties predominantly intended for commerce and services, in addition to residential use, which, although not held under a condominium ownership regime, comprise floors or units capable of independent use, whenever the taxable property value attributed to each of the parts with residential designation does not exceed €1,000,000.

5. In other words, it is a question of whether the quantitative element relevant to the aforementioned norm should be considered on the basis of the taxable property value attributed to each of the parts or to each of the shares of each co-owner, as the Claimant maintains, or whether that element is what results from the total taxable property value of the property, as the Tax Administration contends.

6. It is important, therefore, first of all, to undertake an analysis, albeit succinct, of the prerequisites for the incidence of stamp duty on urban properties with residential designation, with recourse to the relevant tax norms for the definition of their respective legal concepts.

On Tax Incidence

1. Through Law no. 55-A/2012, of 29/10, Entry 28 was added to the General Table of Stamp Duty, subjecting to this tax urban properties whose taxable property value recorded in the register, in accordance with the Municipal Property Tax Code (CIMI), equals or exceeds €1,000,000.

2. The taxable base consists of the taxable property value considered for purposes of Municipal Property Tax, such tax being annually assessed by the Tax Administration in relation to each urban property (CIS, Article 23, paragraph 7), at the rate of:

• 1%, per urban property with residential designation;
• 7.5%, per property, when the taxpayers, not being natural persons, are residents in a country, territory or region subject to a clearly more favorable tax regime, as set out in the list approved by ministerial order of the Minister of Finance.

1. The taxpayers, and those liable for the tax, are the owners, usufructuaries or holders of superficiary rights over the properties on 31 December of the year to which the tax relates, as follows from Article 8 of the CIMI, by express reference in Articles 3, paragraph 3, subparagraph u), and 2, paragraph 4, of the Stamp Duty Tax Code.

2. With respect to the date of constitution of the tax obligation, the tax connection, determination of the taxable base, assessment and payment of the stamp duty in question, the corresponding rules of the CIMI apply, by express reference in Articles 5, paragraph 1, subparagraph u), 4, paragraph 6, 23, paragraph 7, 44, paragraph 5, 46, paragraph 5, and 49, paragraph 3, of the CIS. In general, by reference to Article 67, paragraph 2, of the same Code, the provisions of the CIMI apply subsidiarily to matters not specifically regulated.

3. There being no question, in the present case, regarding the type of property in question, classified as urban and with residential designation, in accordance with the criteria established in Articles 2, 4, and 6 of the Municipal Property Tax Code, the only matter at issue is to determine the exact meaning of "taxable property value considered for purposes of Municipal Property Tax" contained in the norm establishing the incidence of stamp duty.

4. It is thus necessary to resort to the rules of the Municipal Property Tax Code relating to the treatment accorded, under such tax, to parts of urban properties capable of independent use, in particular with respect to the determination of the respective taxable property value and rules applicable to assessment and payment of such tax.

5. In accordance with paragraph 3 of Article 12 of the aforementioned Code, which establishes the concept of property register, "each floor or part of a property capable of independent use is considered separately in the property registration, which discriminates its respective taxable property value."

6. The separate listing in the register of functionally and economically independent parts of a property in total ownership is driven by fiscal and extrafiscal reasons. On the fiscal plane, such separate listing relates to the very determination of taxable property value, which constitutes the taxable base of Municipal Property Tax, given that the formula for determining such value, provided for in Article 38 of the same Code, contains indices that vary depending on the use assigned to each of those parts. On the extrafiscal plane, such separate listing continues to find justification in the significance attributed to the taxable property value of properties and their autonomous parts in urban rental legislation.

7. However, in the system of Municipal Property Tax, the separate listing of parts of urban property capable of independent use is not limited to their separation in the property registration and discrimination of the respective taxable property value. Such autonomy extends to the very assessment of the tax.

8. Indeed, Article 119, paragraph 1, of the aforementioned Code provides that the tax collection document must contain a discrimination of the properties, their parts capable of independent use, and the respective taxable property value. To comply with this provision, the assessment of Municipal Property Tax, in the strict sense of application of the rate to the taxable base, does not take as reference the sum of the taxable property values attributed to the autonomous parts of the same property, but the value attributed to each of them considered individually.

9. In the same sense of individualization, for tax purposes, of the autonomous parts of urban properties, the norm of paragraph 1 of Article 15-O of Legislative Decree no. 287/2003, of 12/11, as amended by Law no. 60-A/2011, of 30/11, is also relevant.

10. In accordance with the provision of the aforementioned norm, the safeguard clause relating to the increase of Municipal Property Tax taxation resulting from the general valuation of urban properties is applicable per property or part of an urban property that is the subject of such valuation.

11. It thus follows from the relevant norms of the CIMI, applicable by reference to the stamp duty referred to in Entry 28 of the respective Table, that the autonomous parts of urban properties assume full autonomy, in terms of valuation and description in the property register and tax assessment.

12. When referring to the taxable property value considered for purposes of Municipal Property Tax, the norm establishing the incidence and quantification of the stamp duty referred to in Entry 28 of the respective Table cannot but appeal to the reality described above, that is, to the taxable property value considered under Municipal Property Tax relating to each part of an urban property capable of independent use.

13. As indeed is reflected in the assessments questioned in the present request for arbitral decision: the Tax Administration, after, without legal basis, performing the sum of the taxable property values of the various autonomous parts of the property to extract therefrom the quantitative prerequisite for the incidence of stamp duty, performs the assessment by reference to each of those parts even though, individually, none of them reaches that value.

14. It is noted that the question raised in this proceeding is entirely identical to those raised and decided in numerous arbitral decisions, as well as in judgments of the Supreme Administrative Court, whose conclusion, to the effect that it is illegal for the Tax Administration to subject to taxation the residential parts of a property in total ownership on the basis of the total taxable property value of the property and not of that which is actually attributed to each of the parts separately, is wholly endorsed herein.

15. The situation to which the present proceeding refers has the peculiarity that although there is a property in total ownership comprising various units capable of independent use – and which are actually being used as such, as evidenced by the various lease agreements – such fact does not find corresponding discrimination of property values in the respective property registration.

16. Such circumstance, however, does not alter the sense of the orientation referred to above. Indeed, and as has been substantively addressed in the arbitral decisions rendered in proceedings 573/2014-T and 110/2016-T, relating to the property and tax in question and to the assessments relating to the years 2013 and 2014, which is unreservedly endorsed:

"(…) Subjecting the property in question to Entry 28.1 of the GTSD would be equivalent to taxing uses different from those which the legislature expressly intended to tax and which are urban properties with residential designation and land for construction, both provided that they have a taxable property value equal to or exceeding €1,000,000.00.

And this result – taxation of properties with a use different from those contained in Entry 28.1 of the GTSD – is precisely what the legislature intended to keep outside the scope of application of the norm, but which is obtained through the assessments now subject to arbitral review, in the exact measure that in considering the totality of the urban property at issue and its taxable property value, one is inevitably and indiscriminately taxing uses different from those provided for in the said norm, with the aggravating factor that those same non-residential areas contribute, in the measure of their quantitative proportion (which in concreto is unknown) to the taxable property value of the property, it being moreover questionable whether the areas with residential designation could or could not, of themselves, make up a taxable property value equal to or exceeding the minimum benchmark set by the legislature in Entry 28.1 of the GTSD for purposes of subjection – €1,000,000.00.

One is thus faced with a property with two distinct uses, as follows from the information contained in the register (as gathered from the property record), in which the active subject of the tax legal relationship does not determine which part has residential use or commerce use.

If to this factuality we add the facts established as proven which go unequivocally to the effect that, indeed, the majority of floors or units, in addition to being substantially capable of independent use (through autonomous entrances), are in fact devoted to commerce and services, a fact which, moreover, the Respondent did not dispute, it does not appear sustainable that the Tax Administration intends, over a reality which it itself recognizes has two different uses, to feign that such commercial use does not exist and on the basis of this fiction, to tax an urban property with respect to the area with commerce and services use.

Which, as we have already set forth above, is precisely a result contrary to that which the legislature intended when drafting the legal norm in question.

Therefore, such solution finds no support whatsoever in the legal norm of tax incidence under analysis, and thus one cannot fail to conclude, given the existence of two different uses, indetermination as to the part or parts to which these same uses correspond for purposes of quantifying the eventual taxable base subject to the GTSD, and indiscriminate taxation over the three existing uses, that the norm of tax incidence under examination – Entry 28.1 of the GTSD of the Stamp Duty Tax Code – is violated herein."

1. In that regard, the tax assessments in question do not meet the requirements of the norm of tax incidence contained in Entry 28.1 of the GTSD, the assessments challenged do suffer from a defect consisting of violation of law, due to error in the legal prerequisites as to the provisions of Entry 28.1 of the GTSD, which entails the declaration of their illegality and consequent annulment.

b) On the Unconstitutionality of the Interpretation Given by the Tax Administration to Entry 28.1 of the General Table of Stamp Duty

1. In view of the foregoing conclusion, regarding the inapplicability of Entry 28.1 of the GTSD to the case sub judice, the examination of the remaining defects alleged, and to which the contested assessments may be subject, is prejudiced as procedurally moot.

2. The question of unconstitutionality, due to violation by Entry 28.1 of the GTSD, introduced by Law no. 55-A/2012, of 28 October, of paragraph 3 of Article 104 of the Constitution of the Portuguese Republic, is thus prejudiced.

On the Right to Compensatory Interest

1. In addition to the annulment of the assessments and consequent reimbursement of amounts unduly paid, the Claimant further requests that it be recognized as having the right to compensatory interest, in accordance with Article 43 of the General Tax Law.

2. Indeed, in accordance with the provisions of paragraph 1 of the aforementioned article, compensatory interest is owed "when it is determined, in an administrative appeal or judicial challenge, that there was an error attributable to the services, resulting in payment of the tax debt in an amount greater than that legally owed." Beyond the means referred to in the provision being transcribed, we understand that, as follows from paragraph 5 of Article 24 of the Arbitral Tax Procedures Regulations, the right to the aforementioned interest can be recognized in the arbitral proceeding and thus the claim is heard.

3. The right to compensatory interest referred to in the aforementioned provision of the General Tax Law presupposes that tax was paid in an amount greater than that owed and that such results from an error, of fact or of law, attributable to the services of the Tax Administration. In the present case, both conditions are met, and thus the obligation to pay compensatory interest in favor of the taxpayer is established, as is hereby declared.

V. DECISION

For these reasons, and on the grounds set forth, the Arbitral Tribunal decides:

To uphold the request for arbitral decision, determining the annulment of the questioned assessments with the legal consequences thereof, in particular the recognition of the right to compensatory interest in favor of the Claimants.

Case Value: The case value is fixed at €13,577.07, in accordance with Article 97-A, paragraph 1, subparagraph a) of the Code of Tax Procedure, applicable by reference to Article 29, paragraph 1, subparagraphs a) and b), of the Arbitral Tax Procedures Regulations and Article 3, paragraph 2, of the Regulation of Costs in Arbitral Tax Proceedings.

Costs: Pursuant to Article 22, paragraph 4, of the Arbitral Tax Procedures Regulations, and in accordance with Table I attached to the Regulation of Costs in Arbitral Tax Proceedings, the amount of costs is fixed at €918.00, to be borne by the Respondent (AT).

Lisbon, 24 July 2017,

The Arbitrator,

Álvaro Caneira

[i] See Silvério Mateus and Leonel Corvelo de Freitas, "Real Estate Property Taxes and Stamp Duty Commented and Annotated," Engifisco, Lisbon 2005, pages 159 and 160.

[ii] Among many others, and referring only to the most recent: CAAD, Procs. 544/2015-T, 552/2015-T, 554/2015-T, 560/2015-T, 562/2015-T, 573/2015-T, 576/2015-T, 581/2015-T, 589/2015-T, 597/2015-T, 606/2015-T, 632/2015-T, 643/2015-T, 644/2015-T, 651/2015-T, 659/2015-T, 681/2015-T, 718/2015-T, 755/2015-T, 768/2015-T, 777/2015-T, 10-2016-T, 20/2016-T, 293/2016-T, 294/2016-T, 298/2016-T, 303/2016-T, 314/2016-T, 330/2016-T, 343/2016-T, 361/2016-T, 383/2016-T, 385/2016-T, 390/2016-T, 397/2016-T, 428/2016-T, 431/2016-T, 453/2016-T, 463/2016-T, 464/2016-T, 471/2016-T, 485/2016-T, 489/2016-T, 495/2016-T, 507/2016-T, 513/2016-T, 529/2016-T, 546/2016-T, 555/2016-T, 778/2016-T

[iii] See STA, Procs. 047/15, 01352/15, 01354/15, 01504/15, 01534/15, 0166/16, 0498/16, 0560/16, 01097/16, 0711/16, 1447/16, 0593/16.