Stamp Tax on Co-Owned Building Land: CAAD 14/2016-T Decision

Process: 14/2016-T

Date: August 22, 2019

Tax Type: Selo

Summary

CAAD arbitration case 14/2016-T addressed whether Stamp Tax under item 28.1 of the General Stamp Duty Table (TGIS) applies to co-owned building land when individual ownership shares fall below the €1,000,000 threshold. The applicant owned a 50% share of land valued at €1,314,002.31 (individual share worth €657,001.15) and was assessed €6,570.01 in Stamp Tax. The applicant challenged this assessment arguing that item 28.1, designed to tax high-value property ownership demonstrating significant taxable capacity, should only apply when a co-owner's individual share reaches or exceeds €1,000,000. The applicant contended that taxing co-owners based on total property value rather than individual share value violates the constitutional principle of tax equality, as co-ownership represents fundamentally different taxable capacity than sole ownership. The Tax Authority countered that the legislator has discretion to establish threshold values, that the €1,000,000 limit represents a legitimate policy choice for defining 'luxury residential properties,' and that differentiated treatment is constitutionally permissible when objectively justified. The Authority argued that different property uses and social functions warrant different tax treatment, and that applying a proportional ad valorem rate to properties exceeding the threshold does not violate constitutional equality principles. This decision, dated August 22, 2019, reformed and replaced the original arbitral decision from September 19, 2016, examining the constitutionality of applying item 28.1 TGIS to co-ownership situations where individual shares fall below the statutory threshold.

Full Decision

Tax Arbitration Jurisprudence

Case No. 14/2016-T

Decision Date: 2019-08-22

Seal

Amount in Dispute: € 6,570.01

Topic: Land for construction in co-ownership; Tax equality principle – Reform of the arbitral decision (attached to the decision). *Replaces the decision of 19 September 2016.

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ARBITRAL DECISION

Topic: Stamp Duty – Land for construction in co-ownership

Applicant: A...

Respondent: TA - Tax and Customs Authority

I - FACTUAL BACKGROUND

1. Request

A..., taxpayer no. …, resident at Street …, Rio de Janeiro, and with tax domicile at Street …, Aveiro, hereinafter referred to as the Applicant, filed on 15-01-2016, pursuant to subsection (a) of Article 2(1) and Article 10 of Decree-Law No. 10/2011 of 20 January, which approves the Legal Framework for Tax Arbitration (RJAT), a request for arbitral decision, in which the TA - Tax and Customs Authority is respondent, with the purpose of:

Annulment of the Stamp Duty assessment act No. 2015..., issued under item 28.1 of the General Stamp Duty Table, relating to land for construction corresponding to article ... of the civil parish union of ... and ..., in the municipality of Aveiro, in the amount of 6,570.01 euros.
Declaration of illegality of the rejection of the administrative complaint filed against that assessment act;
Consequent condemnation of the Respondent to refund the amount paid relating to these tax assessments, plus compensatory interest due.

The Applicant alleges, essentially and with relevance to the decision of the case, the following:

Item 28.1 of the General Stamp Duty Table (GSDT) was introduced by the legislator in order to tax situations of ownership of high-value immovable property, thereby revealing increased taxable capacity;
The rule shows a clear intention by the legislator to target situations that evidence greater taxable capacity, in harmony with Article 104(3) of the Constitution of the Portuguese Republic, which provides that "taxation of property should contribute to equality among citizens".
In this light, being the owner of a property with a value equal to or exceeding one million euros or being a co-owner of the same property are situations to be valued differently, since the taxable capacity inherent in each of these situations is very different.
The subjection of the co-owner depends on whether their share has a value equal to or exceeding one million euros, as that is the threshold of tax relevance provided, which does not occur in the present case, in which the Applicant's share has a tax property value of 657,001.15 euros;

2. Response of the Respondent

In response to the request for arbitral decision filed by the Applicant, the Respondent TA - Tax and Customs Authority alleges, with relevant grounds for opposition:

The principle of tax equality and taxable capacity does not prevent that, taking into account the legislator's freedom of regulation, treatment differentiations may be established, "reasonably, rationally and objectively founded", under penalty of, failing that, "the legislator incurring in arbitrariness, by disregard of solutions objectively justified by constitutionally relevant values".
The fact that the legislator establishes a value (€1,000,000.00) as the delimiting criterion for the tax to apply, below which the provision of the tax rule is not met, constitutes a legitimate choice by the legislator regarding the setting of the material scope of "luxury residential properties" intended to be taxed more heavily, especially since any other value of analogous magnitude would likewise assume an artificial character that is inherent to any quantitative setting of a level or limit;
There is no confusion between this dimension of proportionality of the equality principle and the classical separation between proportional taxation and progressive taxation, nothing preventing at constitutional level that the property taxation in question rest on a proportional ad valorem rate (cf. Article 104(3) of the Constitution);
Concluding, if the use of the property and its respective social function are different, the situation can – and must – be treated differently, as indeed the equality principle itself requires.
In this way, since the differentiated treatment finds sufficient material justification, the equality principle is observed, both per se and in its dimension of proportional equality.

3. Subsequent Procedure

By proposal and with the agreement of both parties, the Tribunal decided to dispense with the holding of the meeting provided for in Article 18 of the RJAT.

The parties dispensed with the submission of final arguments.

II – PROCEDURAL EXAMINATION

The singular Arbitral Tribunal was regularly constituted on 29-03-2016, the arbitrator having been appointed by the Deontological Council of CAAD, with the respective legal and regulatory formalities complied with (Articles 11(1), subsections (a) and (b) of the RJAT and Articles 6 and 7 of the CAAD Deontological Code), and is competent ratione materiae, in accordance with Article 2 of the RJAT.

The parties have legal standing and capacity, are legitimate and are regularly represented, pursuant to Articles 4 and 10 of the RJAT and Article 1 of Order No. 112-A/2011 of 22 March.

No procedural defects were identified.

Nothing therefore prevents the examination of the merits of the case.

III – ISSUES TO BE DECIDED

The only issue to be decided is the constitutionality of item 28.1 of the GSDT when considered applicable to a situation of co-ownership of land for construction, when the value of the taxpayer's share in the tax property value of the property subject to tax is below one million euros.

The Applicant does not, in fact, argue for an interpretation of item 28.1 of the GSDT according to which situations of co-ownership in which the taxpayer's share corresponds to a tax property value below 1,000,000 euros would not fall within its scope.

Rather, the Applicant argues that, in an interpretation of item 28.1 consistent with the Constitution, such situations cannot be subject to the tax.

IV – ESTABLISHED FACTS

The following facts are established as relevant to the decision:

1st: The Applicant was, at the time of filing the request for arbitral decision, a co-owner, with a 50% share, of the urban property classified as land for construction corresponding to article ... of the civil parish union of ... and ..., in the municipality of Aveiro;

2nd: The tax property value of the property was determined in 2013 at 1,314,002.31 euros;

3rd: The Applicant was notified of the Stamp Duty assessment No. 2015..., relating to the aforementioned property, relating to the year 2014, under item 28.1 of the GSDT, in the amount of 6,570.01 euros;

4th: The Applicant paid the assessed tax in three instalments;

5th: The Applicant filed an administrative complaint against the assessment on 5-8-2015, which administrative complaint was fully rejected by express decision on 21-10-2015.

The established facts were proven on the basis of documents submitted to the case.

There are no facts found not proven with relevance to the decision of the case.

V – REASONING

1. Positive Foundation of the Principles of Tax Equality and "Taxable Capacity" in the Portuguese Tax Constitution

The "principle of taxation according to taxable capacity" is not expressly enshrined in the Constitution of the Portuguese Republic (CPR).

However, it is considered both by doctrine (ANA PAULA DOURADO, Tax Law, Coimbra, 2015, p. 198; SALDANHA SANCHES, Manual of Tax Law, 3rd ed., Coimbra, 2007, p. 211; CASALTA NABAIS, Tax Law, 6th ed. Coimbra, 2011, p. 149) and by jurisprudence for a long time as fully operative in our constitutional order.

In an almost unanimous manner, the jurisprudence of the Constitutional Court converges on the conception that the principle of taxation according to taxable capacity - abbreviated as "principle of taxable capacity" - derives from the principle of tax equality insofar as it is required by it as a parameter that allows assessment of the comparability or non-comparability of the situation of taxpayers (See Constitutional Court decisions No. 142/2004 of 10-03-2014; No. 452/03 of 14-10-2003; No. 84/03 of 12-02-2003; No. 211/03 of 28-03-2013).

In our opinion, and in harmony with the generality of doctrine and the jurisprudence of the Constitutional Court, there should be no doubt that the principle of tax equality requires taxation according to taxable capacity, as will be better explained hereafter, since taxable capacity is the parameter of comparison (the tertium comparationis) that allows us to say that two persons are in a situation of equality or inequality for purposes of equal or differentiated treatment by law, regarding the distribution of tax burdens.

The principle of tax equality, however, is also not expressly stated in constitutional law. And on this point, it must be acknowledged that the jurisprudence of the Constitutional Court has fluctuated regarding the positive foundation of the principle, situating it, on certain occasions, in Article 13 of the CPR, on other occasions in Articles 103 and 104 of the same, and yet on other occasions in the set of these provisions.

The solution to this question, in our view, is found in Article 13(1) of the CPR itself, which establishes the principle of equality, stating: "1. All citizens have the same social dignity and are equal before the law."

If all citizens are equal before the law, in general, it follows necessarily that all citizens are equal before tax law. Thus, absent a special provision, there can be no doubt that the principle of tax equality derives directly from the general principle of equality of citizens before the law, enshrined in Article 13 of the CPR (in this sense, see Constitutional Court decisions No. 57/1995 of 16-02-1995; No. 437/2006 of 12-07-2006; No. 306/2010 of 14-07-2010; No. 590/2015 of 11-11-2015; No. 620/2015 of 03-12-2015;)

In Portuguese doctrine, a number of authors ground the principle of tax or fiscal equality exclusively in Article 13 of the Constitution.

Thus, Pedro Soares Martinez (Tax Law, 10th ed., Coimbra, 1998, p. 105) affirms:

"The generality of tax requires the obligation of all to contribute to public expenses 'according to their means' (…) This is a projection into the tax realm of the generic principle of equality of citizens before the law (Const. of 1933, art. 5, §2; Const. of 1976, art. 13)."

Nuno de Sá Gomes (Manual of Tax Law, II, 9th ed., Lisbon, 2000, pp. 208-209) affirms, regarding the principle of tax equality:

"The principle of legal equality, as a fundamental legal principle, affirms, on the one hand, the formal equality of all citizens before the law (Article 13(1) of the Constitution), which has, as corollaries, the principles of generality and impersonality of laws (…)."

And further ahead (p. 214):

"First, the principle of generality of taxation is not confused with the idea of formal generality, inherent in any normative proposition (abstraction and impersonality of the addressees of the norm). On the contrary, the principle has material content in the sense that only those with taxable capacity should pay taxes, but that all persons who have taxable capacity should pay taxes, without regard to extratax, discriminatory and arbitrary criteria".

Domingos Pereira de Sousa (Tax Law and Tax Procedure, 1st ed., Coimbra, 2013, pp. 91-92) further states:

"The principle of tax equality is today a specific expression of the principle of equality, which translates not only a formal equality before the law, directed at the Administration and courts, but also and above all, material equality in the law, (…)".

The situation is similar in other legal systems.

In Germany, JOACHIM LANG and KLAUS TIPKE (Tax Law, 20th ed., Cologne, 2008, p. 83) affirm:

"Tax justice derives mainly from the general principle of equality (Article 3 I of the German Constitution). This reflects the importance of equality as a fundamental idea of justice in the Constitution. The rule of Article 3 I GG postulates equality before the law and is also directly addressed to the application of law. Thus, Article 3 I of the Constitution prescribes equality in the application of tax law by the tax administration and by tax courts."

In Italy, ENRICO POTITO, The Italian Tax System, Milan, 1978, p. 18, states:

"If, on the other hand, the requirement is imposed that the amount of the financial contribution required from the individual be proportional to the taxable capacity possessed by him in the concrete case, the principle is first affirmed that the individual can never be subjected to taxation by reason of circumstances other than a manifestation of wealth (…). Secondly, one identifies the same field of further specification of the principle of equality contained in art. 3 of the Constitution, which forbids any discrimination between subjects with parity of subjective and objective situations (…)"

In Spain, MARTÍN QUERALT, LOZANO SERRANO and POVEDA BLANCO, Tax Law, 4th ed. Pamplona, 1999, p. 56, affirm:

"Article 14 of the Constitution provides that 'Spaniards are equal before the law, without any discrimination being able to prevail on account of birth, race, sex, religion, opinion or any other personal or social condition or circumstance'. The principle of equality has become an essential element of our constitutional order, as Article 1 CE clearly expresses by configuring it as one of the superior values thereof. In the tax field it is common to consider that the principle of equality translates into the form of taxable capacity".

Already other authors, in Portugal, have been considering the principle of tax equality as founded simultaneously on Article 13 and on Articles 103 and 104 of the CPR.

Among these appear to be Casalta Nabais and Ana Paula Dourado.

ANA PAULA DOURADO (Tax Law, 1st ed., Coimbra, 2015, p. 197) affirms:

"The principle of equality in its negative aspect prohibits discriminations and tax privileges (art. 13(2) of the CPR). (…).

In taxes, the principle of equality is realized through the principle of taxable capacity. The principle of taxable capacity is a principle of tax justice and contains the measure of comparability between the object of taxation, on the one hand, and the measure of comparability between taxpayers, on the other. Our tax Constitution, in choosing various criteria of taxation, realizes the principle of taxable capacity in various types of taxes (art. 104 of the CPR) (…)."

For his part, Casalta Nabais, Tax Law, 6th ed., Coimbra, 2011, p. 149, tells us:

"(…) the principle of taxable capacity as tertium comparationis of equality in the field of taxes does not require a specific and direct constitutional provision. Its constitutional foundation is, then, the principle of equality articulated with the other principles and provisions of the respective 'tax constitution' and not any other."

Finally, SÉRGIO VASQUES appears to hold that the principle of tax equality is founded directly and exclusively in Articles 103 and 104 of the CPR. Indeed, the Author states (Manual of Tax Law, 1st ed., Coimbra, 2011, p. 247):

"Equality constitutes the most important principle of our Tax Constitution and if we do not take account of this when reading Article 13, we certainly do when reading Articles 103 and 104, establishing a whole program of intervention for the tax system and subordinating taxes on income, property and consumption to concerns of social justice."

As for the jurisprudence of the Constitutional Court, we find therein the three conceptions described here.

We find the conception that the principle of tax equality is founded exclusively in art. 13, for example, in decision No. 57/95 of 16-02-1995, where it reads:

The Court reiterates the same doctrinal position in decision No. 348/97 of 29-04-1997, where it reads:

In other cases the Constitutional Court adopted the conception according to which the principle of tax equality finds its foundation in the set of Articles 13, 103 and 104. This is the case in decision No. 590/2015 of 11-11-2015, where it reads:

"Let us then examine the parameter of constitutionality to which the appellant devoted most of its argument, founded on the principles of tax equality and taxable capacity (Articles 13, 103 and 104 of the Constitution)."

Finally, on other occasions the Court reflected the conception that the principle of tax equality rests exclusively on Articles 103 and 104 of the CPR. This is the case in decision No. 84/03 of 12-02-2003, where it reads:

"Notwithstanding the silence of the Constitution, it is the generalized understanding of doctrine that 'taxable capacity' remains a basic criterion of our 'tax Constitution' being that one can (or should) reach it from the principles structuring the tax system formulated in Articles 103 and 104 of the CPR (…)".

The same conception is found in other decisions, namely Constitutional Court decision No. 497/97 of 09-07-1997;

We thus identify, in the jurisprudence of the Constitutional Court and in Portuguese tax doctrine, three conceptions regarding the positive foundation of the constitutional principle of tax equality. We set forth below our conception which, we advance from the outset, we share with PEDRO SOARES MARTINEZ (Tax Law, 10th ed., Coimbra, 1998, p. 105).

2. The Principle of Tax Equality and the Principle of Reduction of Inequalities through the Tax System as Principles with Distinct Contents, Which Do Not Exclude Each Other

Article 104 of the CPR, by stipulating in its (1) that "tax on personal income aims at reducing inequalities and shall be unique and progressive, taking into account the needs and income of the household", and in (3) that "taxation of property should contribute to equality among citizens", establishes a principle of tax law different from the principle of equality found in Article 13 of the Basic Law. It establishes the tax principle of "reduction of actual inequalities through the tax system."

On Article 107 of the CPR in the 1982 version, predecessor to the current Article 104, SOARES MARTINEZ states:

"The egalitarian principle that we encounter in Article 107 of the current Constitution offers a different character. Instead of recognizing and respecting the equality of citizens before tax law, it aims to remove actual economic inequalities using tax means".

As is easy to conclude, this "reduction of inequalities", as a normative principle, is not contained in the principle of equality of citizens before the law, neither in its formal sense nor in its material sense.

The most important difference between the two principles lies in that the principle of tax equality is satisfied with proportional taxation (in this sense, JOACHIM LANG, The Influence of tax principles on the taxation of income from capital, in ESSERS/RIJKERS, The Notion of Income from Capital, I, Amsterdam, 2005, p. 9), while the principle of reduction of inequalities through the tax system requires progressive taxation, where it can take place, as can be seen through the following example:

If citizen A has an income 10 times higher than that of citizen B and if the same tax rate of 20% is applied to both, the principle of tax equality is fully complied with, since citizen A pays a tax 10 times higher than citizen B. But, after the collection of the tax, citizen A continues to have available income (after tax) 10 times higher than that of citizen B. There was equality of treatment, there was no reduction of actual inequality.

But if a progressive rate is applied, if citizen A is applied a rate of 30% and citizen B a rate of 20%, at the end of taxation citizen A's available income will no longer be 10 times higher than that of citizen B. The actual inequality that existed at the outset was reduced.

This progressivity of taxation is not founded on the principle of equality, but on the principle of distributive justice, whose roots are lost in time, but which is found with certainty in Thomas Aquinas[1], as it is truly a transfer of income from those who have more to those who have less, reducing inequality.

Spanish doctrine makes no hesitation in distinguishing the principles of equality, which it grounds directly in Article 14 of the Spanish Constitution (MARTÍN QUERALT, LOZANO SERRANO and POVEDA BLANCO, Tax Law, p. 56) and the principle of progressivity. On the latter, the cited authors state:

"Article 31 of the Constitution requires that the contribution of citizens to the financing of public expenditure be carried out through a tax system that is just, inspired by the principles of equality and progressivity (…)"

Also on this point, the jurisprudence of the Constitutional Court has fluctuated. On some occasions, the Court considered that the principle of tax equality requires proportional taxation and no more than proportional, which implies distinguishing the principle of equality from the principle of progressivity.

For example, it reads in decision No. 348/97, already cited:

The same conception is found in the following passage from decision No. 695/2014 of 15-10-2014:

"In sum, the principle of tax equality can be realized through different aspects: a first, is in the generality of the tax law, in its application to all without exception; a second, in the uniformity of the tax law, in treating equally taxpayers who are in equal situations and differently those who are in different situations, to the extent of the difference, to be assessed by taxable capacity".

In decisions No. 590/2015 of 11-11-2015 and No. 247/2016 of 04-05-2016, the Court reaffirms the same conception, citing CASALTA NABAIS:

"And such criterion, as CASALTA NABAIS emphasizes, is found in the principle of taxable capacity: 'This thus implies equal tax for those with equal taxable capacity (horizontal equality) and different tax (in qualitative or quantitative terms) for those with different taxable capacity in proportion to this difference (vertical equality)'.

However, when the Court states that the principle of tax equality and its corollary of the principle of taxation according to taxable capacity have as their foundation Article 104 of the CPR (as it does in decision No. 84/03, already cited) it enters into contradiction with this understanding of Casalta Nabais, which it declares to subscribe to in the previously cited decisions.

In some cases, the Court even appears to explicitly incline towards the idea that tax equality requires the progressivity of taxes, as in decision No. 806/93 of 30 November 1993, where it reads:

"It is thus that, in Article 107(1) of the Constitution, and with regard to tax on personal income, our Fundamental Law points to some delimiting criteria of a tax system that can be considered just, postulating the objective of reduction of inequalities in close articulation with the unique and progressive character of the tax, whence results an understanding of equality not merely formal but rather eminently material, because deriving from progressivity according to the economic capacity of taxpayers and the ultimate redistributive ends (the 'just distribution of income and wealth' to which Article 106(1) of the Constitution alludes)."

In this decision, the Court appears to consider that the principle of tax equality in its material aspect is contained in Article 107 of the CPR (in the 1982 version, now Article 104) and is identified with progressivity. In our opinion, this interpretation of constitutional law, which, as we already think we have demonstrated, cannot be considered unanimous in the jurisprudence of the Constitutional Court, is incorrect.

From the example given above it follows, in our view, that we are before distinct principles, which should not be confused.[2] To understand the scope of the principle of tax equality, we should limit ourselves to Article 13 of the CPR.[3] The contrary, i.e. confusing the principles of equality and "reduction of actual inequalities through the tax system", leads to the indeterminacy of the content and scope of the principle of tax equality, leading to its weakening and to insurmountable difficulties in its application. It is for this reason that, in our opinion, the question should be carefully treated.

That the confusion between the principle of equality of citizens before tax law, which is founded on Article 13 of the CPR and which postulates the application of the principle of taxation according to taxable capacity, and the "principle of reduction of inequalities through the tax system" results in a weakening of the value of the principle of tax equality can be clearly seen in the following passage from decision No. 711/2016 of 29-12-2006:

"Under Article 104(1) of the Constitution, tax on the income of natural persons 'aims at reducing inequalities and shall be unique and progressive, taking into account the needs and income of the household'. The Court has drawn from this rule the requirement of the shaping of the tax as just and oriented towards the objective of reducing inequalities, which immediately dismisses the idea of rigorous formal equality, whether in the selection of taxpayers or in the amount of tax due. Indeed, the progressivity of the tax according to the economic capacity of taxpayers and the idea of just distribution of income and wealth, which is drawn from Article 103(1) of the Constitution, preferentially convoke an objective of material equality both in the sacrifice that citizens must individually bear, as well as in the result of the consequent redistribution of wealth."

Now, in our opinion, first, the tax equality that derives from the principle of equality enshrined in art. 13 is both formal and material (the understanding is corroborated on some occasions by the Constitutional Court itself, as in Constitutional Court decision No. 57/95 of 16-02-1995); and second, the constitutional provision has everything necessary to arrive at "a rigorous tax equality, both formal and material". The rigor of the principle of tax equality is not affected, evidently, by situations in which the constitutional text itself admits exceptions. Those exceptions are the progressivity of the tax on the income of natural persons and property taxation, and tax benefits which, corresponding to ruptures with the principle of taxable capacity, must necessarily be justified by extratax ends of constitutional value (NUNO SÁ GOMES, General Theory of Tax Benefits, Lisbon, 1991, pp. 62-63; Constitutional Court decision No. 188/03 of 08-04-2003).

As for Article 103(1), where it is provided that "The tax system aims to meet the financial needs of the State and other public entities and a just distribution of income and wealth", it refers primarily to the application of State revenues, thus being a principle of financial law.

3. Content of the Principle of Tax Equality – Its Relationship with the Principle of Taxation According to Taxable Capacity

On the content of the principle of equality enshrined in art. 13, the Constitutional Court defines it as follows, in decision No. 523/95 of 28-09-1995:

Consisting equality in treating equally what is essentially equal and differently what is essentially different, it does not prohibit distinctions unless these are arbitrary or without sufficient material foundation. That is, distinctions are only materially unfounded when they rest on motives that do not offer an objective and reasonable character, or, in other words, when the rule in question does not present any reasonable material foundation.

In the specific field of tax law, the Constitutional Court stated in its decision No. 348/97 of 29-04-1997:

"The duty of citizens to pay taxes constitutes a public obligation with constitutional basis. As such, it is subject to rules equivalent to those of fundamental rights, namely the principles of generality and equality, that is, that they should be subject to its payment citizens in general (Article 12(1)), and should be subject to it in equal measure, without any undue discrimination (Article 13(2)), thus constituting the principle of tax equality. This principle is relevant not only in the case of tax imposition but also in the case of tax exemptions and concessions, which cannot fail to respect it under penalty of constitutionally unlawful privilege."

Tax equality has innumerable possible concretizations, depending on which aspect of the tax law one is considering. For example, all citizens will have the same rights, the same duties and the same subjections, regarding tax procedure.

One aspect of tax equality is that which concerns the scope of the tax and the quantification of the tax burden that falls on each taxpayer. If, in its aspect of universality of the duty to pay taxes, the principle of tax equality determines that all citizens must be called to contribute to the financing of public expenses through taxes (Constitutional Court decision No. 590/2015 of 11-11-2015; Constitutional Court decision No. 695/2014 of 15-10-2014), in its aspect of uniformity, the principle of tax equality determines that the tax burden imposed on citizens must be established in conditions of equality.

Now, the criterion that allows assessment of equality or inequality among citizens for purposes of uniform distribution of the tax burden is taxable capacity (Constitutional Court decision No. 142/2004 of 10-03-2004). In simple terms, taxable capacity is nothing more than wealth, manifested through income, property or expenditure incurred (as results from Article 4(1) of the General Tax Law).

Thus, the constitutional principle of equality of citizens contained in Article 13 of the CPR, applied to the tax field, will determine that persons with identical taxable capacity (wealth) bear identical tax burden (horizontal equality), and that persons with different taxable capacity bear tax burdens that are proportionally different (vertical equality). To realize the principle of tax equality (vertical), the difference between the tax burdens borne, as we have already seen, only has to be proportional to the difference in taxable capacity (Constitutional Court decision No. 197/2013 of 09-04-2013).

The conception that the principle of taxable capacity is the realization of the principle of tax equality is relatively consensual in the jurisprudence of the Constitutional Court (see Constitutional Court decisions No. 590/2015 of 11-11-2015, No. 84/2003 of 12-02-2003; and No. 695/2014 of 15-10-2014)

Thus, in Constitutional Court decision No. 695/2014 of 15-10-2014, it is said:

"[the] principle of taxable capacity expresses and realizes the principle of fiscal or tax equality in its aspect of 'uniformity' – the duty of all to pay taxes according to the same criterion – with taxable capacity filling the unitary criterion of taxation"), which means that "the distribution of taxes among citizens obeys the same identical criterion for all".

Having the Constitutional Court affirmed this understanding many times, it does so clearly in its decision No. 57/95 of 16-02-1995, in which it reads:

"The principle of tax equality presents a threefold dimension, with the first two dimensions appearing as an emanation of the general principle of equality, provided for in Article 13(1) of the Constitution. First, that principle means that all citizens are equal before tax law, so that all taxpayers who are in the same situation defined by tax law must be subject to the same tax regime (…). This is merely a formal sense of the principle of tax equality, which translates into a generic and impartial application of tax law, resulting only in equality before the law. Second, the principle of tax equality also has a material or substantive sense, whose meaning is that the law must ensure that all citizens with the same level of income must bear identical tax burden, thus contributing equally to public expenses or charges. (…). The principle of tax equality in a material sense not only prohibits the legislator from adopting treatment inequalities, in the tax field, that are not authorized by the Constitution or that are materially unfounded, devoid of reasonable foundation or arbitrary, as it requires that the law ensure that all citizens with equal taxable capacity are subject to the same tax burden, thus contributing equally to public expenses or charges (…)."

In decision No. 348/97 of 29-04-1997, it is in turn said:

Thus, the generality of the duty to pay taxes means its universal character (non-discriminatory), and uniformity (equality) means that the distribution of taxes among citizens must obey an identical criterion for all. And such criterion, (…) is that of taxable capacity (economic capacity, ability to pay, etc.), which means that taxpayers with the same taxable capacity should pay the same tax (horizontal equality) and taxpayers with different taxable capacity should pay different (qualitative and/or quantitative) taxes (vertical equality)", being certain that the subjective scope of this principle applies both to individuals (natural persons) and to legal entities.

More recently, the Constitutional Court affirmed this same understanding in its decision 590/2015 of 11-11-2015:

"The constitutional principle of tax equality, as a specific expression of the general structuring principle of equality (Article 13 of the Constitution), finds realization 'in the generality and uniformity of taxes. Generality means that all citizens are bound to the payment of taxes (…); in turn, uniformity means that the distribution of taxes among citizens obeys the same identical criterion for all" (TEIXEIRA RIBEIRO, Lessons on Public Finance, 5th edition, p. 261). And such criterion, as CASALTA NABAIS emphasizes, is found in the principle of taxable capacity: "This thus implies equal tax for those with equal taxable capacity (horizontal equality) and different tax (in qualitative or quantitative terms) for those with different taxable capacity in proportion to this difference (vertical equality)"

4. The Principle of Tax Equality Does Not Exhaust the Principle of Taxable Capacity

Before continuing in the task of delimiting the sense and scope of the principle of tax equality, we deem it opportune to interpose here a brief parenthesis for a clarification regarding the principle of taxation according to taxable capacity.

If it is true that the principle of tax equality requires the principle of taxation according to taxable capacity, as taxable capacity is the distinctive criterion that allows assessment of who is in a situation of equality, who is in a situation of inequality and what is the measure of inequality between the various situations, the principle of taxation according to taxable capacity does not exhaust itself in this function of allowing equal tax treatment.

The principle of taxable capacity also means that the legislator should only tax situations that reveal taxable capacity, which is no longer a relative concept but an absolute one.

Read in this regard what the Constitutional Court said in its decision No. 217/2015 of 08-04-2015:

"The principle of taxable capacity assumes, in the terms in which it is invoked here, parametric value fundamentally as a condition of taxation, so as to prevent the Special Contribution from reaching a wealth or income that does not exist, prohibiting the exaction of a spending capacity that truly does not occur."

We are here before another principle with deep roots in Judeo-Christian culture (the principle is also formulated in terms of tax law by Saint Thomas Aquinas in his work Sancti Thomae Aquinatis Doctoris Angeiici super Epistolam Sancti Pauli Apostoli ad Romanos expositio, Cap. XIII) that the State cannot tax its citizens except from a limit of wealth, below which there is no taxable capacity.

Whether this aspect of the principle of taxable capacity can or cannot still be considered included in the principle of tax equality is a question which we will not address, as it is unnecessary in context, though not failing to note that the Constitutional Court appears to have positioned itself on the question, in a negative sense, in its decision No. 601/04 of 12-10-2014:

"The inequality of the case would reside, if we understand correctly, in taxation for non-existent facts – that is, essentially, in the violation of another constitutional principle in tax matters, which is the principle of taxable capacity, as is also alleged."

5. Full Applicability of the Principle of Tax Equality to All Taxes

Because it is founded on the very general principle of equality, the principle of tax equality and therefore the principle of taxation according to taxable capacity are fully applicable to all taxes without exception, there being no taxes in relation to which the legislator is more bound by the principle of capacity than others. This is recognized by the ordinary legislator in Article 4 of the General Tax Law.

Nothing in the constitutional order permits affirming that there is greater binding to the principle of tax equality in taxes on income than in taxes on property. No argument in that sense can be drawn, specifically, from Articles 103 and 104 of the CPR, which we have already seen are not related to the principle of equality nor to the principle of taxable capacity.

Besides, if Article 104(1) expressly refers to tax on personal income, determining that it aims at "reducing inequalities and shall be unique and progressive, taking into account the needs and income of the household", in turn section 3 of the same provision states that "Taxation of property should contribute to equality among citizens." Therefore, neither from this could it be drawn, if one were to sustain another understanding on the foundation of the principle of equality, that this is more binding in the case of taxes on income than in taxes on property.

If it is true that in the field of property taxes, specifically in property tax on real estate, personal factors determining taxable capacity that are taken into account in income tax are not considered – such as for example the fact that the taxpayer has a disability or has health expenses – it is also true that in the field of property tax on real estate personal factors determining taxable capacity have recently been introduced – such as the number of dependents in the household (Law No. 82-B/2014 of 31 December) – and it is no less true that in the field of Tax on the Income of Natural Persons there are areas in which the consideration of personal factors determining taxable capacity are absent, such as autonomous taxation or taxation at liberatory rates. In truth, the consideration to a lesser or greater degree of personal factors determining taxable capacity is fundamentally related to its practicability in each aspect of the tax, and not to the nature of the manifestation of wealth in question.

The taxation under item 28.1 of the General Stamp Duty Table, being a taxation on property, does not constitute an exception to the principles of tax equality and taxation according to taxable capacity. There is therefore no reason to, prima facie, assume that the principle of taxation according to taxable capacity should suffer any compression in this tax.

6. Application of the Principle of Tax Equality to the Concrete Situation of the Case

Thus far we have concluded that there prevails in Portuguese tax constitutional law the principle of tax equality, derived from the principle of equality enshrined in Article 13 of the CPR, an understanding that finds support in the jurisprudence of the Constitutional Court; That the principle of tax equality applies to all aspects of tax laws, among which that of the scope of the tax; That to apply in the field of the scope of the tax, the principle of tax equality requires the application of the principle of taxable capacity, which determines that taxpayers with equal taxable capacity must bear the same tax burden, and persons with different taxable capacities must bear different tax burdens, with the difference in the tax burden being proportional to the difference in taxable capacity (unless something else results from other constitutional norms, such as Article 104(1) or (3) of the CPR); And that there exists in the Constitution no element that permits concluding that the principle of taxable capacity is less binding in the field of property taxation than in the remaining taxes.

At issue is the application of item 28.1 of the GSDT to the situation of co-ownership of land for construction.

According to item 28.1 of the GSDT, read together with Article 1(1) of the Stamp Duty Code, subject to Stamp Duty taxation, at the annual rate of 1%, to be applied to the tax property value of the property subject to tax, is the ownership, usufruct or right of superficies of urban properties whose tax property value, shown in the tax assessment roll, is equal to or exceeding 1,000,000 euros. In the category of urban properties subject to tax are expressly included land for construction whose building, authorized or foreseen, is for housing, pursuant to the provision in the Property Tax Code.

Like the Property Tax on Real Estate, taxation under item 28.1 of the GSDT is a tax on real estate property. Both have as their prerequisites facts that constitute manifestation of taxable capacity – real property rights.

In the field of Property Tax on Real Estate for purposes of scope, neither the tax value of real estate nor the total value of the taxpayer's real estate property is considered. The value of real estate is not considered because, in general, the value of the property is not determinative of taxable capacity. Taxable capacity, in the field of a tax such as Property Tax on Real Estate, would have to be determined by the total value of real estate property. However, since Property Tax on Real Estate is a proportional tax, the total value of real estate property becomes irrelevant, the principle of equality being realized by applying the rate to each property according to its tax property value. On the other hand, in the calculation of the tax property value of each property, numerous factors are taken into account which, while seeking to determine the market value of the property, also introduce into the calculation of the tax property value indicia of taxable capacity. Therefore, in Property Tax on Real Estate, the principle of taxation according to taxable capacity is realized, first, by the method of calculating the tax property value of each property, into which factors indicating greater or lesser taxable capacity enter, and second by the application of a proportional rate to all properties (though we should note that the tax does not fully realize the principle of taxable capacity by not providing for non-subjection of own permanent residence dwellings up to a certain tax property value).

Item 28.1 of the GSDT, on the contrary, applies only to urban properties whose tax property value equals or exceeds 1,000,000 euros. It does not tax real estate portfolios whose total value reaches or exceeds 1,000,000 euros, but rather properties that reach or exceed that value. Obviously, a tax with this structure contends with the principle of tax equality, because a taxpayer who is the owner of real estate property of 1,000,000 euros composed of several properties is not called to contribute to the financing of public expenses through this tax, whereas a taxpayer who is the owner of a single property with that value is.

Initially, item 28.1 of the GSDT applied only to properties with residential use. It was understood that land for construction did not fall within this definition. Properties with residential use were therefore only "residential dwellings", that is, residential units.

The justification for the differentiated treatment, through its subjection to tax, of residential units (dwellings) of value equal to or exceeding 1,000,000 euros was easily found in the fact that in Portugal a residential unit (not exempt under the Tax Benefits Statute) of value equal to or exceeding 1,000,000 euros is in itself indicative of especially elevated taxable capacity. In this way, the principle of taxable capacity was safeguarded. The ownership of a residential unit of value equal to or exceeding 1,000,000 euros – a luxury home – constitutes, in itself alone, manifestation of especially elevated taxable capacity and therefore, by imposing taxation on such properties, the principle of taxable capacity is still respected. The definition of the taxable fact rested on a qualitative element (luxury residential dwelling), which, being a qualitative index of taxable capacity, safeguarded the principle of taxable capacity.

When, with the legislative amendment of 2013, taxation under item 28.1 began to include land for construction, the justification for the differentiated treatment given to owners of properties of value equal to or exceeding 1,000,000 euros disappeared, as far as this type of property is concerned. There is no doubt that in land for construction with a tax property value of 1,314,002.31 euros there exists no index of taxable capacity that does not exist in a set of two properties whose total tax property value totals 1,314,002.31 euros.

Similarly, no index of taxable capacity exists in the co-ownership of a one-half share of land for construction with a tax property value of 1,314,002.31 euros that does not exist in the ownership of land for construction with a tax property value of 657,001.15 euros. If regarding residential units (residential dwellings) of value equal to or exceeding 1,000,000 euros there was a qualitative element that safeguarded the principle of taxable capacity, as the legislator considered that it was "luxury homes", that qualitative element does not exist in the case of land for construction of value equal to or exceeding 1,000,000 euros.

At first glance, therefore, in subjecting to taxation some of the indicated situations and not subjecting others to taxation, when between them there exists identity regarding taxable capacity, it cannot be said that material equality in the treatment of these situations is being respected.

In its jurisprudence, however, the Constitutional Court has identified limitations on the principle of tax equality.

Let us see the application that the Constitutional Court has made of the principle of tax equality and its corollary of taxation according to taxable capacity.

7. Application of the Principle of Tax Equality in Practice

The Constitutional Court has affirmed that the principle of tax equality and its corollary of taxation according to taxable capacity must be compatible with other constitutional principles. For example, in decision No. 711/2006 of 29-12-2006:

"it is clear that the 'principle of taxable capacity' must be made compatible with other principles with constitutional dignity, such as the principle of the Social State, the legislator's freedom of regulation, and certain requirements of practicability and cognizability of the taxable fact, indispensable also for the fulfillment of the ends of the tax system".

None of these constitutional principles is at issue in the case before us.

From the outset, it is not apparent what problems of practicability or cognizability of the taxable fact would prevent the legislator from formulating the provision of item 28.1 of the GSDT with a different character, more in conformity with the principle of equality, it not being our task to substitute ourselves for the legislator in that formulation.

It is true that the social state requires an efficient tax system capable of generating the revenues necessary for its financial maintenance. Now, in the case of the provision here under consideration, what is at issue is the non-taxation of persons with the same taxable capacity as those whom the provision of scope reaches. The social state requires a tax system capable of generating sufficient revenues for the financing of public services, but that does not authorize the State to not adopt legislative solutions, in the tax field, that ensure the equal distribution of tax burdens.

There exists a broad freedom of regulation by the legislator regarding the tax system.

This is what the Constitutional Court states in its decision No. 127/04 of 03-03-2004:

"[…] given its function constitutionally defined, the tax legislator enjoys, in principle, normative-constitutive discretion regarding the election of facts revealing taxable capacity that can be raised to the category of taxable facts, as well as the definition of elements that concur to define the taxable base".

Indeed, this is the main argument of the Respondent in the case at hand, which states in its response:

"The fact that the legislator establishes a value (€1,000,000.00) as the delimiting criterion for the tax to apply, below which the provision of the tax rule is not met, constitutes a legitimate choice by the legislator regarding the setting of the material scope of 'luxury residential properties' intended to be taxed more heavily, especially since any other value of analogous magnitude would likewise assume an artificial character that is inherent to any quantitative setting of a level or limit;"

Indeed, the legislator cannot fail to have a broad margin of decision in the shaping of taxable facts. But this discretion cannot be absolute, and is, precisely, limited by constitutional principles, among which is that of tax equality.

Through item 28.1 of the GSDT, in its initial wording, the legislator sought to tax "luxury properties", as the Respondent refers and very well. Being certain that, for purposes of the scope of the tax, the total value of the taxpayer's real estate property was not taken into account, it is also clear that the taxable fact rested on a qualitative element that the legislator considered apt to reveal special taxable capacity. That qualitative element resided precisely in being before "a luxury residential property". Indeed, the data of experience show that taxable capacity does not have to be assessed only by quantitative elements, but that qualitative elements can enter into the assessment of taxable capacity. As we have already referred, a "luxury residential property" contains a qualitative element that is itself indicative of especially elevated taxable capacity, just as a yacht or other property normally associated with elevated levels of wealth.

Nothing prevented, therefore, the legislator, in the exercise of its freedom of legislative regulation, from basing itself on that qualitative element – luxury residential unit – to shape the taxable fact. In doing so, it had to define "luxury residential property". And in setting the value of 1,000,000 euros to define a "luxury" residential unit, it continued to act within the limits of its freedom of legislative regulation.

However, in extending taxation to land for construction, which cannot be considered "luxury properties", that qualitative element ceased to be present in the taxable fact. There is nothing that distinguishes, in qualitative or quantitative terms, for purposes of assessment of the taxable capacity of two given taxpayers, the ownership of land for construction with a tax property value of 1,000,000 euros or the ownership of two parcels of land for construction each with a tax property value of half a million euros.

And similarly, there is nothing that distinguishes, in terms of taxable capacity, the ownership of a property, other than not being a "luxury" property, with a tax property value of 657,001.15 euros – which is not taxed – from the ownership of a share of a property to which corresponds a tax property value of 657,001.15 euros.

It is thus evident that, in light of the criterion of taxable capacity – the only criterion on which the realization of the principle of tax equality in the case of taxes should rest – the disputed assessment translates into unequal treatment of equal situations.

In its jurisprudence on the principle of equality, and on the principle of tax equality in particular, the Constitutional Court has sought to delimit the conditions in which unequal treatments are admissible.

In decision No. 806/93 of 30-11-1993, for example, the Court affirms:

But, if the principle of equality does not prohibit that there be treatment differences in the law, rather sometimes imposes them directly or indirectly, what can with certainty be said is that such principle prohibits, indeed, arbitrary, unreasonable or unfounded discriminations, being deemed as such all those that do not find sufficient support in the distinct materiality of the different situations being considered or in the compatibility of the mentioned equality principle with other constitutionally accepted principles.

In decision No. 211/2003 of 28-04-2003, it reads:

"The violation of the constitutional principle of equality implies a concrete and effective situation of unjustified or discriminatory differentiation, being certain that, in this regard, constitutional jurisprudence has insistently emphasized that that principle does not prohibit creating distinctions, provided these are not arbitrary or devoid of sufficient material foundation."

In another decision, decision No. 409/99 of 29-06-1999, it is stated:

"The principle of equality, enshrined in Article 13 of the Constitution of the Portuguese Republic, requires that equal treatment be given to what is essentially equal and that different treatment be given to what is essentially different. In truth, the principle of equality, understood as an objective limit on legislative discretion, does not prohibit the law from adopting measures that establish distinctions. However, it prohibits the creation of measures that establish discriminatory distinctions, that is, inequalities of treatment that are materially unfounded or without any reasonable, objective and rational foundation. The principle of equality as a binding principle of the law translates into a general idea of prohibition of arbitrariness (…)"

The Court considers therefore, first, that the principle of equality requires that equal treatment be given to what is essentially equal. Essentially equal means, in our view, equal in what is relevant, in the situations in question, in light of the ends or objectives of the laws in question. In other words, the Court considers that treatment differences that are arbitrary, unreasonable or unfounded are not to be admitted, being deemed as such all those that do not find sufficient support in the distinct materiality of the different situations being considered.

It seems to us to be to be understood, as we have already sought to demonstrate, that between the situation of co-ownership of a 50% share of land with a tax property value of 1,314,002.31 and the situation of ownership of land for construction with a tax property value of 657,001.15 euros, there does not exist "distinct materiality". There exists essential equality. The truth is that the second situation is not taxed, the first is.

The Court considers, on the other hand, that a difference in treatment of situations that are essentially identical can be justified provided that they are not arbitrary or devoid of sufficient material foundation." That is, the difference in treatment between situations that are essentially equal can be justified if there exists a sufficient material foundation for that differentiation.

Specifically regarding item 28.1 of the GSDT, the Constitutional Court affirms in its decision No. 247/2016 of 04-05-2016:

"Nor is found in the provision of scope in question an arbitrary fiscal measure, because devoid of rational foundation. As we have seen, the legislative amendment had as its purpose broadening property taxation, making it fall more intensely on property ownership which, by its value significantly superior to that of the generality of urban properties with residential use, reveals greater indicators of wealth and, as such, is susceptible of founding the imposition of increased contribution to the saneation of public accounts on its holders, in realization of the mentioned 'principle of equity in social austerity'.

As we have already said previously, we maintain that this reasoning is valid only for those properties that can be qualified, in common language, as "residential dwellings". The qualifier "property ownership which, by its value significantly superior to that of the generality of urban properties with residential use" is not applicable to land for construction. Indeed, if it can be said that a tax property value of 1,000,000 euros is an exceptionally high value for a "residential dwelling", thus denoting a "particularly elevated" taxable capacity, which a person owning two properties with a lower value does not possess, it is already not true that the ownership of land for construction with a tax property value of 1,000,000 euros denotes a taxable capacity superior to that of a person who owns two properties each with the value of half a million euros.

Accordingly, it is not apparent that there exists between the situations of ownership and co-ownership that are discriminated by item 28.1 of the GSDT, insofar as land for construction is concerned, "sufficient material foundation for the differentiation of taxation to which the same leads.

And accordingly, we must conclude that that discrimination is arbitrary, because without sufficient rational foundation, and therefore contrary to and in violation of the principle of tax equality contained in Article 13 of the CPR.

VI – RIGHT TO COMPENSATORY INTEREST

Given the illegality, by violation of constitutional norm, of the disputed assessment acts, for the reasons set forth, and having the Applicant fully paid the assessed tax, the Applicant has the right, in accordance with Articles 24(1)(b) of the RJAT and 100 of the General Tax Law, to refund of the tax improperly paid.

As to the right to compensatory interest, Article 43 of the General Tax Law provides that "compensatory interest is due when it is determined, in administrative complaint or judicial impugnation, that there was error attributable to the services resulting in payment of the tax debt in an amount exceeding that legally due".

The Supreme Administrative Court has made a broad interpretation of this normative provision, considering that there exists error attributable to the services in the generality of cases in which the annulment of the tax act is decided for illegality (see, in this sense, Supreme Administrative Court decisions of 22-05-2002, Case No. 457/02; of 31.10.2001, Case No. 26167; of 2.12.2009, Case No. 0892/09).

The only exceptions, until recently, concerned cases of defect for lack of competence or form (see Supreme Administrative Court decision of 09-09-2009, case No. 0369/09; Supreme Administrative Court decision of 27-06-2007, case No. 080/07).

As to cases in which the dispute between the taxpayer and the tax administration is decided by annulment of the impugned act based on violation of constitutional norm, the Supreme Court considered for a long time that such illegality was still reducible to a broad concept of error attributable to the services. An example of application of this doctrine is the Supreme Administrative Court decision of 09-10-2002, case No. 0789/02, in which it was summarized: "I. Compensatory interest is due in favor of the taxpayer when a tax has been required from him that was assessed by application of a norm which, in its judicial impugnation, was judged unconstitutional. II - The obligation to indemnify does not cease to exist simply because the Administration is not free to refrain from applying the law, under the pretext of its unconstitutionality."

Recently, however, the Supreme Administrative Court revised its position on this matter.

In the decision of the Supreme Administrative Court of 11-05-2016, case No. 704/14, the Court begins by evoking its own doctrine regarding the impossibility of the tax administration foregoing application of a norm based on a judgment of unconstitutionality, citing its decision of 26-02-2014 (case No. 481/13), paraphrasing:

"We conclude, thus, that in Portuguese Constitutional Law there does not exist the possibility of the Administration refusing to obey a norm it considers unconstitutional, substituting itself for the organs of constitutional scrutiny, unless it is a matter of violation of rights, freedoms and guarantees constitutionally enshrined, which is not manifestly the case when it is a matter of application of a norm possibly violating the principle of non-retroactivity of tax law…".

To then conclude:

Faced with this doctrine, we cannot fail to conclude that the Tax Administration could not have decided differently the administrative complaint filed by the appellant, either because it does not have the right to refuse application of a norm which in its view could be unconstitutional, because it is not permitted to it to form a judgment on that constitutionality, or because prior to that decision had been rendered by the Constitutional Court a decision in which it had concluded by the constitutional conformity of the concrete legal provision, on which, subsequently, the judgment of unconstitutionality fell. As to the consequences, while not disregarding the content of other decisions of this Supreme Court, with some longevity, to the effect that the assessment made based on law declared unconstitutional, being illegal, cannot fail to be annulled, it is also true that the Tax Administration cannot make a judgment of retrospective prognosis regarding unconstitutionality, the court having to avoid extensive interpretations and also to heed the values of legal certainty and security and the terms of the legal attribution of responsibility for payment of compensatory interest that exclude any objective responsibility of the Public Treasury for which, residually, the interests of the taxpayer will be safeguarded by the possibility of filing an indemnity action against the Portuguese State for error attributable to the legislative power. We thus have that we must conclude that in the present case, and for purposes of payment of compensatory interest to the taxpayer, no error can be attributed to the tax services which, by itself, determined the payment of tax debt in an amount exceeding that legally due, since it was not within its discretion to decide differently from how it decided, at the time it did so.

The same doctrinal position is subscribed to in the decisions of the same court of 1-06-2016, case No. 1352/14, and of 21-01-2015, case No. 843/14.

Considering that there already exists a number of decisions that permits speaking of a current in jurisprudence and attending to the principle of legal certainty and its related principle of uniformity in the application of law, we deem it should adopt this same doctrinal current, thus denying, in the concrete case, the right of the Applicant to compensatory interest.

VII - DECISION

For the reasons set forth, it is decided:

To judge entirely well-founded the request for declaration of illegality of the assessed Stamp Duty, by applying a rule violating the principle of tax equality, enshrined in Article 13 of the Constitution of the Portuguese Republic;
To declare the illegality and annul, for the same reasons, the act of rejection of the administrative complaint filed against that assessment act;
In consequence, to annul the disputed assessment act and to condemn the Respondent TA – Tax and Customs Authority to refund the amount paid relating to the annulled assessment.

Economic value of the dispute: The economic value of the dispute is fixed at 6,570.01 euros.

Costs: Pursuant to Article 22(4) of the RJAT, the amount of costs is fixed at 612.00 euros, in accordance with Table I attached to the Regulation on Costs in Tax Arbitration Proceedings, to be borne by the Respondent.

Let this arbitral decision be registered and notified to the parties.

Lisbon, Administrative Arbitration Center, 19 September 2016

The Arbitrator

(Nina Aguiar)

[1] Summa Theologiae, Secunda secundae, 61

[2] To the contrary, Constitutional Court decision No. 695/2014 of 15-10-2014.

[3] The Constitutional Court in some cases stated, in our view incorrectly, that the principle of tax equality is enshrined in Article 104 (or in the predecessor 106) of the CPR. This is the case in decision 497/97 of 9 July 1997.

ARBITRAL DECISION - Replaces the decision of 19 September 2016.

I - FACTUAL BACKGROUND

1. REOPENING OF PROCEEDINGS

By decision dated 19-09-2016, this Tribunal granted the request for annulment of the Stamp Duty assessment act No. 2015..., issued under item 28.1 of the General Stamp Duty Table, relating to land for construction corresponding to article ... of the civil parish union of ... and ..., in the municipality of Aveiro, in the amount of 6,570.01 euros, in the following terms:

"For the reasons set forth, it is decided:

To judge entirely well-founded the request for declaration of illegality of the assessed Stamp Duty, by applying a rule violating the principle of tax equality, enshrined in Article 13 of the Constitution of the Portuguese Republic;
To declare the illegality and annul, for the same reasons, the act of rejection of the administrative complaint filed against that assessment act;
In consequence, to annul the disputed assessment act and to condemn the Respondent TA – Tax and Customs Authority to refund the amount paid relating to the annulled assessment."

The Respondent Tax and Customs Authority appealed from this decision to the Constitutional Court, pursuant to Article 280(1)(a) of the Constitution of the Portuguese Republic and Articles 70(1)(a), 72(1)(a) and (3) of Law No. 25/82 of 15 November, and Article 25(1) of the RJAT, which appeal was admitted by this Tribunal by order of 21-12-2016.

In Constitutional Court Decision No. 105/2019 of 19-02-2019, rendered by the 3rd Section of the Constitutional Court, the following decision was rendered:

"III. Decision

For all the foregoing, it is decided:

a) Not to judge unconstitutional the provision of items 28 and 28.1 of the General Stamp Duty Table, attached to the Stamp Duty Code, in the wording given by Article 194 of Law No. 83-C/2013 of 31 December, insofar as it imposes annual taxation on co-ownership of land for construction, whose tax property value is equal to or exceeding one million euros, even though the co-owner's share corresponds to a fraction of value less than that amount;

b) To grant the appeal, determining the reform of the appealed decision with regard to the issue of constitutionality."

Following this decision, the present arbitral proceedings are reopened in order that, in accordance with what is determined by the Constitutional Court, a new decision be rendered on the dispute, which is done in the following terms:

1. Request

A..., taxpayer no. …, resident at Street …, … …-… …, Rio de Janeiro, and with tax domicile at Street …, …, …, …-…, Aveiro, hereinafter referred to as the Applicant, filed on 15-01-2016, pursuant to subsection (a) of Article 2(1) and Article 10 of Decree-Law No. 10/2011 of 20 January, which approves the Legal Framework for Tax Arbitration (RJAT), a request for arbitral decision, in which the TA - Tax and Customs Authority is respondent, with the purpose of:

Annulment of the Stamp Duty assessment act No. 2015..., issued under item 28.1 of the General Stamp Duty Table, relating to land for construction corresponding to article ... of the civil parish union of ... and ..., in the municipality of Aveiro, in the amount of 6,570.01 euros;
Declaration of illegality of the rejection of the administrative complaint filed against that assessment act;
Consequent condemnation of the Respondent to refund the amount paid relating to these tax assessments, plus compensatory interest due.

The Applicant alleges, essentially and with relevance to the decision of the case, the following:

Item 28.1 of the General Stamp Duty Table (GSDT) was introduced by the legislator in order to tax situations of ownership of high-value immovable property, thereby revealing increased taxable capacity;
The rule shows a clear intention by the legislator to target situations that evidence greater taxable capacity, in harmony with Article 104(3) of the Constitution of the Portuguese Republic, which provides that "taxation of property should contribute to equality among citizens".
In this light, being the owner of a property with a value equal to or exceeding one million euros or being a co-owner of the same property are situations to be valued differently, since the taxable capacity inherent in each of these situations is very different.
The subjection of the co-owner depends on whether their share has a value equal to or exceeding one million euros, as that is the threshold of tax relevance provided, which does not occur in the present case, in which the Applicant's share has a tax property value of 657,001.15 euros.
It is in light of this clear intention to identify situations that in the legislator's mind evidence greater taxable capacity, leading to negative discrimination of the same, and bearing in mind that the Constitution of the Portuguese Republic, in Article 104(3), provides that "taxation of property should contribute to the equality of citizens", that we understand that the application of item 28.1 of the GSDT cannot be indiscriminately applied to owners and co-owners of the properties identified therein, without respecting, as to the latter, the minimum threshold of taxation provided for in law.

2. Response of the Respondent

In response to the request for arbitral decision filed by the Applicant, the Respondent TA - Tax and Customs Authority alleges, with relevant grounds for opposition:

The principle of tax equality and taxable capacity does not prevent that, taking into account the legislator's freedom of regulation, treatment differentiations may be established, "reasonably, rationally and objectively founded", under penalty of, failing that, "the legislator incurring in arbitrariness, by disregard of solutions objectively justified by constitutionally relevant values".
The fact that the legislator establishes a value (€1,000,000.00) as the delimiting criterion for the tax to apply, below which the provision of the tax rule is not met, constitutes a legitimate choice by the legislator regarding the setting of the material scope of "luxury residential properties" intended to be taxed more heavily, especially since any other value of analogous magnitude would likewise assume an artificial character that is inherent to any quantitative setting of a level or limit;
There is no confusion between this dimension of proportionality of the equality principle and the classical separation between proportional taxation and progressive taxation, nothing preventing at constitutional level that the property taxation in question rest on a proportional ad valorem rate (cf. Article 104(3) of the Constitution);
Concluding, if the use of the property and its respective social function are different, the situation can – and must – be treated differently, as indeed the equality principle itself requires.
In this way, since the differentiated treatment finds sufficient material justification, the equality principle is observed, both per se and in its dimension of proportional equality.

3. Subsequent Procedure

By proposal and with the agreement of both parties, the Tribunal decided to dispense with the holding of the meeting provided for in Article 18 of the RJAT.

The parties dispensed with the submission of final arguments.

II – PROCEDURAL EXAMINATION

The parties have legal standing and capacity, are legitimate and are regularly represented, pursuant to Articles 4 and 10 of the RJAT and Article 1 of Order No. 112-A/2011 of 22 March.

No procedural defects were identified.

Nothing therefore prevents the examination of the merits of the case.

III – ISSUES TO BE DECIDED

The Applicant does not, in fact, argue for an interpretation of item 28.1 of the GSDT according to which, under the rules of interpretation of legal norms, situations of co-ownership in which the taxpayer's share corresponds to a tax property value below 1,000,000 euros would not fall within its scope.

Rather, the Applicant maintains that, in an interpretation of item 28.1 consistent with the Constitution, such situations cannot be subject to the tax out of respect for the principle of equality and taxable capacity.

IV – ESTABLISHED FACTS

The following facts are established as relevant to the decision:

1st: The Applicant was, at the time of filing the request for arbitral decision, a co-owner, with a 50% share, of the urban property classified as land for construction corresponding to article ... of the Civil Parish Union of ... and ..., in the municipality of Aveiro;

2nd: The tax property value of the property was determined in 2013 at 1,314,002.31 euros;

4th: The Applicant paid the assessed tax in three instalments;

5th: The Applicant filed an administrative complaint against the assessment on 5-8-2015, which administrative complaint was fully rejected by express decision on 21-10-2015;

The established facts were proven on the basis of documents submitted to the case.

There are no facts found not proven with relevance to the decision of the case.

V – REASONING

In the above-cited decision which determined the reform of the arbitral decision previously rendered in this case, the Constitutional Court bases its decision in the following terms:

"(...) [R]egardless of the doctrinal position one subscribes to regarding the legal nature of co-ownership, the situation of the holder of a share also cannot be equated with that of the exclusive owner of a property of value equivalent to their share and below one million euros. In truth (...) the mere possibility that, in principle, is recognized to each co-owner of using the common thing in its entirety is sufficient to discern a more intense expression of the taxable capacity aimed at by the legislator – which, as mentioned above, assumes in this tax, just as in Property Tax on Real Estate, a special

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Is Stamp Tax (Imposto do Selo) due on co-owned building land valued over one million euros under Verba 28.1 TGIS?

Under item 28.1 of the General Stamp Duty Table (Verba 28.1 TGIS), Stamp Tax applies to building land with a tax property value of €1,000,000 or more. In case 14/2016-T, the Tax Authority assessed Stamp Tax on co-owned land valued at €1,314,002.31, applying the tax based on the total property value rather than individual ownership shares. The applicant challenged this interpretation, arguing that co-owners should only be liable when their individual share reaches the €1,000,000 threshold. The case centered on whether the tax applies to the property as a whole or to each co-owner's proportional share separately.

How does the principle of tax equality apply to co-ownership of high-value property in Portugal?

The principle of tax equality in Portuguese constitutional law requires that taxation reflect taxpayers' ability to pay and that similarly situated taxpayers receive similar treatment. In the context of co-owned high-value property, the applicant argued this principle demands differentiation between sole ownership and co-ownership, as they represent different levels of taxable capacity. A co-owner holding a €657,001.15 share possesses fundamentally different economic capacity than a sole owner of a €1,314,002.31 property. The Tax Authority maintained that tax equality permits the legislator to establish objective criteria and thresholds, and that treating the property as a single unit for tax purposes does not violate equality principles when the differentiation serves legitimate policy objectives of taxing luxury properties.

Can a co-owner's share value determine Stamp Tax liability separately from the total property value?

This was the central legal question in case 14/2016-T. The applicant contended that each co-owner's Stamp Tax liability should be determined based on their individual share value, arguing that only shares valued at €1,000,000 or above should trigger the tax. With a 50% share worth €657,001.15, the applicant argued they should be exempt. The Tax Authority argued that item 28.1 TGIS applies to the property as a whole when its total value exceeds €1,000,000, making all co-owners proportionally liable regardless of individual share values. The constitutional issue was whether applying the tax based on total property value, rather than individual share values, violates the principle of taxation according to taxable capacity.

What was the outcome of CAAD arbitration process 14/2016-T regarding Stamp Tax on co-owned land?

Case 14/2016-T involved an arbitration regarding €6,570.01 in Stamp Tax assessed on co-owned building land in Aveiro. The applicant, owning 50% of land valued at €1,314,002.31, challenged the assessment under item 28.1 TGIS, arguing their €657,001.15 share fell below the €1,000,000 threshold. The applicant sought annulment of the assessment and refund of amounts paid. The decision, dated August 22, 2019, constituted a reform that replaced the original arbitral decision from September 19, 2016. The case examined the constitutionality of applying item 28.1 to co-ownership situations where individual shares are below the statutory threshold, though the provided excerpt does not include the final ruling.

How does the reform of an arbitral decision work in Portuguese tax arbitration proceedings?

Reform of an arbitral decision (reforma da decisão arbitral) in Portuguese tax arbitration allows correction or modification of a prior decision. In case 14/2016-T, the August 22, 2019 decision expressly replaced the September 19, 2016 decision, as indicated by the notation '*Substitui a decisão de 19 de setembro de 2016' (Replaces the decision of 19 September 2016). This reform mechanism enables the arbitral tribunal to reconsider and revise previous rulings, potentially addressing errors, clarifying reasoning, or reconsidering legal conclusions. The reformed decision becomes the operative ruling, superseding the original decision entirely. This process ensures accuracy and allows for correction of arbitral decisions within the CAAD (Centro de Arbitragem Administrativa) framework established by the Legal Framework for Tax Arbitration (RJAT).

Stamp Tax on Co-Owned Building Land: Tax Equality Principle in CAAD Case 14/2016-T

Table of Contents

Summary

Full Decision

Tax Arbitration Jurisprudence

PDF Version

ARBITRAL DECISION

I - FACTUAL BACKGROUND

1. Request

2. Response of the Respondent

3. Subsequent Procedure

II – PROCEDURAL EXAMINATION

III – ISSUES TO BE DECIDED

IV – ESTABLISHED FACTS

V – REASONING

1. Positive Foundation of the Principles of Tax Equality and "Taxable Capacity" in the Portuguese Tax Constitution

2. The Principle of Tax Equality and the Principle of Reduction of Inequalities through the Tax System as Principles with Distinct Contents, Which Do Not Exclude Each Other

3. Content of the Principle of Tax Equality – Its Relationship with the Principle of Taxation According to Taxable Capacity

4. The Principle of Tax Equality Does Not Exhaust the Principle of Taxable Capacity

5. Full Applicability of the Principle of Tax Equality to All Taxes

6. Application of the Principle of Tax Equality to the Concrete Situation of the Case

7. Application of the Principle of Tax Equality in Practice

VI – RIGHT TO COMPENSATORY INTEREST

VII - DECISION

ARBITRAL DECISION - Replaces the decision of 19 September 2016.

I - FACTUAL BACKGROUND

1. REOPENING OF PROCEEDINGS

1. Request

2. Response of the Respondent

3. Subsequent Procedure

II – PROCEDURAL EXAMINATION

III – ISSUES TO BE DECIDED

IV – ESTABLISHED FACTS

V – REASONING

Frequently Asked Questions

Tags

FRESH Legal Group

Table of Contents

Stamp Tax on Co-Owned Building Land: Tax Equality Principle in CAAD Case 14/2016-T

Table of Contents

Summary

Full Decision

Tax Arbitration Jurisprudence

PDF Version

ARBITRAL DECISION

I - FACTUAL BACKGROUND

1. Request

2. Response of the Respondent

3. Subsequent Procedure

II – PROCEDURAL EXAMINATION

III – ISSUES TO BE DECIDED

IV – ESTABLISHED FACTS

V – REASONING

1. Positive Foundation of the Principles of Tax Equality and "Taxable Capacity" in the Portuguese Tax Constitution

2. The Principle of Tax Equality and the Principle of Reduction of Inequalities through the Tax System as Principles with Distinct Contents, Which Do Not Exclude Each Other

3. Content of the Principle of Tax Equality – Its Relationship with the Principle of Taxation According to Taxable Capacity

4. The Principle of Tax Equality Does Not Exhaust the Principle of Taxable Capacity

5. Full Applicability of the Principle of Tax Equality to All Taxes

6. Application of the Principle of Tax Equality to the Concrete Situation of the Case

7. Application of the Principle of Tax Equality in Practice

VI – RIGHT TO COMPENSATORY INTEREST

VII - DECISION

ARBITRAL DECISION - Replaces the decision of 19 September 2016.

I - FACTUAL BACKGROUND

1. REOPENING OF PROCEEDINGS

1. Request

2. Response of the Respondent

3. Subsequent Procedure

II – PROCEDURAL EXAMINATION

III – ISSUES TO BE DECIDED

IV – ESTABLISHED FACTS

V – REASONING

Frequently Asked Questions

Tags

FRESH Legal Group

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