Stamp Tax on Urban Land for Construction: CAAD Arbitration Decision 186/2013-T on Property Valuation

ENGLISH TRANSLATION:

Case No. 186/2013-T

Arbitral Decision

I – Report

1. "A" (hereinafter referred to as the "Applicant") filed, on 26 July 2013, a request for the constitution of an arbitral tribunal, in accordance with the provisions of Articles 2, No. 1, subsection a), and 10, of Decree-Law No. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter "LFATM").

2. The Applicant requests a ruling with a view to declaring the illegality of the Stamp Tax (hereinafter "ST") assessment issued by the Tax and Customs Authority (hereinafter "TCA" or "Respondent"), in the total amount of €53,200.70, which is shown in the stamp tax assessment (1st instalment), attached as document No. 1 to the arbitral ruling request.

3. The claim which is the object of the arbitral ruling request consists in declaring the illegality of the aforementioned stamp tax assessment act, on urban real property of the type "building land", carried out on the basis of the rule in Article 1 of the Stamp Tax Code (hereinafter "STC"), combined with Item No. 28.1 of the respective General Schedule (hereinafter "TGIS") and with Article 6 of Law No. 55-A/2012, of 29 October; a tax against which the Applicant files a challenge.

4. On 26 September 2013, the present Singular Arbitral Tribunal was constituted.

5. The Arbitral Tribunal was duly constituted and is materially competent, in light of the provisions of Articles 2, No. 1, subsection a), 5, 6, No. 1 and 11, paragraph 1 of the LFATM.

6. In accordance with Article 17, No. 1, of the LFATM, the TCA was summoned, as the respondent party, to file a response, in accordance with and for the purposes of the aforementioned article. The TCA filed its response on 1 November 2013, submitting the administrative file and arguing, in summary, the complete lack of merit of the Applicant's claim.

7. The hearing in accordance with and for the purposes of the provisions of Article 18 of the LFATM took place on 21 January 2014, with the respective Minutes being added to the file. The parties opted not to present oral or written arguments, and dispensed with the production of witness evidence. The date of 21 February 2014 was set for the pronouncement of the arbitral decision.

8. The case is not affected by any nullities and no issues, preliminary or subsequent, have been raised that would prevent the examination of the merits of the case, with conditions being met for a final decision to be rendered.

9. The Parties have legal personality and capacity and have standing, in accordance with Articles 4 and 10, No. 2, of the LFATM and Article 1 of Regulation No. 112-A/2011, of 22 March.

II – Grounds: Facts

II.A. Facts Considered Proven

a) The Applicant was notified of the tax assessment at the rate of 1% on the taxable property value (TPV) of €5,320,070 corresponding to building land registered in the urban property register of the parish of ... in the municipality of Porto under No. U-..., until 2012 in the property of the Applicant.

b) Assessment No. 2013 ..., dated 21 March 2013 and relating to the year 2012, was based on the application of the provisions in No. 28.1 of the TGIS, in the wording given by Article 4 of Law No. 55-A/2012, of 29 October, which provided "For property with residential purpose - 1%"

c) In the Urban Property Register the property is described as "Building Land", and only in the Valuation Data does "Housing" appear mentioned as the "Location coefficient type".

d) The Urban Property Register shows that the valuation of the taxable property value was carried out on 20 November 2012.

II.B. Facts Considered Not Proven

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

II.C. Grounds for the Facts Proven

The facts given as proven result from the documentary evidence in the file, whose authenticity and correspondence to reality were not contested.

III – Grounds: Law

III.A. Position of the Applicant

a) The Applicant argues that the assessment act is illegal due to the absence of the tax incidence prerequisite, alleging that building land does not in itself have the "residential purpose" required for tax incidence (Articles 4 et seq. of the Initial Request, hereinafter "I.R.")

b) It is stressed that, for the purposes of Article 6 of the IMI Code, there is a clear distinction between two types of urban properties, building land on one hand, residential properties on the other (Articles 8 to 11 I.R.)

c) It is argued that mere licensing for construction of residential properties does not convert building land into a residential property, into property with "residential purpose", synonymous with "residential use", for the purposes of Article 6 of the IMI Code (Articles 12 to 17 I.R.)

d) It is alleged that the association of this "residential purpose" with building land would make the tax incidence correspond to a future thing (Article 17 I.R.)

e) Reference is made to the legislative intent ("mens legislatoris") in the words of the State Secretary for Tax Affairs stated in the Assembly of the Republic on 10 October 2012, in which the objective of special taxation of "residential urban properties" and "houses" with value exceeding one million euros is mentioned (Articles 18 and 47 I.R.)

f) The assessment act would be unconstitutional, the Applicant alleges, due to violation of the principle of equality, even if the prerequisite of tax incidence "residential purpose" were accepted as satisfied (Articles 21 et seq. I.R.)

g) The violation of the principle of equality is expressed in the disrespect of the principle of tax capacity, assessed by manifestations of wealth of the taxpayer, and aimed at achieving balance in the distribution of the tax burden (Articles 22 et seq. I.R.)

h) It is alleged that, as an accessory tax to the IMI, the stamp tax provided for in No. 28.1 of the TGIS follows the modality of supplementary tax, as a kind of "selective surcharge"; but that this circumstance creates an unsustainable discrimination between assets of equal value and equal "purpose", paying attention only to their greater or lesser fragmentation (Articles 37 to 38 I.R.)

i) It is specifically alleged that, if the taxation of building land with "residential purpose" is admitted on the grounds that it has a unit value exceeding 1 million euros, the taxation will no longer apply if a residential property composed of units with unit value below 1 million euros is built on it, even if the sum of the value of the units far exceeds that amount of 1 million euros – which would constitute a flagrant distortion of the principle of tax capacity (Articles 39 to 46 I.R.)

j) Finally, the Applicant alleges that there is illegality in the violation of the transitional regime of the TGIS applicable to the year 2012, provided for in Article 6 of Law No. 55-A/2012, of 29 October:

a. because the valuation of the property only took place on 20 November 2012 when the aforementioned rule establishes that in 2012 (the reference year) the tax event occurs on 31 October;

b. because the same rule establishes that in 2012 the rate is 0.5% or 0.8%, depending on whether or not there is a valuation in accordance with the IMI Code (but in both cases not the rate of 1% that was applied)

c. because the same rule establishes that the assessment relating to 2012 must take place by 20 December 2012, when the fact is that it only took place on 21 March 2013.

k) Therefore, it is verified that all the prerequisites of taxation under the 2012 transitional regime have been violated (Articles 50 to 55 I.R.).

III.B. Position of the Respondent

a) In its challenge, the Respondent argues that Item 28.1 of the TGIS does not violate the principle of equality because it is formulated in the proper general and abstract terms, distinguishing only unequal situations based on the various legal qualifications and inherent legal effects that apply to each (Articles 6 to 16 of the Respondent's response, hereinafter "Response TCA")

b) It subscribes to an understanding of what "residential purpose" of building land means, starting from what is established in Articles 2, 1, 6, 1, 41 and 45, 2 of the IMI Code, which configure such lands as properties and subject them to a valuation that determines their respective purpose through a "location coefficient" – with applicability through Article 67, 2 of the STC – being therefore the aforementioned "residential purpose" nothing more than the purpose or aptitude determined through the aforementioned coefficient (Articles 17 to 29 Response TCA)

c) It emphasizes that the Applicant did not oppose (or at least did not do so through the appropriate means and in the proper timeframes) the application of the location coefficient that allowed it to characterize the building land as being intended for "housing" (Articles 32 to 37 Response TCA)

d) It argues that the legal provision is that of "residential purpose", an expression broader than "property intended for housing", and distinct from it, because it aims to encompass other realities such as that of the value of the "implantation area" of authorized and planned buildings based on the building or urbanization project, or values connected with the purpose of land for the purposes of Master Plans, subdivisions and building, and which necessarily precede the actual building (Articles 43 to 51 Response TCA)

e) It argues that there is no violation of the transitional regime established in Article 6 of Law No. 55-A/2012, of 29 October, arguing that in the case at hand, it is an assessment to be carried out in the year 2013, applying therefore, in its view, exclusively No. 2 of the aforementioned article.

III.C. Issues to be Decided

1. Given that we are facing a situation in which the taxable property value exceeds 1 million euros, the question at issue centers on the definition of what constitutes "properties with residential purpose" for the purposes of the objective tax incidence of Item 28.1 of the TGIS. In other words, it is quite simply a matter of knowing whether or not building land is included within the scope of the stamp tax referred to in Item 28.1 of the TGIS, insofar as it may be accepted that such land be characterized as "urban properties with residential purpose".

2. If the answer is affirmative, it will also be worthwhile to consider whether, beyond the poor legislative drafting that allowed for the inclusion of expressions and concepts lacking rigor and ambiguity in the provision of tax incidence rules, there will not remain a problem of unconstitutionality – specifically that which concerns the inequalities introduced by a criterion which, in at least some cases, disregards clear differences in tax capacity expressed in various real property realities, in addition to rewarding mere property fragmentation. And it would also be important to know whether there was or was not a violation of the transitional regime established in Article 6 of Law No. 55-A/2012, of 29 October; and it should be noted that there has been confusion on this point, concerning the year to which the taxation relates – whether to 2012, as shown in the assessment act, or to 2013, as the Respondent appears to want to argue (which, among other implications, would mean that the Applicant is no longer the taxpayer of the tax).

3. If the answer to the central issue is negative, these and other questions that arise may be considered as prejudiced.

4. Now the answer to the central question at issue appears to be negative: building land does not form part of nor can it form part of the concept of "properties with residential purpose".

5. For this conclusion we adduce arguments of a logical-systematic order (of "legislative intent"), of a historical order (of "legislative purpose"), and of a jurisprudential order.

III.C.1. Arguments of a Logical-Systematic Order (of "Legislative Intent"):

1. Law No. 55-A/2012, of 29 October, added No. 2 to Article 67 of the STC, which provides that "To matters not regulated in the present Code concerning Item No. 28 of the General Schedule, the provisions of the IMI Code shall apply, subsidiarily".

2. Now the IMI Code clearly distinguishes, within urban properties, residential properties and building land (Articles 4 and 6, 2 and 3).

3. If there existed "residential purpose" current, effective, already present in a "building land", it would cease to be such and would become conceptually integrated into the category of "residential property". Legality and legal certainty do not permit, in light of this normative distinction, that a tax incidence takes as its focus a mere potentiality, a mere contingent futurity that may simply never come to pass, never come to be realized: on building land, a building, whether residential or non-residential, may never be implanted – because that is within the freedom of its owner.

4. But the most decisive logical-systematic argument is provided by the legislator itself: doubtless recognizing that the concept of "residential purpose" was useless, Law No. 83-C/2013, of 31 December, came to amend, in its Article 194, Item 28.1 of the TGIS, giving it new wording: "For residential property or for building land whose building, authorized or planned, is for housing, in accordance with the provisions of the IMI Code - 1%"

5. This means that the legislator itself realized that the dichotomy enshrined in the IMI Code, between residential properties and building land, had to be respected; and although it now subjects both to the same taxation, it recognizes, without a shadow of doubt, that the previous wording of Item 28.1 of the TGIS did not authorize that equivalence – because this had to be explicitly stated.

6. Although problems of unconstitutionality remain for the future that the new wording does not resolve, and perhaps even aggravates, the fact that is relevant in the case at hand is that, at the date of the facts to which the present case relates, there existed a wording of Item 28.1 of the TGIS which the legislator subsequently recognized as being insufficient to support an interpretation such as that which is sustained by the Respondent in the present case.

III.C.2. Arguments of a Historical Order (of "Legislative Purpose"):

1. Law No. 55-A/2012, of 29 October, resulted from Bill No. 96/XII (2nd). Now, in the discussion of that Bill, the State Secretary for Tax Affairs stated: "(…) First, the Government proposes the creation of a special tax on residential urban properties of higher value. It is the first time that Portugal has created a special taxation on high-value properties intended for housing. This rate will be 0.5% to 0.8% in 2012, and 1% in 2013. And it will apply to houses with a value equal to or exceeding 1 million euros" (Journal of the Assembly of the Republic – I Series, of 11 October 2012, p. 32).

2. What the Assembly of the Republic approved, by voting on that Bill and converting it into Law No. 55-A/2012, was therefore the creation of a special rate on "residential urban properties", on "houses" – not on "building land". That is the "legislative purpose".

III.C.3. Arguments of a Jurisprudential Order:

1. The arguments of a logical-systematic order and of a historical order have led us to a conclusion that places us in harmony with the jurisprudential precedents, which are unanimous in supporting the same understanding regarding the non-applicability to "building land" of what is provided for in Item No. 28.1 of the TGIS, in the wording given by Article 4 of Law No. 55-A/2012, of 29 October.

2. We refer to the arbitral decisions rendered in Cases No. 42/2013-T (Nuno Azevedo Neves), No. 48/2013-T (Manuel Carlos Rodrigues), No. 49/2013-T (Álvaro Caneira), No. 50/2013-T (Maria do Rosário Anjos), No. 53/2013-T (Jorge Manuel Lopes de Sousa / Conceição Pinto Rosa / Alberto Amorim Pereira) and No. 132/2013-T (Miguel Patrício).

3. We permit ourselves to highlight some passages from these decisions, in reinforcement of what has already been argued:

A) Case No. 42/2013-T (Nuno Azevedo Neves)

"40. Building land, not being built upon, does not satisfy, by itself, any condition to be considered as properties with residential purpose, since, on one hand, they do not possess a license for use for housing, and on the other hand, they are not habitable (because they are simply not built upon)."

"42. […] only when "residential purpose" is concretized, and never before its building, can we consider that the urban property comes within the scope of the objective tax incidence rule in question."

"46. Based on the foregoing, it is considered that the expression "urban property with residential purpose" provided for in Item 28.1 of the TGIS corresponds to urban residential property, as provided for in Article 6, No. 1, subsection a), of the IMI Code."

B) Case No. 48/2013-T (Manuel Carlos Rodrigues)

"As can be seen from the presentation of bill No. 96/XII (2nd), what was proposed to the deputies and what they approved was the creation of taxation of high-value real estate, which does not include building land (…) that is, a taxation on residential properties referred to in No. 2 of Article 6 of the IMI Code. Therefore, in the case at hand, the tax and customs administration is giving an interpretation of the rule in Article 28.1 of the General Schedule of Stamp Tax that is not in conformity with the law approved in the Assembly of the Republic, being therefore illegal the assessment carried out"

C) Case No. 49/2013-T (Álvaro Caneira)

"16. The characterization of a property, or its purpose, depends on the normal use that can be given to it in view of its current and real characteristics. In that building land, the normal use cannot be, as is logical, housing, since there is no built property capable of permitting such use."

"61. The expression "with residential purpose" suggests, on simple reading, an idea of real and present functionality. From the rule in question it is not possible to extract, by interpretation, that, as is stated in the respondent's response, the legislator's choice for that expression was intended to integrate "other realities beyond those identified in Article 6, No. 1, subsection a), of the IMI Code." Such interpretation has no legal support, in light of the principles contained in Articles 9 of the Civil Code and 11 of the General Tax Law."

"62. In fact, if the legislator intended to include within the scope of tax incidence other realities than those resulting from the classification governed by Article 6 of the IMI Code, it would have said so expressly. But it does not, instead referring, in whole, to the concepts and procedures provided for in that Code."

"70. In the circumstances referred to, the fact that for a particular building land authorization exists for the building of property intended for housing, or for any other purpose, although it should be considered in its valuation, does not determine any alteration in the classification of the land which, for tax purposes, continues to be considered as such."

"71. In these terms, resulting from Article 6 of the IMI Code a clear distinction between "residential" urban properties and "building land", these cannot be considered, for the purposes of the stamp tax incidence, as "properties with residential purpose"."

D) Case No. 50/2013-T (Maria do Rosário Anjos)

"25 "(…) It is clear that the legislator understood that this value, when attributed to a residence (house, autonomous unit or flat with independent use) expresses a tax capacity above the average and, as such, capable of determining a special contribution to ensure fair distribution of the fiscal burden." (in the same sense, arbitral decision in Case No. 132/2013-T [Miguel Patrício])

E) Case No. 53/2013-T (Jorge Manuel Lopes de Sousa / Conceição Pinto Rosa / Alberto Amorim Pereira)

"If it is to be understood that the expression "property with residential purpose" coincides with that of "residential properties", it is manifest that the assessments will be affected by error regarding the factual and legal prerequisites, since all the properties with respect to which Stamp Tax was assessed under the aforementioned Item No. 28.1 are building land, without any building or construction, required to satisfy that concept of "residential properties". For this reason, the adoption of the interpretation that "property with residential purpose" means "residential property" makes the assessments whose declaration of illegality is requested illegal, because there is no building or construction on any of the land."

"The recognized lack of coherence of Stamp Tax is particularly exuberant in the case of this Item No. 28.1, hastily included outside the General State Budget, by a tax legislator without perceptible overall fiscal guidance, who is successively implementing tax aggravation rules as a result of setbacks in budget execution, impositions from international institutional creditors (represented by the 'troika') and scrutiny by the Constitutional Court."

"In light of the literal content of Item No. 28.1, building land must be removed from the scope of Stamp Tax provided therein if it has not yet had any type of use defined, because it is not yet applied nor intended for housing purposes. That is, building land that does not have defined use cannot be considered property with residential purpose, because it does not yet have any purpose nor any other destination than construction of unknown type."

"(…) in proper hermeneutics, "property with residential purpose" cannot be a property merely licensed for housing or intended for that purpose (that is, it will not suffice that it be a "residential property"), having to be a property that already has effective purpose for that end."

"Moreover, the text of the law, by adopting the formula "property with residential purpose", instead of "urban properties with residential purpose", which appears in the aforementioned "Explanatory Statement", strongly points to the sense that it is required that the residential purpose already be concretized, because only then will the property be with that purpose."

"(…) in none of the cases are we faced with properties with current residential purpose, so Stamp Tax provided for in Item 28.1 of the TGIS does not apply to those properties."

III.C. In Conclusion

1. The assessments whose declaration of illegality is requested are affected by the vice of violation of Item 28.1 of the TGIS, due to error regarding the legal prerequisites, requiring their annulment (Article 135 of the Code of Administrative Procedure).

2. In light of the declaration of illegality of the assessment which is the object of the present case, due to a vice that prevents the renewal of the act, the consideration of the remaining vices that are attributed to it by the Applicant is prejudiced.

3. We gave priority to the vices whose substantiation determined more stable and effective protection of the Applicant's interests, in compliance with the provisions in subsection a) of No. 2 of Article 124 of the Code of Tax Procedure.

IV – Decision

In light of the foregoing, it is decided:

To find the request for declaration of illegality of Stamp Tax Assessment No. 2013 ..., dated 21 March 2013, to be well-founded, with all legal effects, namely the annulment of that assessment.

V – Value of the Case

The value of the case is fixed at €53,200.70 (fifty-three thousand two hundred euros and seventy cents), in accordance with Article 97-A of the Code of Tax Procedure, applicable by force of the provisions of Article 29, No. 1, subsections a) and b), of the LFATM, and Article 3, No. 2, of the Regulation of Costs in Tax Arbitration Proceedings.

VI – Costs

Costs at the charge of the Respondent (TCA), in the amount of €2,142.00 (two thousand one hundred and forty-two euros), in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, given that the present request was found to be well-founded, and in compliance with the provisions of Articles 12, No. 2, and 22, No. 4, both of the LFATM.

Lisbon, 21 February 2014

The Arbitrator

(FERNANDO ARAÚJO)

Document drawn up by computer, in accordance with the provisions of Article 138, No. 5, of the Code of Civil Procedure, applicable by reference from Article 29, No. 1, subsection e), of the LFATM. The wording of the present decision is governed by the spelling prior to the Agreement on Orthographic Accord of 1990.