Stamp Tax on Building Land Over €1M: CAAD Arbitration on Verba 28.1 TGIS (Process 193/2016-T)

ARBITRAL DECISION

I. REPORT

A…, S.A., taxpayer no. …, with registered office at …, no. …, … side, …-…, …, hereinafter designated as Claimant, submitted a request for constitution of a singular Arbitral Tribunal, in accordance with the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter only designated as RJAT), in which the Tax and Customs Authority (hereinafter AT) is Respondent, with the purpose of obtaining the annulment of the dismissal of the Complaint submitted against the act of assessment of Corporate Income Tax (IS) No. 2015…, 2015… and 2015…, relating to the year 2014, in the total amount of €29,069.45.

The request for constitution of the Arbitral Tribunal was accepted by the Esteemed President of CAAD on 11.04.2016 and automatically notified to the AT.

In accordance with the provisions of paragraph c) of Article 11, paragraph 1 of the RJAT, the singular Arbitral Tribunal was constituted on 13.06.2016.

The AT responded, arguing for the rejection of the claim, seeking to maintain the assessment act as it embodies the correct interpretation of item 28 of the General Table of Stamp Tax (TGIS).

The meeting referred to in Article 18 of the RJAT and the submission of final arguments were dispensed with, given the nature of the matters contained in the case file.

The Arbitral Tribunal was duly constituted.

The parties possess legal personality and capacity, are legitimate (Articles 4 and 10, paragraph 2, of the same statute and Article 1 of Administrative Order No. 112-A/2011, of 22 March) and are duly represented.

There are no nullities, exceptions, or preliminary issues that prevent immediate consideration of the merits of the case.

II. STATEMENT OF FACTS

Based on the elements contained in the case file, the following facts are considered proven:

A. The Claimant is a Portuguese joint-stock company that carries out its activity with CAE … - construction of buildings (residential and non-residential);

B. In the context of its activity, the Claimant is the owner of a plot of land for construction (hereinafter property), described in the Land Registry of Lisbon under no. …, of the parish of … and registered in the urban real property matrix under article …, of the parish of …, of the municipality of Lisbon (document no. 3);

C. The property is a plot of land for construction intended for residential construction (document no. 4);

D. The TPC (Taxpayer Property Cadastral Value) of the property for purposes of IMI is €2,906,945.26 (document no. 4);

E. The Claimant was notified of the Corporate Income Tax assessment act identified in the case, in accordance with item 28.1 of the TGIS;

F. The Claimant proceeded to payment of the amount underlying the assessment act, in the amount of €29,069.45 (document no. 1);

G. On 28 August 2015, the Claimant submitted a complaint against the Corporate Income Tax assessment act sub judice;

H. On 29 December 2015, through Official Notice No. …, the Claimant was notified of the dismissal of the complaint submitted, by registered mail with return receipt dated 31 December 2015.

With relevance for the decision, there are no facts that should be considered as unproven.

Taking into account the positions assumed by the parties, in light of Article 110, paragraph 7 of the Tax Procedure Code (CPPT) and the documentary evidence attached to the case, the facts listed above are considered proven, with relevance for the decision.

III. STATEMENT OF LAW

The main question that arises in the present case is whether the provision contained in item 28.1 of the TGIS underlying the assessment act sub judice is materially unconstitutional due to violation of the principle of tax equality and taxpayer capacity.

In this sense, the Claimant defends, in summary, the following:

1. The assessment act in question was made in manifest violation of the principle of tax equality, provided for in Articles 12 and 13 of the Constitution of the Portuguese Republic ("CRP") and Article 55 of the General Tax Law, which imposes that passive taxpayers with greater taxpayer capacity be treated differently from those with lesser taxpayer capacity;

2. In this sense, Casalta Nabais states that the principle of tax equality has always inherently contained the idea of generality or universality, according to which all citizens are bound by the duty to pay taxes, and of uniformity, requiring that such duty be assessed by the same criterion – the criterion of taxpayer capacity (cf. Casalta Nabais, José – Tax Law, 6th Edition, 2010, p. 149).

3. Indeed, only the criterion of taxpayer capacity can legitimize equal tax treatment for equal situations and different tax treatment for different situations, for which reason Casalta Nabais' understanding goes in the direction that taxpayer capacity implies "equal tax for those with equal taxpayer capacity (horizontal equality) and different tax (in qualitative or quantitative terms) for those with different taxpayer capacity in proportion to such difference (vertical equality)" (cf. Casalta Nabais, José – Tax Law, 6th Edition, 2010, p. 149);

4. Thus, as has been consistently understood by the Constitutional Court, the principle of equality, as a limit on legislative discretion, does not prohibit the establishment of distinctions, but rather prohibits distinctions devoid of objective and rational justification;

5. It is not possible to find plausible justification, within the spirit of the legislator, for the negative discrimination made by Item 28.1 of the TGIS regarding land with residential designation whose TPC is equal to or greater than €1,000,000.00 relative to the taxation of built residential properties that are constituted as horizontal or vertical property ownership, or whose individual allocation units or autonomous fractions do not exceed, in their respective TPC, the value of €1,000,000.00, but whose total TPC is equal to or greater than that same value, since this results in the holder of the right of property of land for construction, intended for residential use, with a TPC greater than €1,000,000.00, being subject to increased taxation relative to that to which it will be subject from the moment it has proceeded to construct a residential building on the land for construction.

6. Similarly, no justification is found in light of the principle of equality for the negative discrimination operated regarding residential properties with a TPC equal to or greater than €1,000,000.00 and regarding land for construction with residential designation with the same value, for the current value of wealth and/or the potential value of enrichment, provided by the unbuilt property, is not equal – is rather, necessarily inferior – to the current value of wealth and, through this, of taxpayer capacity, real or presumably provided by built property, since mere ownership of land for construction does not appear, in itself, to be an indicative criterion of the greater taxpayer capacity of its owner;

7. It is thus to be concluded that the provision of item 28.1 of the TGIS, in the wording introduced by Law No. 83-C/2013, of 31 December, is materially unconstitutional, due to violation of the principle of equality, provided for in Article 13 of the CRP, as it applies to land for construction with TPC equal to or greater than €1,000,000.00 for which the authorized or planned construction does not include any fraction susceptible to independent use with value equal to or greater than that amount.

8. In this sense, the arbitral decision rendered within arbitral process no. 507/2015-T, of 17 March 2016, which states that "In truth, it lacks rational justification to tax based on hypothetical elevated taxpayer capacity situations in which there is ownership of rights over land for construction in which exclusively authorized or planned buildings are comprised of fractions of individual value less than €1,000,000.00 and not apply the same taxation to situations in which on the land such buildings have already been constructed, with enormous increase in the patrimonial tax value of the building, since 'the value of the built-up area varies between 15% and 45% of the value of authorized or planned buildings.' As regards land for construction intended for construction of autonomous residences with value equal to or greater than €1,000,000.00, ownership of rights over land with this purpose reveals, in itself, a situation of wealth, according to 'the highest standards of Portuguese society': that is, if the land, in itself, has a value equal to or greater than €1,000,000.00 and is intended for construction of individual residences of value also equal to or greater than this, one is faced with situations in which mere ownership of rights over the land reveals wealth corresponding to 'the highest standards of Portuguese society.' Item 28.1 of the TGIS, as regards land for construction, contains, however, no limitation to its application based on the value of authorized or planned residences, so one must conclude that it only makes its application depend on the patrimonial tax value of the land itself."

9. Furthermore, the land in question constitutes, for the Claimant, an essential factor of production for the pursuit of its corporate purpose, the patrimonial substrate of its economic activity, which it intends to generate profit through the construction and resale of the autonomous fractions identified;

10. From which it is concluded that land for construction and resale, regardless of their respective TPC, when constituting property of commercial companies whose corporate purpose is real estate activity, are only a means of pursuing their respective economic activity, for which reason, in this case, one cannot attribute to it the essential presupposition of Item 28, that property over such land can be symptomatic of greater taxpayer capacity or "wealth".

11. Additionally, the taxation, under Corporate Income Tax, of the properties provided for in item 28.1 of the TGIS is thus subject to double taxation, constitutionally inadmissible, arising from the overlap between IS and IMI (Municipal Property Tax).

12. Indeed, residential properties and land for construction whose authorized or planned construction is for residential purposes are already subject to IMI, residing in the sphere of legitimacy of this tax the taxation of urban properties situated in Portuguese territory, as results from Article 1 of the IMI Code.

13. Now, IMI is a tax that falls on properties and whose taxable event is, precisely, the ownership of such assets, in accordance with Article 8, paragraph 1, of the IMI Code.

14. Thus, there is double taxation, both under IS and under IMI, of the same legal reality – the ownership of properties.

15. In light of what has been stated above, it is also manifest the illegality of the Dispatch of the Head of the Administrative Justice Division (substituting), dated 28 December 2015, which determined the dismissal of the Complaint submitted against the aforesaid assessment act which is also object of the present request for arbitral pronouncement.

16. Given what is set out in the present request for arbitral pronouncement, there remain no doubts that the undue payment of tax already made is only attributable to fault of the services, for which reason all requirements for recognition of the right to compensatory interest will be met, which is requested as of now.

For its part, the AT alleges, in summary, the following:

1. For tax purposes, the properties are land for construction, as such were acquired and thus are predially classified, and therefore, are undoubtedly plots of land for construction, more precisely urban properties with residential vocation.

2. In the property record of the property, the type of property is "land for construction".

3. On the matter of determination of the TPC of land for construction, JOSÉ MARIA FERNANDES PIRES considers, in Lessons on Heritage and IS, Almedina, Coimbra, 2011, pages 100 and 101, that "The methodology followed in the IMI Code for determination of the patrimonial value of properties is also very close to the terms used in the real estate market to determine the value of such land.

In the market, the value of land for construction does not depend only on its intrinsic characteristics, such as its area and its location or its orography.

More important than that is a factor that is intrinsic to it and that depends on public authorities, which is its construction potential, namely the authorized volumetry and the characteristics of a reality that does not yet exist, which is the urban property that can be constructed on it. The value of land for construction corresponds, fundamentally, to a legal expectation, embodied in a right to be able to construct a property on it."

1. Also, there is no double taxation, since IMI and IS are different taxes, as indeed the Claimant itself distinguishes them.

2. Item 28 is a provision conforming to the Constitution of the Portuguese Republic, for the legislator defined an economically valid presupposition, as a manifestation of taxpayer capacity (whose addressees have indeed a special taxpayer capacity in view of the criterion adopted) required for payment of this tax.

3. Note that the reduction of inequalities, which presided, as will be demonstrated below, the submission of Law Proposal No. 96/XII (2nd), in which the legislator intended to distribute the sacrifices imposed by Austerity among all, permitting the discrimination of assets, without which, as the Claimant intends, violates Constitutional provisions, namely the principle of equality, either per se, or in its aspect of taxpayer capacity, since this does not result in unjustified differences in treatment between taxpayers, since different situations are treated differently, in line with that constitutional principle.

4. It is, unequivocally, a norm of a general and abstract character, applicable uniformly in all cases in which the respective factual and legal presuppositions are met.

5. Indeed, the different valuation and taxation of a property with residential allocation in relation to a property intended for commerce, industry or services, or even a rural property, results from the different aptitude of the properties in question (residential/services/commerce/industry/agricultural activity), which sustains the different treatment given by the legislator which, for economic and social reasons, decided, within its discretionary power, to exclude from the incidence of the tax properties intended for purposes other than residential;

6. Item 28.1 TGIS emerged in an exceptional context and evident difficulties that the Country, in particular the public accounts, faced in the course of compliance with the adjustment program to which the Portuguese Republic committed itself and which had as its guiding document the Memorandum of Understanding on Economic Policy Conditionality, of 17 May 2011.

7. Also relevant to what brings us here is the reference to the Report that accompanied the State Budget Proposal for the year 2013, from which the following considerations flow: "(…) it was necessary to find a set of substitute measures for those considered unconstitutional by the Constitutional Court.

8. The Government's solution in this matter is based on a comprehensive approach that takes into account the implications of the principle of equality in the distribution of public burdens.

9. From the foregoing, it is then clear that the tax legislator considered that the property, usufruct or right of superficies of a residential property or land for construction whose authorized or planned construction is residential, with TPC equal to or greater than €1,000,000.00, represented a manifestation of wealth and was capable, in itself, of revealing significant taxpayer capacity, thus making item 28.1 of the TGIS applicable to the possession of certain types of properties, in contradistinction to labor income and pension income, already affected by other tax measures (and not only).

10. With respect to a difference in situations between the ownership of "concentrated" real estate assets (one single property with value of €1,000,000) or "dispersed" real estate assets (several properties whose total value reaches €1,000,000), it must be immediately noted that the measure embodied in item 28.1 of the TGIS is, in its own essence, entirely unrelated to any consideration or overall assessment of the taxpayer's real estate assets;

11. The legislator's essential objective was to establish individualized taxation of "high-value properties intended for residential purposes", of "homes with value equal to or greater than 1 million euros", or, colloquially, of high-value or luxury properties.

12. Indeed, the factual and legal reality selected by the legislator to constitute the basis of tax incidence is the property itself considered, in attention to its destination and its patrimonial tax value, not the taxpayer's total property assets.

13. Since, at the time of the facts, the Tax Administration made the application of the law in the terms in which as an executive body it is constitutionally bound, one cannot speak of error of the services in the terms provided in Article 43 of the LGT, nor is there place for payment of compensatory interest.

Let us consider what should be understood.

IV. DECISION

A. The principles of tax equality and taxpayer capacity

The Constitution of the Portuguese Republic (CRP) establishes in its Article 13 the principle of equality, in the following terms:

1. All citizens have the same social dignity and are equal before the law.

2. No one may be privileged, benefited, prejudiced, deprived of any right or exempted from any duty by reason of ancestry, sex, race, language, territory of origin, religion, political or ideological beliefs, education, economic situation, social condition or sexual orientation.

Article 103 of the CRP provides, in turn, that:

1. The tax system aims at satisfying the financial needs of the State and other public entities and a just distribution of income and wealth.

2. Taxes are created by law, which determines the taxable event, the rate, tax benefits and taxpayers' guarantees.

3. No one may be required to pay taxes that have not been created in accordance with the Constitution, that have a retroactive nature or whose assessment and collection are not made in accordance with the law.

In accordance with Article 104 of the CRP:

1. Personal income tax aims at reducing inequalities and shall be sole and progressive, taking into account the needs and income of the household.

2. The taxation of business enterprises falls fundamentally on their actual income.

3. The taxation of property should contribute to equality among citizens.

4. Tax on consumption aims to adapt the structure of consumption to the evolution of economic development needs and social justice, and should burden luxury consumption.

It is in light of the aforementioned provisions that the constitutionality of the provision contained in items 28 and 28.1 of the TGIS should be assessed, which determines the incidence of IS on:

"Property, usufruct or right of superficies of urban properties whose patrimonial tax value contained in the matrix, in accordance with the Municipal Property Tax Code (CIMI), is equal to or greater than €1,000,000 – on the patrimonial tax value used for purposes of IMI:

28.1. – For each residential property or for land for construction whose authorized or planned construction is for residential purposes, in accordance with the provisions of the IMI Code…… 1%."

From the analysis of the constitutional provisions referenced, it results that the constitutional principle of tax equality constitutes a specific expression of the general structural principle of equality, "which translates not only a formal equality – an equality before the law, (…), but also and above all a material equality – an equality of the law, which obliges, in various ways, also the legislator."[1]

Thus, the principle of tax equality unfolds into two aspects: the aspect of generality of taxes and the aspect of uniformity of taxes.

In the aspect of generality of taxes, the principle of tax equality determines that the duty to pay taxes is universal, whereas in the aspect of uniformity of taxes the aforementioned principle implies the adoption of the same criterion for all taxpayers.

Fundamentally, "the principle of tax equality requires that what is (essentially) equal be taxed equally, and what is (essentially) unequal be taxed unequally in the measure of that inequality."[2]

To ascertain what is equal and what is unequal, the criterion of taxpayer capacity then emerges, which is materialized in the aspect of horizontal equality when it imposes that taxpayers with the same taxpayer capacity pay the same tax, and in the aspect of vertical equality, to the extent that it leads to taxpayers with different taxpayer capacity paying different taxes (qualitatively and/or quantitatively), with arbitrariness prohibited.

On this matter, the Claimant understands that IS on the property, usufruct or right of superficies of urban properties with residential designation and land for construction, with patrimonial value exceeding €1,000,000.00, at the rate of 1%:

a) Does not respect the principle of equality, insofar as taxation falls only on land for construction whose construction is for residential purposes and not on the construction of a residential property on land for construction;

b) Violates the principle of equality, since it determines an unjustified negative discrimination against companies engaged in commercializing land for construction;

c) Violates the principle of prohibition of double taxation arising from the overlap between IS and IMI.

However, the Claimant is not correct.

In truth, from the principle of tax equality does not result the prohibition of the freedom of choice on the part of the Legislator of taxation of certain taxable events in detriment of others, but rather the prohibition of arbitrariness.

In the case under analysis, the Legislator considered that on urban residential properties and (later) on land for construction whose construction is for residential purposes should fall the commonly designated "luxury tax", within the scope of the budgetary consolidation effort.

What was intended with such taxation was to distribute the sacrifices required of owners of high-value residential properties with those who live from their labor income (See Economic and Financial Adjustment Program (PAEF), agreed between the Portuguese Government and the IMF, the European Commission and the ECB).

The creation of this new taxable event occurred in the context of economic crisis and serious crisis in public finances, for the purpose of increasing the State's tax revenue, through the taxation of those who reveal greater indicators of wealth.

In truth, through item 28.1 of the TGIS it is intended to tax the wealth exteriorized in the property, usufruct or right of superficies of luxury urban properties which, by their value substantially superior to that of the generality of urban properties, reveals greater indicators of wealth, capable of founding the imposition of increased contribution for the cleanup of public accounts on their holders, in realization of the aforementioned "principle of social equity in austerity, guaranteeing an effective distribution of the sacrifices necessary to comply with the adjustment program." – (See Law Proposal No. 96/XII).[3]

In this context, taxation falls not only on land for construction whose construction is for residential purposes, but also on the construction of a residential property on land for construction, when the TPC of such property is, subsequently, eligible, in accordance with item 28.1 of the TGIS.

No reason is thus found that would justify the violation of the principle of equality between the aforementioned taxable events, for both facts are potentially subject to taxation, in legal terms, at different moments. Since it is not possible to compare the incomparable, that is, the present property and the future property or properties, due to absence of a comparative term.

Also, the Claimant's argument regarding unjustified negative discrimination of companies engaged in commercializing land for construction does not hold, given the context of budgetary consolidation effort underlying the creation of the rule and the public interest thus invoked.

Furthermore, not only are tax benefits provided for under IMI and Transfer Tax (IMT), certainly applicable to the Claimant, within the scope of its real estate commercialization activity, not applicable to other taxpayers, but also excluded from taxation under IS are properties assigned to business activities.[4]

It has been understood that "Only the choices of regime made by ordinary legislation can be censured on the basis of violation of the principle of equality in those cases in which it is proven that they result in differences in treatment between persons that do not find justification in reasonable, perceptible or intelligible grounds, having the constitutional purposes pursued with the measure of difference (…) this principle, in its dimension of prohibition of arbitrariness, constitutes essentially a negative criterion (…) which, not eliminating 'the freedom of legislative configuration' – understood as the freedom that belongs to the legislator to 'define or qualify the factual situations or relations of life that are to function as reference elements to be treated equally or unequally' – it falls to courts not the power to escape from the legislator, 'weighing the situation as if they were in his place and imposing their own idea of what would be, in the case, the reasonable, just and opportune solution (what would be the ideal solution of the case)', but rather that of 'setting aside those legal solutions wholly incapable of being rationally credited.'"[5]

Taking into account the foregoing, it is considered that the taxable events contemplated by item 28.1 of the TGIS were not chosen arbitrarily, their choice being justified by the underlying political-economic context.

The Claimant's argument that the provision of incidence here in discussion violates the principle of equality thus does not hold.

For the reasons set out above, this Tribunal also does not consider that the principle of taxpayer capacity is affected by the exclusion of other properties, beyond those contemplated in the provision, which reveal equal taxpayer capacity.

In truth, the principle of taxpayer capacity does not apply equally regarding all types of tax, having an expression of the first degree in taxes on income, an expression of the second degree in taxes on property and an expression of the third degree in taxes on consumption.

In this way, it is understood that as regards the taxation of property, the Legislator is essentially obliged to contribute to equality among citizens (Article 104, paragraph 3 of the CRP), which does not prevent it from proceeding to the discrimination of assets, taxing the highest ones and exempting the lowest ones, it being certain that such principle does not result in the obligation for the existence of a property tax with progressive rates.

Bearing in mind the principle of taxpayer capacity, as a criterion for determining compliance with the principle of tax equality, it is noted that the taxable event chosen by the legislator in item 28.1 of the TGIS is revelatory of taxpayer capacity, there also being a connection between the tax obligation and the economic presupposition selected by the Legislator.

In fact, the provision under analysis chose as its economic presupposition the right of property, usufruct or right of superficies of urban properties or land for construction whose construction is for residential purposes, with patrimonial value exceeding €1,000,000.00 and to such economic presupposition it assigned a rate of 1%.

In sum: taking into account that from the urban property record of the property under analysis it appears that the destination of the property is residential use and that its TPC is €2,906,945.26, the rate provided for in item 28.1 of the TGIS is applicable here, there being no violation of the principle of tax equality.

B. On the violation of the principle of double taxation

The Claimant alleges that taxation under IS of the properties provided for in item 28.1 of the TGIS is subject to unconstitutional double taxation arising from the overlap between IS and IMI.

It happens that, for double taxation to be considered to exist, there must be identity of the taxable event, identity of the subject, identity of the taxation period and identity of the tax.[6]

In the case under analysis, such identity does not exist, although the taxable event under IS is land for construction with residential designation, with value exceeding €1,000,000, whereas under IMI, taxation falls on all and any properties. Also, the subjects of the tax legal relation are different, for, under IS, the relation is established between passive taxpayers and the State, and in the case of IMI, between passive taxpayers and Municipalities.

Taking into account that the CRP does not require, as regards taxes on property, the existence of a single and progressive tax (See Article 104, paragraph 3 of the CRP), and that there is not absolute identity between the taxable events under analysis, it is understood that taxation under IS, through item 28.1 of the TGIS, falls within the scope of discretion permitted by the Constitution, there being no violation of the principle of prohibition of double taxation.

V. DECISION

In these terms, this Arbitral Tribunal decides to adjudge entirely unmeritorious the claim for declaration of illegality and consequent annulment of the Corporate Income Tax assessment act, relating to the year 2014, regarding the plot of land for construction described in the Land Registry of … under no. …, of the parish of … and registered in the urban real property matrix under article …, of the parish of …, of the municipality of ….

VI. VALUE OF THE CASE

In accordance with the provisions of Article 306, paragraph 2 of the Civil Procedure Code, Article 97-A, paragraph 1(a) of the Tax Procedure Code and Article 3, paragraph 2 of the Regulations on Costs in Tax Arbitration Proceedings, the value of the claim is fixed at €29,069.45.

VII. COSTS

In accordance with the provisions of Articles 12, paragraph 2 and 22, paragraph 4, both of the RJAT, and Article 4, paragraph 4 of the Regulations on Costs of Tax Arbitration Proceedings, the value of the arbitration fee is fixed at €1,530.00, in accordance with Table I of the aforementioned Regulations, borne by the Claimant.

Let it be notified.

Lisbon, 1 September 2016

The Arbitrator,

Magda Feliciano

(The text of this decision was prepared by computer, in accordance with Article 131, paragraph 5, of the Civil Procedure Code, applicable by reference to Article 29, paragraph 1, letter e) of Decree-Law No. 10/2011, of 20 January (RJAT), its drafting governed by the spelling prior to the 1990 Orthographic Agreement.)

[1] José Casalta Nabais, in The Fundamental Duty to Pay Taxes, Theses Almedina, 2009, pp. 435.

[2] Op. Cit. pp. 442.

[3] See Constitutional Court Decision No. 590/2015, rendered in process No. 542/2014.

[4] As José Maria Fernandes Pires teaches, "the application of the tax to properties with residential allocation and to land for construction in which planned and approved construction of residential units is foreseen, reveals the intention not to burden the productive sector and companies in general. In truth, properties assigned to business activities, namely commerce, services or industrial activity, can reach a value exceeding one million with relative ease, without such fact being able to reveal relevance in terms of wealth identical to that revealed by those with residential allocation with the aforementioned value.

[5] See Constitutional Court Decision No. 187/2013, of 5 April, nos. 33 and 35.

[6] Casalta Nabais, in Tax Law, 6th Edition, 2010, p. 229.