Stamp Tax on Construction Land Under Verba 28 TGIS: CAAD Arbitration Decision 196/2016-T

ARBITRAL DECISION

I. Report

1. The company A…, S.A., (hereinafter referred to as "Claimant"), with tax identification number…, with tax domicile at Av. …, No.…, …, …-…, Lisbon, filed on 29 March 2016, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, i.e., Legal Framework for Arbitration in Tax Matters ("RJAT"), a request for the constitution of an Arbitral Court to declare illegal the assessment of Stamp Duty ("IS"), under the terms of Item 28 of the General Stamp Duty Rate Table ("TGIS"), relating to the 2014 tax year, in the amount of € 17,075.77, identified by No. 2015…, corresponding to the first instalment, No. 2015…, corresponding to the second instalment and No. 2015…, corresponding to the third instalment, with the Tax and Customs Authority ("Respondent" or "TA") being the respondent party.

A) Constitution of the Arbitral Court

1. Pursuant to the provisions of subsection (a) of paragraph 2 of Article 6 and subsection (b) of paragraph 1 of Article 11 of the RJAT, the Ethics Committee of the Administrative Arbitration Centre ("CAAD") appointed the undersigned as arbitrator of the sole arbitral tribunal, who communicated his acceptance of the appointment within the applicable deadline, and notified the parties of this appointment on 25 May 2016.

2. Thus, in accordance with the provisions of subsection (c) of paragraph 1 of Article 11 of the RJAT, and by means of a communication from the President of the Ethics Committee of the CAAD, the Sole Arbitral Court was constituted on 13 June 2016.

B) Procedural History

1. In the request for arbitral ruling, the Claimant sought a declaration of the illegality of the express dismissal of a Gracious Complaint filed against the aforementioned IS assessment, divided into three instalments, concerning a land plot for construction registered in the urban property register, under No.…, of the Parish of …, in the municipality of Lisbon.

2. The TA presented its response, requesting the dismissal of the request for arbitral ruling, arguing that there was no defect consisting of violation of law, and requesting that the tax act under analysis, as it does not violate any legal or constitutional provision, be upheld in the legal order.

3. By order dated 31 October 2016, the Sole Arbitral Court, pursuant to the provisions of subsection (c) of Article 16 of the RJAT, decided, without opposition from the parties, that it was not necessary to hold the hearing referred to in Article 18 of the RJAT, as a result of the simplicity of the matters at issue, as well as considering that it had at its disposal all the necessary elements to render a clear and impartial decision.

4. It also decided, in accordance with paragraph 2 of Article 18 of the RJAT, that oral arguments were not necessary, as the positions of the parties were clearly defined in their respective pleadings, and set 5 December 2016 as the deadline for the arbitral decision.

5. Under the order, it also requested the parties to present their final arguments, which they did.

6. The Court was duly constituted and is competent to consider the matters indicated (Article 2, paragraph 1, subsection (a) of the RJAT), the parties have legal personality and capacity and possess full standing (Articles 4 and 10, paragraph 2 of the RJAT and Article 1 of Order No. 112-A/2011, of 22 March). There are no nullities and no exceptions have been raised, so nothing prevents consideration of the merits.

7. The present case is therefore in a position for a final decision to be rendered.

II. Question to be Decided

1. The core issue to be considered and decided with regard to the merits of the case, as appears from the parties' procedural documents, is whether, in the case under analysis, the relevant land plot for construction falls within the scope of Item 28.1 of the TGIS, in its wording at the relevant date of the facts, namely whether it is a "land plot for construction whose building, authorized or provided for, is for residential purposes, in accordance with the provisions of the Municipal Property Tax Code."

III. Decision on the Facts and its Motivation

1. Having examined the documentary evidence produced, this court finds proven, as relevant to the decision of the case, the following facts:

I. The Claimant is the owner of an urban property, namely a land plot for construction, registered in the urban property register of the parish of …, municipality of Lisbon, under No.…, with a Tax Patrimonial Value ("TPV") of € 1,707,576.53.

II. The urban property in question forms part of a parcel of 18 land plots which, since 23 June 1999, have had authorization for subdivision for the construction of residential housing or hotel, offices, commerce or services, garage and service station and parking—with a maximum of 14 storeys above ground.

III. In its property record, the location coefficient assigned to the property was residential, this assignment having been contested by the Claimant on 31 December 2015.

IV. The Claimant, with respect to the 2014 tax year and as a result of the foregoing in Item 28.1 of the TGIS, received the TA assessment notices mentioned above, in the total amount of € 17,075.77, which it paid in full.

V. The Claimant filed a Gracious Complaint with a view to obtaining a declaration of the illegality of the assessment mentioned above, on 27 August 2015, which was expressly dismissed on 28 December of the same year.

1. This court's conviction regarding the facts found to be proven resulted from the documents appended to the case file and contained in the parties' unchallenged request and arguments, as specified in the factual matters set out above.

2. There is no relevant factuality for the decision of the case found to be unproven.

IV. The Law

A) Legal Framework

1. Given that the legal question to be decided in the present proceedings requires the interpretation of the relevant legal texts, it is important, first, to set out the rules that comprise the relevant legal framework, at the date of occurrence of the facts.

2. The subjection to IS of properties with residential designation resulted from the addition of Item 28 to the TGIS, effected by Article 4 of Law 55-A/2012, of 29 October, which typified the following tax facts:

"28 – Ownership, usufruct or right of superficies of urban properties whose tax patrimonial value shown in the register, in accordance with the Municipal Property Tax Code (CIMI), is equal to or exceeds € 1,000,000.00 – on the tax patrimonial value used for IMI purposes:

28.1 – For property with residential designation – 1%

28.2 – For property, when taxpayers other than natural persons are residents in a country, territory or region subject to a clearly more favorable tax regime, listed in the order approved by the Minister of Finance – 7.5%".

1. The said law also added, in the Stamp Duty Code, paragraph 7 of Article 23, regarding the assessment of IS: "in the case of tax due for the situations provided for in Item No. 28 of the General Rate Table, the tax is assessed annually, in relation to each urban property, by the central services of the Tax and Customs Authority, applying, with the necessary adaptations, the rules contained in the CIMI", and Article 67, paragraph 2, which provides that "to matters not regulated in the present Code concerning Item 28 of the General Rate Table, the CIMI applies, subsidiarily."

2. Additionally, and taking into account the legislative amendment introduced by Law No. 83-C/2013, of 31 December, it is also important to transcribe the wording of the said Item from 1 January 2014, "for residential property or for land plot for construction whose building, authorized or provided for, is for residential purposes, as provided for in the Municipal Property Tax Code."

3. In this context, and taking into account the above indication, let us now examine the Municipal Property Tax Code ("IMI Code").

4. In the IMI Code, the types of properties are enumerated (in Articles 2 to 6), as follows:

"Article 2 - Concept of Property

1 – For the purposes of this Code, property is any parcel of land, including waters, plantations, buildings and constructions of any nature incorporated therein or erected thereon, with the character of permanence, provided that it forms part of the assets of a natural or legal person and, in normal circumstances, has economic value, as well as waters, plantations, buildings or constructions, in the aforesaid circumstances, endowed with economic autonomy in relation to the land on which they are located, although situated on a parcel of land that forms an integral part of assets of a different nature or does not have patrimonial nature.

2 – Buildings or constructions, even if moveable by nature, are deemed to have the character of permanence when used for non-temporary purposes.

3 – The character of permanence is presumed when buildings or constructions have been situated in the same location for a period exceeding one year.

4 – For the purposes of this tax, each autonomous fraction, under the horizontal property regime, is deemed to constitute a property.

Article 3 - Rural Properties

1 – Rural properties are land plots situated outside an urban settlement that are not to be classified as land plots for construction, in accordance with paragraph 3 of Article 6, provided that:

a) They are used for, or in the absence of concrete use, have as their normal destination a use generating agricultural income, such as are considered for personal income tax (IRS) purposes;

b) Not having the use indicated in the previous subparagraph, they are not built upon or have only buildings or constructions of an accessory character, without economic autonomy and of reduced value.

2 – Also rural properties are land plots situated within an urban settlement, provided that, by force of a legally approved provision, they cannot be used to generate any income or can only be used to generate agricultural income and are in fact being used for this purpose.

3 – Also rural properties are:

a) Buildings and constructions directly used for the generation of agricultural income, when situated on the land plots referred to in the preceding paragraphs;

b) Waters and plantations in the situations referred to in paragraph 1 of Article 2.

4 – For the purposes of this Code, urban settlements are considered, in addition to those situated within legally fixed perimeters, clusters with a minimum of 10 dwellings served by streets for public use, with their perimeter delimited by points distanced 50 m from the axis of the streets, in the transversal direction, and 20 m from the last building, in the direction of the streets.

Article 4 - Urban Properties

Urban properties are all those that should not be classified as rural properties, without prejudice to the provisions of the following article.

Article 5 - Mixed Properties

1 – Whenever a property has rural and urban parts it is classified, in its entirety, according to the main part.

2 – If neither part can be classified as main, the property is deemed to be mixed.

Article 6 - Types of Urban Properties

1 – Urban properties are divided into:

a) Residential;

b) Commercial, industrial or for services;

c) Land plots for construction;

d) Others.

2 – Residential, commercial, industrial or for services are buildings or constructions licensed for such purposes or, in the absence of a license, that have as their normal destination each of these purposes.

3 – Land plots for construction are considered to be land plots situated within or outside an urban settlement, for which a license or authorization has been granted, prior notification admitted or prior favorable information issued for a subdivision or construction operation, and also those that have been declared as such in the acquisition title, with the exception of land plots where the competent authorities prohibit any of those operations, in particular those located in green areas, protected areas or which, according to municipal land use plans, are allocated to public spaces, infrastructure or equipment.

4 – Under the provision of subparagraph d) of paragraph 1 are included land plots situated within an urban settlement that are not land plots for construction nor are covered by the provision in paragraph 2 of Article 3, as well as buildings and constructions licensed or, in the absence of a license, that have as their normal destination other purposes than those referred to in paragraph 2, and also those of the exception in paragraph 3".

1. Finally, attention should also be paid to the rules on the interpretation of laws.

2. Article 11 of the General Tax Code ("GTC") establishes the essential rules for the interpretation of tax laws as follows:

"Article 11 - Interpretation

1. In determining the meaning of tax provisions and in qualifying the facts to which they apply, the general rules and principles of interpretation and application of laws are observed.

2. Whenever tax provisions use terms specific to other branches of law, they must be interpreted in the same sense as that which they have therein, unless otherwise clearly provided by law.

3. If doubt persists regarding the meaning of the applicable provisions of tax incidence, the economic substance of the tax facts should be considered.

4. Gaps resulting from tax provisions covered by the legal reserve of the Republic's Assembly are not subject to integration by analogy."

5. The general principles of interpretation of laws, to which paragraph 1 of Article 11 of the GTC refers, are set forth in Article 9 of the Civil Code, which establishes the following:

"Article 9 - Interpretation of Law

1. Interpretation must not be limited to the letter of the law, but must reconstruct from the texts the legislative intent, taking above all into account the unity of the legal system, the circumstances under which the law was enacted and the specific conditions of the time in which it is applied.

2. However, the interpreter cannot consider legislative intent that does not have in the letter of the law a minimum of verbal correspondence, even if imperfectly expressed.

3. In determining the meaning and scope of the law, the interpreter shall presume that the legislator adopted the most appropriate solutions and knew how to express its intent in adequate terms."

4. Thus, it is within this legal framework that it is important to consider whether the land plot for construction in question has, or does not have, an authorized or provided building for residential purposes, in accordance with Item 28.1 of the TGIS, and is thus subject to IS.

B) Arguments of the Parties

1. In its arguments, the Claimant alleged, in summary, that the assessment in dispute suffered from unconstitutionality, namely by violating the principle of equality, since, in its view, "taxpayers with the same contributive capacity, in particular owners of land plots for construction, whose TPV equals or exceeds € 1,000,000.00, are taxed not according to their wealth, but rather according to the intended use that will, eventually, be given to said property.

Similarly, there is no justification, in light of the principle of equality, for the negative discrimination operated with respect to residential properties with a TPV equal to or exceeding € 1,000,000.00 and with respect to land plots for construction with residential designation of the same value, since the current value of wealth and/or the potential value of enrichment, provided by the unidentified land, is not equal – it is rather necessarily inferior – to the current value of wealth and, by this means, of contributive capacity, real or presumably provided by built property,

Since mere ownership of a land plot for construction does not appear, per se, to be an indicative criterion of greater contributive capacity of its owner.

It seems evident that the legislator used a criterion that is arbitrary and objectively lacking substantiation of tax incidence."

1. The Claimant further states "that the construction to be carried out on that land plot may not be (as is the case in the present proceedings) for the exclusive use of the owner of the land plot, but rather for the pursuit of an economic activity (…)

The Claimant thus understands that, given that land plots for construction, whose buildings are intended for the pursuit of a commercial activity, do not fall within the scope of Item 28.1 of the TGIS, insofar as this item aims to proceed with the taxation of wealth, which is why the legislator was motivated to exclude from objective incidence land plots for construction of buildings intended for services or of a commercial or industrial nature.

(…)

In view of the foregoing, there is no doubt that Item 28 of Stamp Duty constitutes a special tax burden for companies engaged in the commercialization of land plots for construction (…)

Whence it follows that, also on this ground, Item 28 of the TGIS is materially unconstitutional, by violation of the principle of equality, since it determines an unjustified negative discrimination of companies commercializing land plots for construction."

1. The Claimant further considered that, based on this tax framework, "properties provided for in Item 28.1 of the TGIS are thus subject to double taxation, constitutionally inadmissible, resulting from the overlap between Stamp Duty and IMI.

(…)

Now, in order for there to be double taxation, the "rule of four identities must be satisfied, that is, identity of object, identity of subject, identity of period of taxation and identity of tax" (…)

In the present case, this rule (of the four identities) is fully satisfied.

(…)

It is thus concluded that, also for this reason, the assessment sub judice cannot be upheld and must be annulled accordingly."

1. From another perspective, for the Claimant, "even if it is not understood that the legal provision contained in Item 28.1 of the TGIS is unconstitutional – which is understood without conceding – the assessment in question must still be annulled, by violation of the provision in Item 28.1 of the TGIS, since the land plot in question is not a land plot for construction whose building, authorized or provided for, is for residential purposes, being licensed only for commerce.

(…)

As can be clearly seen from the synoptic table of the parcel in question, as well as from the formal description of the building to be constructed, the building to be constructed on said property is licensed only for commerce.

Consequently, it is entirely at odds with reality the statement in the dismissal order of the Gracious Complaint, which states 'the property in question is a land plot for construction allocated only to residential use (…) precisely because that is what is shown in the property record', since, in the present case, the building is provided for with a purpose different from residential, as set forth above, even though in the valuation carried out, residential was the designation imputed to the land plot for construction.

(…)

Therefore, also for this reason (…) the assessment in dispute must be annulled."

1. Finally, the Claimant understood that the express dismissal of the Gracious Complaint previously filed with a view to declaring the aforementioned assessment as illegal also suffered from illegality, since "it is based on factual and legal assumptions not in conformity with the applicable legal norms and principles, characterized by an incorrect application of the law to the facts, which cannot and should not be disregarded, should result in the annulment of the assessment acts now contested, with the necessary legal consequences."

2. Also requesting that compensatory interest be paid to it.

3. Called upon to present its final arguments, the Claimant sought, above all, to reinforce the understanding already advocated in its initial petition.

4. For its part, the Respondent, after being duly notified, presented its response in which, in summary, it alleged the following:

5. "…In the property record of the property, the type of property is "parcel of land for construction."

There can be no doubt that we are dealing with "land plots for construction," more specifically, with parcels of urban land for construction, with areas for implementation of the building and construction clearly defined and identified in urban property records, as described above.

Fiscally, the properties are land plots for construction, in that capacity they were acquired and are thus classified in the property records, and therefore are undoubtedly parcels of land for construction, more precisely urban properties with residential vocation.

(…)

Thus, the residential designation of the property is apparent.

(…)

The Claimant alleges that the property in question has residential designation together with services, so the taxation carried out in the manner it was is illegal.

However, it appears that this property corresponds only to residential designation (the main and preponderant one).

Indeed, according to the evaluation data in the property record of the property, it appears that the said property was assigned only one designation – residential.

Accordingly, Stamp Duty should apply only to the tax patrimonial value of the part considered to have residential designation, which in the present case is the entirety of the property (…)".

1. Regarding the property register complaint, the Respondent considered that "although the Claimant has filed a property register complaint on 31-12-2015, the assessment under discussion refers to 2014 and is not recorded as resolved.

Moreover, the document presented is nothing more than a project for a building for residential, services and commerce, and as a project is nothing more than an idea, which may not be realized."

1. For the Respondent, there is also no double taxation, "since taxation under IMI and Stamp Duty are different taxes, as the Claimant itself distinguishes them."

2. Regarding the constitutional issues raised by the Claimant, the Respondent understood that "in the present dispute, the Arbitral Court should not assess or discuss the merits of the legislative measure and its scope, but should limit itself to its assessment in the aspect of its conformity (manifest, it must be said) with the constitutional text.

(…)

That is, Item 28 is a provision in conformity with the Constitution of the Portuguese Republic,

(…)

We therefore consider the option for this revenue-raising mechanism to be justified, since such measure is applied indiscriminately to all and any holders of properties with residential designation of value exceeding € 1,000,000.00, bearing on the wealth embodied and manifested in the value of the properties.

(…)

And what results from the law itself results a priori from legislative action itself, when the intention was solely to define that ownership of properties with residential designation of value exceeding the amount indicated demonstrates that the respective owner has special contributive capacity, i.e., can acquire a single property under these conditions."

1. Called upon to present its final arguments, the Respondent, considering that "the learned arguments of the Claimant (…) add nothing new to the thesis that had been, by the same, developed in the initial petition.

They thus do not give rise to any change in the arguments put forward in the arbitral petition, so do not prevent the acceptance of the argumentation developed by the Respondent in its Response.

Such being the case, the Respondent maintains in full (…) the tenor of its Response properly presented."

C) Court's Assessment

1. By way of preliminary remark, it should be noted that, in the view of this Arbitral Court, the question to be decided concerns defining, based on the facts found to be proven, whether the property in dispute is or is not subject to IS, under Item 28.1 of the TGIS.

2. In this way, the present court will seek to assess whether the land plot for construction in question meets the legally necessary requirements to fall within the scope of Item 28.1 of the TGIS, namely whether its building, authorized or provided for, is for residential purposes.

3. Now, in the present case, we are dealing with a land plot for construction which, in 1999, at the time of its subdivision, was granted authorization for the construction of residential housing or hotel, offices, commerce or services, garage and service station and parking, with a maximum of 14 storeys above ground.

4. In 2004, a project for construction on that land plot was also drawn up and approved, with the building relating to parking, warehouses and commercial area.

5. The property record, updated in 2014 (the latest valuation known for the land plot for construction), defines the property as a land plot for construction with a residential location coefficient type.

6. Now, the first difficulty faced by this Court concerns clarifying whether that provision (Item 28.1 of the TGIS) applies to land plots for construction wholly allocated to residential building or whether, by contrast, such allocation can be only partial.

7. For if this is the case, the legislator has not provided tools to taxpayers and the TA to determine that partial allocation.

8. It should be noted that the legislator is bound by the principle of legality in the sense of clearly defining the tax facts that are subject to tax.

9. Paragraph 2 of Article 6 of the IMI Code clarifies what is meant by "residential" properties for the purposes of subparagraph (a) of paragraph 1, classifying as such buildings licensed for residential use or which, in the absence of a license, have that normal use.

10. In this way, it appears clear that that provision refers to buildings already built which will be residential when that is the use for which they were licensed or when, in the absence of a license, that is their normal use (and not to land plots for construction).

11. This court understands that the criterion of "normal use," in the absence of a license, cannot be extrapolated with the objective of guessing at buildings that may be made on land plots for construction, a type of property provided for in subparagraph (c) of paragraph 1 of the same article, as the Respondent suggests.

12. It cannot be overlooked that in the valuation of the land plot the TA used the residential type location coefficient, and the taxpayer could have, in fact, reacted against the application of this coefficient, although it has not been demonstrated that it did so by the end of 2015.

13. However, the legislator has not attributed to the use of that coefficient any relevance in the qualification of the property, only in its valuation.

14. Therefore, in view of the foregoing, the following should be established.

15. It is clear that, under Item 28.1 of the TGIS, besides residential properties, land plots for construction are subject to tax, provided that construction intended for residential purposes has been authorized or is provided for.

16. Under the said item, however, it is not clear whether the construction intended for residential purposes must be total or partial, such that, in case of doubt, only those cases in which the construction is, in its entirety, intended for residential purposes should be subject to it.

17. Now, in the present case, the Respondent, on whom the burden of proof lay, failed to demonstrate with facts that the land plot for construction under discussion had, at the date of the relevant facts, authorization, project or provision of construction intended only for residential purposes, so as to be subject to IS, under Item No. 28.1 of the TGIS.

18. And, according to the evidence filed in the case, within the scope of its subdivision authorization, the land plot for construction in question was given the possibility of residential construction thereon.

19. However, this possibility was extended to other scenarios, as indicated above, in particular to the construction of a hotel.

20. Furthermore, what is known, appended to the present discussion, is a project that provides for the construction on that land plot of parking, warehouses and shops.

21. And thus, this court does not understand how it could succeed in including the present land plot for construction within the scope of Item 28.1 of the TGIS, since the Respondent failed to prove that the allocation of the land plot, authorized or provided for, was only for residential purposes.

22. It is not said that the Claimant proved the contrary.

23. However, under Article 74, the burden of proof lay with the Respondent to prove that the property in question, a land plot for construction, had construction, expressed or provided for, only for residential purposes.

24. An obligation which it was unable to fulfill.

25. Therefore, without need for further consideration, and on this ground, the assessment is deemed to be voidable, for being illegal, for the provision of Article 28.1 of the TGIS not being applicable to the property to which it applied.

26. In view of the foregoing, the present court considers that it is not necessary to discuss the remaining arguments put forward by the Claimant, since the conditions are met to render the arbitral decision.

27. Thus, and based on the reasons set out above, the present court understands that the properties in dispute cannot, at the date of the facts, be subject to IS, under Item 28.1 of the TGIS, such that it concludes that the legal assumption for incidence is not satisfied.

V. Decision

1. Thus, this Arbitral Court decides:

A) To uphold the request for arbitral ruling and, consequently, to declare illegal and annul the IS assessment mentioned above, referring to 2014, which resulted in tax due in the amount of € 17,075.77, concerning the taxation of land plots for construction, in accordance with Item 28.1 of the TGIS;

B) To condemn the Respondent, under Article 43, paragraph 1 of the GTC and 61, paragraphs 2 and 5 of the Code of Tax Procedure and Process ("CTPP"), to pay compensatory interest, at the rate resulting from paragraph 4 of Article 43 of the GTC, calculated on the amount paid, from the day on which the assessments mentioned above were paid until the full reimbursement of the amount referred to; and

C) To condemn the Respondent to pay the costs of the proceedings.

VI. Value of the Case

1. The value of the case is fixed at € 17,075.77, under Article 97-A, paragraph 1, subsection (a), of the CTPP, applicable by virtue of subsections (a) and (b) of paragraph 1 of Article 29 of the RJAT and paragraph 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings ("RCTAP").

VII. Costs

1. In accordance with Article 22, paragraph 4, of the RJAT, the arbitration fee is fixed at € 1,224, under Table I of the said Regulation, to be borne by the Respondent, given the full success of the request.

Notify accordingly.

Lisbon, CAAD, 5 December 2016

The Arbitrator

(Sérgio Santos Pereira)