Stamp Tax on High-Value Property: Verba 28 TGIS Threshold for Vertical Ownership Fractions (CAAD 205/2014-T)

ARBITRAL AWARD

CAAD: Tax Arbitration

Case No. 205/2014-T

I – Introduction

1. On 28 February 2014, M…, bearing Tax Identification Number (NIF) … and domiciled at Avenue …, in Lisbon, hereinafter the Claimant, filed a request for the establishment of a singular arbitral tribunal, in accordance with the combined provisions of Articles 2nd and 10th of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to only as LFATM), in which the Tax and Customs Authority is the Respondent, hereinafter the Respondent or the TA.

2. The request for a singular arbitral tribunal was accepted by His Excellency the President of CAAD on 4 March 2014 and the Deontological Council appointed Professor Doctor Jorge Bacelar Gouveia as arbitrator of the Singular Arbitral Tribunal, who communicated acceptance of the position, an appointment that was not contested by the parties.

By agreement between the parties, the meeting provided for in Article 18th of LFATM was waived.

The period of six months for the issuance of the Singular Arbitral Tribunal's decision was extended until 2 February 2015.

II – Characterization of the Dispute

1. Regarding the characterization of the dispute, the Claimant requested that the Singular Arbitral Tribunal declare void on grounds of illegality and unconstitutionality the following acts of assessment of stamp duty relating to 2012, in the total amount of 5,327.55 euros:

• 2013 …
• 2013 …
• 2013 …
• 2013 …
• 2013 …
• 2013 …
• 2013 …
• 2013 …
• 2013 …
• 2013 …
• 2013 …
• 2013 …
• 2013 …
• 2013 …
• 2013 …
• 2013 …
• 2013 …
• 2013 …

These 18 assessments were made individually on the tax patrimonial value of divisions or parts capable of independent use of the property, in a regime of full ownership, located at …, parish of …, in Lisbon, registered under the urban real property register with the number….

The Claimant, owner of half of the property in question, requests the annulment of these assessments on the ground that, as they relate to housing, in no case would they individually reach the minimum limit of 1 million euros of tax patrimonial value, as provided for in the provision of item no. 28 of the General Table of Stamp Duty (GTSD) brought by Article 4th of Law no. 55-A/2012, of 29 October, further considering its unconstitutionality due to violation of applicable constitutional principles.

1. Notified to respond, the Respondent stated that the provision of item no. 28 of the GTSD should be applied, and the claim should be dismissed, considering that the assessments would be levied on the property in fractions with a tax patrimonial value of 1,065,510.00 euros, a value that would be above the minimum limit established by the new provision brought by Law no. 55-A/2012, of 29 October.

The argument sustained to justify the validity of the assessments is based on the fact that the property in question, in the 18 assessments made, should be considered as a whole because it is in a regime of vertical ownership, being relevant in its entirety.

Likewise, the Respondent contested that there had been, with its stamp duty assessments, a violation of the principle of tax equality, as it considers the distinction between the regime of vertical ownership and horizontal ownership of properties to be fundamental, or of the principle of proportionality, given that taxation only applies to property of greater tax patrimonial value.

1. The Singular Arbitral Tribunal was duly constituted and is competent.

The parties enjoy legal personality and capacity and are legitimate (Articles 4th and 10th, no. 2, of the same enactment and Article 1st of Regulatory Decree no. 112-A/2011, of 22 March).

The process is free from nullities.

It is necessary to decide.

III – The Relevant Factual Matter

1. The relevant factual matter is simple and consists of the verification of ownership in favor of the Claimant, of the property identified above, the following facts being considered proven:

a) The Claimant is M…, bearing Tax Identification Number (NIF) … and domiciled at Avenue …, in Lisbon;

b) The Claimant is the owner of half of the property, in a regime of full ownership, located at …, parish of …, in Lisbon, registered under the urban real property register with the number …;

c) The Respondent issued 18 assessment notices of stamp duty relating to 2012, regarding divisions of independent residential use of such property, in the total amount of 5,327.55 euros, which are the following:

• 2013 …
• 2013 …
• 2013 …
• 2013 …
• 2013 …
• 2013 …
• 2013 …
• 2013 …
• 2013 …
• 2013 …
• 2013 …
• 2013 …
• 2013 …
• 2013 …
• 2013 …
• 2013 …
• 2013 …
• 2013 ….

The conviction of the Tribunal regarding the decision on the factual matter was based, on the one hand, on the documents submitted by the Claimant and by the Respondent and, furthermore, on the positions expressed by the parties on the facts alleged by the opposing party, as well as on the non-contestation of the documents submitted to the proceedings.

IV – Applicable Law

A) Preliminary Matters

1. The present dispute has as its central aspect the validity and application of item no. 28 of the General Table of Stamp Duty, added by Law no. 55-A/2012, of 29 October, combined with the provision of Article 6th, no. 2, paragraphs f) and i), of the same enactment.

This new provision establishes that stamp duty applies to ownership of property with residential designation with a Tax Patrimonial Value equal to or greater than 1,000,000 euros, in the following exact terms:

"28 – Ownership, usufruct or right of superficies of urban property whose tax patrimonial value contained in the register, in accordance with the Municipal Property Tax Code (MPTC), is equal to or greater than 1,000,000 euros – on the tax patrimonial value used for the purpose of Municipal Property Tax:

28.1 – For property with residential designation – 1%;

28.2 – For property, when the taxable persons who are not natural persons are residents in a country, territory or region subject to a clearly more favorable tax regime, contained in the list approved by ordinance of the Minister of Finance – 7.5%".

1. The Claimant formulates its request for declaration of nullity of the 18 official assessments of stamp duty on the basis of the incorrect application of such provision made by the Respondent to the aforementioned property, as well as on the unconstitutionality of such provision due to violation of the constitutional principles of equality, legality and proportionality.

2. From the point of view of applicable law, in the present dispute and in order to obtain the success of the request for annulment of the aforementioned stamp duty assessments, a constitutional review examination is required, by force of the supremacy of the Constitution and the duty of the courts to apply it, and the constitutionality of the provision embodying item no. 28 of the GTSD should be questioned in the following terms:

• unconstitutionality due to violation of the principle of equality; and

• unconstitutionality due to violation of the principle of trust protection.

But the argumentation put forward by the Claimant in relation to the factual matter that was set out above also includes the error in the application of the new provision that created item no. 28 of the GTSD, given that in its understanding it would not apply to the divisions of the property mentioned in the said assessments, which would not meet the concept provided for in that provision.

Let us begin with the arguments concerning the constitutional validity of the provision that created item no. 28 of the GTSD, and then proceed to the review of its application to the properties that were considered for the purposes of stamp duty assessment.

B) The Invalidity of Item No. 28 Due to Violation of the Principle of Equality

1. Equality is a value and a principle inherent to the paradigm of the Rule of Law that permeates the entire material Portuguese Constitution, which even becomes a component part of the very idea of Law or Legal Order as a Legal Universe.

The principle of equality is directly stated by the Portuguese constitutional text in its Article 13th, in addition to its evident refraction in the plane of the principle of contributive capacity, which expresses a special orientation of equality in tax matters.

It is thus important to refer to this central constitutional provision of Article 13th of the Portuguese Constitution:

• Article 13th, no. 1: "All citizens have the same social dignity and are equal before the law";

• Article 13th, no. 2: "No one may be privileged, favored, prejudiced, deprived of any right or exempted from any duty by reason of ancestry, sex, race, language, territory of origin, religion, political or ideological convictions, education, economic situation, social condition or sexual orientation".

1. The same applies to the General Tax Code, which also formulates the principle of equality in the context of Portuguese tax legislation, as can be seen in its Article 5th:

• Article 5th, no. 1: "Taxation aims at satisfying the financial needs of the State and other public entities and promotes social justice, equality of opportunity and the necessary corrections of inequalities in the distribution of wealth and income";

• Article 5th, no. 2: "Taxation respects the principles of generality, equality, legality and material justice".

1. The principle of equality, in a Social State, is substantially different from the principle of equality that prevailed in the Liberal State period, with a whole set of new dimensions and modes of action to achieve material equality and equality of opportunity.

But in the matter of taxation of property – not now addressing the theoretical question of the nature of stamp duty in the contrast between taxes on consumption and taxes on property – the Portuguese Constitution itself establishes a central orientation in its Article 104th, no. 3: "The taxation of property must contribute to equality among citizens".

In its simplicity, this constitutional provision, specifically established for this type of taxation, is indeed an example of a principle of fiscal equality that takes into account the new dimensions of the social principle.

1. We believe that the provision in question, which added item no. 28 to the GTSD, is affected by material unconstitutionality due to violation of the principle of equality.

It is important to note that the configuration of the tax event, which operates the distinction between different uses and purposes of the properties in question, does not appear to be justified in the name of the purpose of the fiscal measure adopted.

If the concern is the taxation of higher patrimonial assets, what is the reason that this taxation, in the case at hand of real property of which the taxpayer is the owner, does not tax all such properties, in their multiple subdivisions?

If one looks carefully, there are several categories of properties that do not subject themselves to this new taxation:

• non-urban properties;

• urban properties that do not correspond to the specifications of items nos. 28.1 and 28.2.

There is no apparent rationality in not including all these uses and purposes, and it is certain that if all of them were included, tax revenue would be greater and would equalize taxpayers based on the same patrimonial value referred to.

Even considering the difference in the economic value of rural and urban properties, or within these in their various uses and purposes, as the criterion is referred to the patrimonial value of the MPTC, by this mechanism the wealth in question would have already been assessed objectively, as it is different according to those different distinctions that are taken into account in the assessment undertaken by the relevant provisions of the MPTC.

1. With this differentiation, a perversion of values is even introduced into the Portuguese tax system, contrary to the general orientation that can be obtained from the Portuguese Constitution, which is that of imposing a greater sacrifice on taxpayers who own properties with residential designation to the detriment of other purposes or uses that are not as valuable in light of constitutional values and principles, being possible to invoke in that sense:

• not only the value prominence of the right to housing, provided for in Article 65th of the Portuguese Constitution, which, even though it is an economic and social right, offering legal efficacy inferior to that of rights, freedoms and guarantees, is nonetheless a place of constitutional privilege that provides a benchmark to, at least, avoid discrimination in relation to other uses that do not have the same constitutional importance;

• but also one cannot forget the projection of the very principle of human dignity, the guiding principle of the Portuguese constitutional order and stated right at Article 1st of the Portuguese Constitution, which will certainly imply special appreciation of the uses that citizens conduct within their life spheres, there being here a concretization of this value in the greater protection that should be given to property affected or designated for housing – which is human housing – than properties that have other uses or purposes.

1. There is another reason to consider that item no. 28 of the GTSD infringes the principle of tax equality, in this case considering the constitutional prohibition on double legal taxation, which is also here a double economic taxation.

Double legal taxation means that the same manifestation of wealth, which is translated into the same tax event, is taxed twice, meaning a negative discrimination in relation to other taxpayers whose taxation was only carried out once on the same tax event.

Although without literal expression in the constitutional text, the prohibition of double legal taxation not only is deduced from the principle of contributive capacity, but is expressed in the plane of Criminal Constitutional Law through the principle non bis in idem.

The most authoritative Portuguese tax doctrine has insisted on this aspect of the principle of equality, as is the case of JOSÉ CASALTA NABAIS: "…by imposing intra-systematic limits, that is, coherence between the various taxes and coherence of the tax system as a whole, the principle in question should be invoked for the solution of problems such as internal double taxation, whether this is concretized in a double taxation (double legal taxation) or in an overlap of taxes (double economic taxation), multiple or plural taxation, which translates to the same goods, for example real property, being the object of various taxes, the conversion of taxes, which materializes in the transformation of taxes on income into taxes on property due to, for example, the inertia of the legislator faced with the phenomenon of inflation, etc." (JOSÉ CASALTA NABAIS, Tax Law, 7th ed., Coimbra, 2012, p. 164).

1. Nevertheless, after all, what does this double taxation consist of? It consists in the fact that the ownership of real rights is simultaneously taxed under the MPTC and under Stamp Duty, which affects the same reality, which becomes quite evident when the terms of the taxation of item no. 28 of the GTSD are referred to the applicable rules of the MPTC.

We thus have two coinciding taxes regarding urban property, to which two taxes apply, with their own rates:

• the taxation established in Article 1st of the MPTC; and

• the taxation established in item no. 28 of the GTSD.

It is not considered as a relevant contrary argument the fact that the active subject of the tax legal relationship is different, the State in Stamp Duty and the municipalities in Municipal Property Tax, since only the position of the passive subject is relevant here.

1. It does not seem pertinent to us to defend the outcome of unconstitutionality the fact that the provision in question establishes a limit below which equivalent manifestations of wealth, also relating to properties with residential designation, remain untaxed, whether because they approach the threshold of 1,000,000 euros, or because in the same taxpayer multiple properties can accumulate which, together, exceed that threshold, with taxation being property by property and not a global taxation from the perspective of the taxpayer's tax situation in patrimonial terms.

Obviously the legislator has the need to work with limits in the quantification of taxation, a phenomenon that occurs in many other branches of Law, such as the age of majority in Civil Law or the speed limit in Road Law.

Although these limits, which always artificially divide the reality underlying the application of the norms, are not arbitrary and are imposed by the need to regulate situations of life, in addition to the need for the security that Law also presupposes, they should be accepted and validated from the point of view of their constitutionality and legality.

On the other hand, this limit expresses the definition – within the freedom conferred by the Constitution on the ordinary legislator – of a criterion above which it is considered acceptable to tax more or even to tax at all in the name of a principle of contributive capacity that expresses a concern for social justice.

This means that the principle of equality today has inherent in it the admission of negative discrimination against those groups who, earning higher incomes or possessing more valuable patrimonial assets, may be subject to higher taxation, in two senses:

• whether through progressive taxation, such as that which occurs in taxes on personal income;

• or through proportional taxation, in this case only reaching property above 1 million euros.

This provision is not considered unconstitutional due to violation of the principle of contributive capacity.

C) The Violation of the Principle of Trust Protection

1. Being evidently the Singular Arbitral Tribunal subject to the principle of the claim, in the sense that the subject matter of the proceedings is necessarily defined by the parties, the same is not bound, regarding applicable law, to the legal arguments put forward by the parties.

This means that for the Singular Arbitral Tribunal the provision of item no. 28 of the GTSD raises another issue of unconstitutionality, due to violation of the principle of trust protection, which can and should be reviewed.

1. Although not literally enshrined in the text of the Portuguese Constitution, this principle is nonetheless affirmed in Portuguese constitutional normativity by deduction from the general formulation of the principle of the Rule of Law, referred to in Article 2nd of the Portuguese Constitution.

On the other hand, there have been abundant – especially in these recent decisions handed down in the context of measures to combat the economic and financial crisis – references and applications that the Constitutional Court has made of the same.

The principle of trust protection, in general terms, determines that public power – or legislative power in particular – is prevented from enacting legal measures whose effects mean a revocation or limitation of interests or expectations of citizens, legitimately built through preceding legal regimes, without there being sufficient rational foundation for so doing.

1. One of the specific dimensions of the principle of trust is the retroactive application of laws, which is expressly prohibited in a set of cases stated in the constitutional text.

However, the operativity of this principle is not only connected with retroactivity, nor even with the mild version of retrospectivity, which has specific application in Tax Law when faced with periodic taxes.

This principle can also invalidate future changes to legislation, if these present themselves abruptly, appearing as surprise decisions, with which citizens could not count and had legitimate expectations that would not arise in the manner in which the legislative decision-maker shaped them.

"The principle of trust, requiring that the existing normative framework not change in such a way as to frustrate the expectations generated in citizens about its continuity, implies the prohibition of an intolerable retroactivity of laws, as well as the need for its future alteration in accordance with expectations that are constitutionally protected" (JORGE BACELAR GOUVEIA, Manual of Constitutional Law, II, 5th ed., Coimbra, 2013, p. 726).

1. The review of the provision of item no. 28 of the GTSD does not raise, in this regard, a problem of retroactivity, nor even a problem of retrospectivity, being, in fact, a one-off tax: the new tax event is constructed for the future, more precisely, for the day following the entry into force of the provision that creates it.

It does raise, however, a problem of breach in the trust that should exist between the State-Legislator and the Citizen, who trusted in the stability of the tax provisions on stamp duty, having been "taken by surprise" by a legislative measure that came into force the day following its publication.

This is a fact that in itself would not have special significance if it were a measure that was economically neutral or if it fit into a legal context in which the prospective validity of legislative acts could be indistinctly established between the day following its publication or any other later date.

This is not the case because the placement of the validity of this new provision on the day following its publication comes to deeply undermine the predictability with which taxpayers had the right to rely on the configuration of stamp duty, whose tax event is always assessed on 31 December.

Suddenly, there appears a substantial change in the relevant moment of this tax event to 31 October, not giving them time to act in accordance with the new tax provision created. This is the purpose of Article 6th of Law no. 55-A/2012, of 29 October.

1. What is most striking is that even this change assumes no other rationality than that of suddenly collecting an increase in revenue, through the advancement of the tax event from 31 December to 31 October: it is that for the following year, the year 2013, since the provision of Article 6th only applies for the year 2012, the tax event returns to being on 31 December.

It is understandable why, by the application of the general rule of Municipal Property Tax, there would be no surprise factor in the following year. It is not believed that in a Rule of Law state it is legitimate, in terms of trust protection, for the legislator to act in this manner.

Such behavior on the part of the tax legislator violates the good faith that the citizen deposited in the State, trusting that there would be no surprise measures without adequate rational foundation on its part.

D) The Incorrect Application of the Concept of "Property with Residential Designation" Provided for in Item No. 28 of the GTSD

1. Even with the conclusion regarding the unconstitutionality of the provision that added item no. 28 to the GTSD, for the reasons set out, it is necessary to review the other question at issue, which is that of the application to the stamp duty assessments made of the concept of "property with residential designation".

The provision in question literally states that item no. 28.1 of the GTSD applies to "property with residential designation", but in no place does it address the clarification of this concept.

1. A reading of the MPTC does not permit finding any provision in which the expression "property with residential designation" is used.

There we encounter the fundamental distinction between urban and rural properties, in addition to the category of mixed properties, and then it is made explicit that urban properties may be subdivided into various species, one of which is "residential properties", as established in Article 6th, no. 1, paragraph a), of the MPTC.

A first distinction removes from Article 4th of Law no. 55-A/2012 properties that are rural, or in mixed properties the part that is not urban, as it also removes uses or purposes of urban properties that are not residential, as occurs with commercial or industrial purposes, in accordance with the various categories provided for in Article 6th, no. 1, paragraphs b) to d), of the MPTC.

1. Proceeding with that analysis, it is still necessary to know whether the fact that there are independent divisions is relevant for purposes of calculating the minimum limit above which taxation becomes operative, which is the value of 1,000,000 euros.

The point is relevant because the 18 assessments, taken together, correspond to a tax patrimonial value of 1,065,510.00 euros. If these assessments were considered in isolation, always considering the 18 divisions with residential purpose, this value is never reached, and there is no place for such taxation.

1. It does not appear that the distinction is pertinent here, certainly legal but inadequate to the valuations of contributive capacity, between the regime of vertical ownership and the regime of horizontal ownership.

What matters, in the interpretation of the new provision included in the GTSD, is the consideration of the contributive capacity that underlies it, which takes into account the socio-economic conditions of each taxpayer by reason of the fraction or division, regardless of its ownership regime, for purposes of subjection to a tax with these characteristics.

This is precisely what CAAD decided – and rightly so – in Decision no. 50/2013-T: "Also following these considerations inspiring the legislative innovation under review, it must be concluded that the existence of a property in vertical or horizontal ownership cannot be, in itself, an indicator of contributive capacity. On the contrary, it follows from the law that both should receive the same tax treatment in obedience to the principles of justice, fiscal equality and material truth. Already the existence in each property of independent dwellings, in a regime of horizontal or vertical ownership, may be susceptible of triggering the incidence of the new tax if the Tax Patrimonial Value of each of the parts or fractions is equal to or greater than the limit defined by law: 1,000,000 euros."

These are, in fact, independent fractions, with separate registrations, as is evident from the 18 assessments that were made: in none of them does the tax patrimonial value reach that limit established in item 28 of the GTSD.

1. It should also be mentioned that in the case at hand the ownership in question is only of half of the property, so that contributive capacity only makes sense to evaluate in terms of each owner of the property right in question.

If the property belonged to only one person, only the totality of the taxes would allow reaching slightly above 1 million euros; being the Claimant's ownership of only half, such value is much more distant and will never be reached.

V – Decision

1. For the reasons set out above, the Singular Arbitral Tribunal decides:

a) To declare the illegality, with its consequent annulment, of the 18 stamp duty assessments identified above relating to the property located at …, …, parish of …, in Lisbon, registered under the urban real property register with the number …, as these, and must be individually considered, do not reach the minimum limit established in the normative provision of item no. 28 of the General Table of Stamp Duty;

b) Not to apply the provision of item no. 28 of the General Table of Stamp Duty, as it infringes the principle of equality and the principle of trust protection enshrined in the Constitution of the Republic, in obedience to the provision enshrined in Article 204th of the Portuguese Constitution, leaving the stamp duty assessments made without legal basis.

Amount at issue: € 5,327.55 (five thousand, three hundred twenty-seven euros and fifty-five cents).

Court costs borne by the Respondent, in the amount of € 612.00.

The Arbitrator

Prof. Doctor Jorge Bacelar Gouveia

Lisbon, CAAD, 2 February 2015.