Process: 210/2014-T

Date: July 30, 2014

Tax Type: Selo

Source: Original CAAD Decision

Summary

CAAD arbitration process 210/2014-T addressed whether Portuguese Stamp Tax (Imposto de Selo) under Item 28.1 of the General Stamp Duty Table (GIST) applies to terrenos para construção (building land). The taxpayer, a real estate development company, challenged Stamp Duty assessments totaling €46,853.50 on four urban properties consisting of land intended for construction in Valongo, each with patrimonial values near €949,000. The claimant argued that land for construction constitutes merely undeveloped land without buildings, lacking building permits for residential use and not fit for habitation, therefore falling outside the scope of Item 28.1 GIST's definition of 'urban properties with residential designation.' The company contended that the Portuguese Tax Authority (AT) incorrectly interpreted the objective incidence rule, asserting the legislation intended to tax high-value built real estate, not undeveloped construction land. The AT defended its assessments, arguing that pursuant to Article 67, paragraph 2 of the Stamp Duty Code (CIS), the Municipal Property Tax Code (CIMI) applies subsidiarily to undefined concepts. The tax authority maintained that 'properties with residential designation' encompasses both constructed buildings and land for construction based on literal interpretation of Item 28 GIST. The AT emphasized that absent specific definitions in stamp duty legislation, recourse to CIMI definitions is mandatory. The arbitral tribunal, constituted under Decree-Law 10/2011 establishing the Legal Regime of Arbitration in Tax Matters (RJAT), identified the central legal question as determining whether building land qualifies as residential-designated property for Stamp Tax purposes. This CAAD case represents significant Portuguese tax jurisprudence regarding the interpretation of Verba 28 TGIS and its application to undeveloped urban land assets held for real estate development.

Full Decision

ARBITRAL DECISION

Case No. 210/2014-T

I – Report

1.1. A…, S.A. (hereinafter referred to as "claimant"), having been notified of the Stamp Duty (IS) assessment acts nos. …, …, …, …, …, …, …, …, …, …, … and …, filed, on 28/2/2014, a request for constitution of an arbitral tribunal and for arbitral ruling, pursuant to Article 99 of the CPPT and Article 2, para. 1, sub-para. a), and Article 10, para. 2, sub-para. c), of Decree-Law no. 10/2011, of 20/1 (Legal Regime of Arbitration in Tax Matters, hereinafter referred to only as "RJAT"), in which the Tax and Customs Authority (AT) is requested, seeking the declaration of "invalidity of the same and [...] annulment of the contested assessments."

1.2. On 8/5/2014, the present Singular Arbitral Tribunal was constituted.

1.3. Pursuant to Article 17, para. 1, of the RJAT, the AT was summoned, as the respondent party, to submit its response, in accordance with the aforementioned article. The AT submitted its response on 12/6/2014, having argued, in summary, the total lack of merit of the claimant's request.

1.4. By request of the AT dated 12/6/2014, a waiver was requested of the meeting provided for in Article 18 of the RJAT. Notified of such request, the claimant expressed itself in the same sense, in a request dated 1/7/2014.

1.5. Considering the parties' agreement regarding the waiver of the aforementioned meeting, the Tribunal decided, by order dated 7/7/2014, not to hold the meeting required by Article 18 of the RJAT, as it would serve no purpose, and decided that the proceedings would proceed to the issuance of the arbitral decision.

1.6. The Arbitral Tribunal was regularly constituted, is materially competent, the proceedings do not suffer from defects that would invalidate it, and the Parties possess legal personality and capacity, and are duly entitled.

II – Legal Reasoning: The Factual Matters

2.1. The present claimant alleges, in its initial petition, that: a) "the A.T. made an incorrect interpretation and application of the rule of objective incidence of item 28.1 of the GIST, namely as regards the determination of the scope of the definition of 'urban properties with residential designation'"; b) "land for construction is just that, land, so that, not being built upon, it does not satisfy, in itself, any condition to be considered as properties with residential designation, since, on the one hand, it does not possess a building permit for residential use and, on the other hand, it is not fit for habitation (because it is simply not built upon)"; c) "being the urban properties in question land for construction, they do not fall within the scope of the rule of objective incidence of Item 28.1 of the GIST, which renders the assessment the subject matter of the present arbitral proceeding illegal, and makes the request for declaration of invalidity of the assessment acts meritorious"; d) "what was proposed to the deputies and what they approved was the creation of a tax on high-value real estate property, which does not include land for construction."

2.2. The claimant concludes by requesting the acceptance of the claim and, through it, requests that there be declared "the invalidity [of the assessment acts] and [it be determined] the annulment of the contested assessments."

2.3. For its part, the AT alleges, in its response: a) that "in the absence of any definition of the concepts of urban property, land for construction, and residential designation, in respect of IS, recourse must be had to the CIMI, in search of a definition that permits ascertainment of possible subjection to IS, in accordance with that provided in Article 67, para. 2 of the CIS in the wording given by Law no. 55-A/2012, of 29/10"; b) that "pursuant to the aforementioned legal provision, to matters not regulated in the Code, concerning item no. 28 of the GIST, the provisions of the CIMI shall apply subsidiarily"; c) that, "contrary to what is contended by the Claimant, the AT understands that the concept of 'properties with residential designation', for purposes of the provision in item 28 of the GIST, comprises both built properties and land for construction, given, inter alia, the literal element of the rule"; d) that "the AT understands that the provision of item 28 of the GIST does not constitute a violation of any constitutional command"; e) "the different valuation and taxation of a property in full ownership as opposed to a property constituted in condominium ownership stems from the different legal effects inherent to these two figures." In summary, the AT submits that "the assessments in question constitute a correct interpretation and application of the law to the facts, not suffering from any defect of violation of law, whether of the CRP or of the CIS, and therefore, the claim must be judged to lack merit and the Respondent Entity must be absolved of the request."

2.4. The following facts are deemed proven:

i) The present claimant is a corporation that engages in urban development, land subdivision, and civil construction for sale. The claimant purchases real property for resale and manages real estate assets, whether its own or those of third parties, as well as the provision of related services.

ii) It is or was the owner of the following properties: 1) urban property, composed of land intended for construction, with an area of 1250 m2, located on Avenue …, Valongo, bordering on the north by Street 2, south by Street 1, east by Street 2 and west by Street 1, with a patrimonial value of €949,600.00, registered in the urban cadastre of the parish of Valongo under article …; 2) urban property composed of land intended for construction, with an area of 1250 m2, located on Avenue …, Valongo, bordering on the north by Street 2, south by Street 1, east by Street 2 and west by Street 1, with a patrimonial value of €949,130.00, registered in the urban cadastre of the parish of Valongo under article …; 3) urban property composed of land intended for construction, with an area of 1250 m2, located on Avenue …, Valongo, bordering on the north by Street 2, south by Street 1, east by Street 2 and west by Street 1, with a patrimonial value of €949,130.00, registered in the urban cadastre of the parish of Valongo under article …; 4) urban property composed of land intended for construction, with an area of 1250 m2, located on Avenue …, Valongo, bordering on the north by Street 2, south by Street 1, east by Street 2 and west by Street 1, with a patrimonial value of €949,130.00, registered in the urban cadastre of the parish of Valongo under article…

iii) Based on the provision of item 28.1 of the General Stamp Duty Table (GIST), the AT assessed stamp duty for 2012, which is the origin of the assessments in question, in the total amount of €46,853.50.

2.5. There are no unprovable facts relevant to the resolution of the case.

III – Legal Reasoning: The Legal Matters

In the present case, there is one disputed legal question: 1) to determine whether "the concept of land for construction, for tax purposes, [can, or cannot] be considered a property designated for residential purposes, under the provision of Article 1, para. 1, of the CIS and the same Item 28."

There are no other disputed legal questions, although the AT asserts, in the 3rd point of its response, that "[the present claimant] further alleges that the interpretation underlying the contested assessments, according to which land for construction are properties with residential designation, suffers from unconstitutionality due to violation of the principles of legality and equality enshrined in the Constitution of the Portuguese Republic." However, upon reading the entirety of the claimant's petition, it is clear that the same does not invoke, at any point, such a defect of unconstitutionality, wherefore the (alleged) question will not be addressed herein.

Let us proceed.

The source of the disputed question (identified above) is item no. 28 of the GIST, added by Article 4 of Law no. 55-A/2012, of 29/10, which provided as follows (note that, in the meantime, the wording of para. 1 of this item was altered by Law no. 83-C/2013, of 31/12):

"28 – Ownership, usufruct, or right of surface of urban properties whose tax patrimonial value as recorded in the cadastre, pursuant to the Municipal Property Tax Code (CIMI), is equal to or greater than €1,000,000.00 – on the tax patrimonial value for IMI purposes: 28.1 – For property with residential designation – 1%. 28.2 – For property, when the taxpayers who are not natural persons are resident in a country, territory, or region subject to a clearly more favorable tax regime, as recorded on a list approved by order of the Minister of Finance – 7.5%."

Law no. 55-A/2012, which came into force on 30/10/2012, did not proceed to qualify the concepts contained in the aforementioned item no. 28, in particular, the concept of "property with residential designation." However, observing what Article 67, para. 2, of the Stamp Duty Code (CIS), also added by the aforementioned Law no. 55-A/2012, provides, it is clear that "to matters not regulated in this code concerning item 28 of the General Table, the CIMI shall apply subsidiarily." There being doubt as to the scope of the aforementioned item, it is therefore justified to observe what the CIMI says.

From reading the CIMI, it appears that the concept of "property with residential designation" seems to refer to the concept of "urban property" (see Article 2 and, especially, Article 4).

Now, among the types of "urban properties" (Article 6), there are expressly mentioned "residential urban properties" [see para. 1, sub-para. a)] and "land for construction" [see para. 1, sub-para. c)]. Paragraphs 2 and 3 of the aforementioned article of the CIMI specify that the former "are buildings or constructions licensed for such purpose or, in the absence of a license, which have as their normal destination each of these purposes," and that the latter are "land situated within or outside an urban agglomeration, for which a license or authorization has been granted, a prior communication admitted, or favorable prior information issued regarding a land subdivision or construction operation, and also those which have been declared as such in the title of acquisition, except for land in which the competent entities prohibit any of those operations, namely those located in green zones, protected areas, or which, in accordance with municipal land-use planning instruments, are designated for public spaces, infrastructure, or facilities."

However, from reading the provisions of the CIMI (see Articles 2, 4, and 6), there is not discernible, in the classification of "properties," the (specific) concept of "property with residential designation." Accordingly, in the absence of exact terminological correspondence of the concept of "property with residential designation" with another used in this and other statutes, only interpretative hypotheses can be ventured, in light of the provisions of Article 9, para. 1, of the Civil Code.

This was already done, for example, in Arbitral Decision no. 231/2013-T, of 3/2/2014: "The starting point for the interpretation of that expression 'properties with residential designation' is, naturally, the text of the law, and it is on the basis of it that 'legislative intent' must be reconstructed, as required by para. 1 of Article 9 of the Civil Code, applicable by virtue of the provision in Article 11, para. 1, of the LGT."

In this context, the two possible interpretations were tested: 1) that the concept in question ("properties with residential designation") refers to "residential properties"; 2) that such concept refers to a concept distinct from that of "residential properties."

As to the first of these hypotheses, it is concluded here, as in the aforementioned Decision, with which agreement is expressed, that, "if it is understood that the expression 'property with residential designation' coincides with [the concept of] 'residential properties,' it is manifest that the assessments will suffer from error as to the assumptions of fact and of law, for all properties with respect to which Stamp Duty was assessed under the aforementioned item no. 28.1 are land for construction, without any building or structure, required by that para. 2 of Article 6 to satisfy that concept of 'residential properties.' Accordingly, if one were to adopt the interpretation that 'property with residential designation' means 'residential property,' the assessments whose declaration of illegality is sought will be illegal, because there is no building or structure on any of the land parcels."

In summary, from this it follows that: either the terms of the expression used in item no. 28.1 of the GIST are identical to that which is extracted from para. 2 of Article 6 of the CIMI – and then the assessments made with that justification are illegal for the reasons already mentioned above – or then the aforementioned terms are not identical. In the latter case, it must be concluded that it was intended to use a concept different from that of "residential properties." But what concept would that be?

This is therefore the inquiry underlying the second hypothesis treated in the aforementioned Decision, which concluded that, as there is no coherent sense in item no. 28.1, only the path of interpretation of the legal text would remain, framed by Article 9, para. 3, of the Civil Code: "The recognized lack of coherence of the Stamp Duty is particularly exuberant in the case of this item no. 28.1, hastily included at the margins of the General State Budget, by a fiscal legislator without a perceptible overall fiscal orientation, which successively implements tax increase norms as required by budgetary execution setbacks, by the impositions of international institutional creditors (represented by the 'troika') and by the oversight of the Constitutional Court. [...]. In this context, as there are no secure interpretative elements that permit detection of legislative coherence in the solution adopted in the aforementioned item no. 28.1 or of the correctness or incorrectness of the adopted solution (relevant for interpretative purposes in light of para. 3 of Article 9 of the Civil Code), the tenor of the legal text must be the primary element of interpretation, in accordance with the presumption, imposed by the same para. 3 of Article 9, that the legislator knew how to express its intent in adequate terms."

Now, as the aforementioned Decision aptly continues, "in light of those meanings of the words 'designation' and 'designate,' which are 'to assign' or 'to apply,' the formula used in that item no. 28.1 of the GIST manifestly encompasses properties that have already been assigned to residential purposes, properties that are already applied to residential ends, whereby it is important to ascertain whether it will also encompass properties that, despite not yet being applied to residential ends, are destined for them, namely in a land subdivision permit. To this end, it is necessary to clarify when a property can be understood to be designated for a residential purpose, namely whether it is when such purpose is fixed for it in a land subdivision permit or licensing act or the like, or only when the effective assignment of that purpose is realized. [...]. The text of the law, by adopting the formula 'property with residential designation,' instead of 'urban properties of residential designation,' which appears in the [...] 'Statement of Reasons,' points strongly toward the understanding that the residential designation must already be concrete, for only thus will the property be with that designation."

The fact is that, in the present case – as was the case in that underlying the Decision that has been frequently cited – "one is faced with a reality even more distant from residential designation, which is that of there not even existing any building or structure, and therefore, one cannot consider existing a designation that presupposes its existence. Furthermore, as the Claimant correctly points out [and as the present claimant, in the very same terms], the legislative intent to not extend the scope of incidence to land for construction was expressly referred to by the Government upon presenting Bill 96-XII to the Plenary of the Parliament, saying, through the voice of the Secretary of State for Tax Affairs: 'First, the Government proposes the creation of a special tax to tax high-value residential urban properties. It is the first time that Portugal has created a special tax on high-value properties intended for residential purposes. This tax will be 0.5% to 0.8% in 2012, and 1% in 2013, and will apply to houses with a value equal to or greater than 1 million euros. With the creation of this additional tax, the tax effort required of these owners will be significantly increased in 2012 and in 2013.' The express reference to 'houses' as the target of the incidence of the new tax leaves no room for doubt as to the legislative intent. Furthermore, there is no reference in the discussion of said Bill to 'land for construction.'"

Indeed, as the claimant also alleges, with reason, it follows "from the presentation of bill no. 96-XII [that] what was proposed to the deputies and which they approved was the creation of a tax on high-value real estate property, which does not include land for construction, or, in the clearer words of SEAF, a special tax on high-value properties intended for residential purposes and a special tax that will apply to houses with a value equal to or greater than 1 million euros, that is to say, a tax on the residential properties referred to in para. 2 of Article 6 of the CIMI."

Note, finally, what is stated, with clarity and appropriately, in Arbitral Decision no. 49/2013-T, of 18/9/2013: "Land for construction – whatever the type and purpose of the building that will be, or may be, erected on it – does not satisfy, in itself, any condition to be licensed as such or to be defined as having residential purpose as its normal destination. Referring, therefore, the rule of incidence of stamp duty to urban properties with 'residential designation,' without any specific concept being established for this purpose, there cannot be extracted from it that it contains a future potentiality, inherent to a distinct property that might possibly be built on the land."

This understanding, according to which the concept of "land for construction," for tax purposes, cannot be considered as "property with residential designation," has, moreover, been consistently affirmed in multiple Arbitral Decisions, beyond those already cited herein (AD no. 48/2013-T, of 9/10/2013; AD no. 53/2013-T, of 2/10/2013; AD no. 180/2013-T, of 7/3/2014; AD no. 189/2013-T, of 20/3/2014; AD no. 288/2013-T, of 30/4/2014), as well as in various Judicial Decisions, such as, for example, the following: "As the legislator did not define the concept of '(urban) properties with residential designation,' and resulting from Article 6 of the IMI Code – subsidiarily applicable to the Stamp Duty provided for in the new item no. 28 of the General Table – a clear distinction between 'residential urban properties' and 'land for construction,' these cannot be considered, for purposes of the incidence of Stamp Duty (Item 28.1 of the GIST, in the wording of Law no. 55-A/2012, of 29 October), as urban properties with residential designation." (Decision of the SAC of 23/4/2014, proceeding 271/14).

From the above, it is concluded that the claimant is correct, given that the assessments in question violate the rule of objective incidence contained in item no. 28.1 of the GIST, constituting error as to the assumptions of law, which renders them voidable pursuant to Article 135 of the CPA.

IV – Decision

In light of the above, it is decided:

– To adjudge the arbitral request meritorious, with the consequent annulment, with all legal effects, of the contested assessment acts.

The value of the case is set at €46,853.50 (forty-six thousand eight hundred and fifty-three euros and fifty cents), in accordance with the provisions of Article 32 of the CPTA and Article 97-A of the CPPT, applicable by virtue of the provision in Article 29, para. 1, sub-paras. a) and b), of the RJAT, and Article 3, para. 2, of the Regulations on Costs in Tax Arbitration Proceedings (RCPAT).

Costs to be borne by the respondent, in the amount of €2,142.00 (two thousand one hundred and forty-two euros), in accordance with Table I of the RCPAT, given that the present request was adjudged meritorious, and in compliance with the provisions of Articles 12, para. 2, and 22, para. 4, both of the RJAT, and the provision in Article 4, para. 4, of the aforementioned Regulation.

Notify.

Lisbon, 30 July 2014.

The Arbitrator

(Miguel Patrício)

Text prepared on computer, in accordance with the provision in Article 138, para. 5, of the CPC, applicable by referral from Article 29, para. 1, sub-para. e), of the RJAT.

The wording of this decision is governed by the orthography prior to the Spelling Agreement of 1990.

Frequently Asked Questions

Automatically Created

Is Portuguese Stamp Tax (Imposto de Selo) applicable to building land under Verba 28.1 of the TGIS?
The applicability of Portuguese Stamp Tax to building land under Verba 28.1 TGIS was the central dispute in CAAD Process 210/2014-T. The Portuguese Tax Authority assessed Stamp Duty on terrenos para construção, interpreting Item 28.1 to include undeveloped land designated for construction. The taxpayer challenged this interpretation, arguing that unbuilt land without residential use licenses does not constitute 'urban properties with residential designation' under the GIST provision.
Are terrenos para construção considered residential properties for Stamp Tax purposes in Portugal?
Whether terrenos para construção qualify as residential properties for Stamp Tax purposes under Verba 28 TGIS was contested in this arbitration. The AT argued that the concept of 'properties with residential designation' encompasses both built properties and land for construction based on literal interpretation and subsidiary application of CIMI definitions. The claimant contended that undeveloped land, lacking buildings and residential use authorization, cannot satisfy the requirements to be considered residential-designated property for Imposto de Selo purposes.
How did CAAD Process 210/2014-T rule on the scope of Verba 28 TGIS for undeveloped land?
CAAD Process 210/2014-T examined whether building land falls within the scope of Verba 28 TGIS for Stamp Tax purposes. The arbitral tribunal identified the disputed legal question as determining if land for construction constitutes property with residential designation under Item 28.1 of the General Stamp Duty Table. The case involved assessments on four urban land plots valued at approximately €949,000 each, with the taxpayer seeking invalidation of €46,853.50 in Stamp Duty charges.
Can the Portuguese Tax Authority apply Stamp Tax to urban land plots without a housing use license?
The Portuguese Tax Authority applied Stamp Tax to urban land plots designated for construction without existing housing use licenses, resulting in assessments under Item 28.1 TGIS. The AT justified this application by interpreting 'properties with residential designation' to include terrenos para construção and citing subsidiary application of CIMI provisions pursuant to Article 67(2) of the Stamp Duty Code. The taxpayer challenged this interpretation through CAAD arbitration, arguing that unbuilt land lacking residential permits cannot be taxed as residential property.
What is the legal basis for challenging Imposto de Selo assessments on building land through tax arbitration in Portugal?
The legal basis for challenging Imposto de Selo assessments on building land through Portuguese tax arbitration is established in Decree-Law 10/2011 of 20 January (RJAT - Legal Regime of Arbitration in Tax Matters). Specifically, Article 2, paragraph 1, subparagraph a), and Article 10, paragraph 2, subparagraph c) of RJAT provide jurisdiction for CAAD arbitral tribunals to review Stamp Duty assessments. Taxpayers may request constitution of an arbitral tribunal pursuant to Article 99 of the Tax Procedure Code (CPPT) to seek invalidation and annulment of contested assessments.